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The Governance of Close Corporations and PartnershipsUS and European Perspectives$

Joseph A. McCahery, Theo Raaijmakers, and Erik P. M. Vermeulen

Print publication date: 2004

Print ISBN-13: 9780199264353

Published to Oxford Scholarship Online: January 2010

DOI: 10.1093/acprof:oso/9780199264353.001.0001

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(p.441) Appendix 2 The European Private Company Draft Regulation: Schedule 1. Standard Form Articles of Association

(p.441) Appendix 2 The European Private Company Draft Regulation: Schedule 1. Standard Form Articles of Association

Source:
The Governance of Close Corporations and Partnerships
Publisher:
Oxford University Press

Model A

Form

1.The company is a European Private Company formed pursuant to EuropeanUnion Regulation number … (‘the Regulation’).

Name

2.The name of the company is ‘… European Private Company’.

Object

3.The object of the company is to …

Registered Office

4.The registered office of the company is at …

Duration

5.The duration of the company is indefinite.

Share Capital

6.1 The company’s share capital is … divided into … shares of … each which shall be subscribed for and paid in full at the time of subscription in cash or in kind but not in work or services.

6.2 Any increase of capital shall be paid for in full at the time of subscription.

(p.442) 6.3 No shareholder shall be bound by any alteration to these articles requiring them to take or subscribe for more shares in the company or increasing their liability contribute to the company’s share capital or otherwise pay money to the company unless such shareholder has agreed in writing to be so bound.

Contributions

7. The founding shareholders shall contribute the share capital in the following proportions:-

In cash…

Mr…

Euros

 

Mr

Euros

Total

 

Euros, which amount was deposited on ../../.. to the credit of an account opened in the name of the company [in formation] at … Bank as is proven by [receipt no….].

In kind in the form of … which the founding shareholders value at … Euros, and which has been put at the disposition of the company as is proven by the receipt of … as agent for the company in formation. A report valuing the contribution(s) in kind is appended to these articles.

Transfer of Shares

8.1 Shares are transferred by a written form of transfer signed by or on behalf of the transferor and transferee.

8.2 Shares are freely transferable to other shareholders but shares or any interest in them may only be transferred to third parties with the written approval of [other] shareholders representing [three quarters of] the shares not subject to the proposed transfer.

Note: The words in square brackets represent alternative ways of dealing with the problem that arises where a majority shareholder wishes to transfer part of their holding to a third party of whom the remaining shareholders may not approve. Such a transfer should be subject to the approval of either all of the other shareholders (in which case all of the words in the brackets could be removed) or of a three-quarters majority of the other shareholders (in which case the brackets themselves should be removed).

8.3 Within 28 days of receiving a written request to transfer shares the company shall notify the applicant of the decision of the shareholders.

8.4 If a shareholder requests approval to transfer some or all of their shares, the continuing shareholder or shareholders who so wish are entitled to take a transfer of the shares at a fair valuation determined in accordance with article 8.6 below, and if more than one such shareholder, to take them in proportion to their existing shareholdings

(p.443) 8.5 If the shareholders refuse approval of a transfer of shares the shareholder requesting transfer shall make reasonable endeavours to find a transferee willing to take a transfer who is acceptable to the continuing shareholders. If such endeavours fail to find an acceptable transferee, the continuing shareholders shall at the expiration of six months from the refusal of the original transfer take the shares of the shareholder requesting transfer in proportion to their existing shareholdings at a fair valuation for an immediate or deferred payment.

Note: While it may be desirable to find an exit route for disappointed transferors, they should not have too immediate a right to offload their shares on the continuing members as a sudden withdrawal of capital would threaten the survival of many small businesses.

8.6 A fair valuation shall be found by taking the market value of all the company’s shares, assuming a sale by a willing seller to a willing buyer as at the end of the six month period referred to, and by multiplying that market value by the fraction of the whole share capital of the company which the shares to be transferred represent.

8.7 Failing agreement on valuation, a fair valuation on the basis set out above shall be decided by an independent person acting as an expert valuer. The independent valuer shall be the company’s statutory auditor if one is appointed, or if none, shall be nominated by agreement between the parties, or in the event that they fail to agree the valuer shall be nominated by [the President for the time being of the … Chamber of Commerce].

Note: This should result in a pro rata valuation rather than one discounted by reason of the shares being a minority holding nor one giving a premium for control.

8.8 Any share or shares may only be held in the name of a single shareholder and the company shall not be bound by or recognize any interest in shares except the absolute right of the holder to the whole interest therein.

Note: This provision, which is usual in English companies, is inserted to deal with the problem of shares being held by trustees, or an administratiekantoor in the Dutch system or possibly under a usufruct in this and other systems.

Management and Representation

9.1 The business of the company shall be managed by the shareholders exercising all the powers of the company as a management board unless by unanimous decision they appoint a manager or managers to act in their place for a fixed period. The manager or managers may be appointed from among the shareholders or not, as the shareholders shall decide.

9.2 If no manager or managers are appointed the members shall conduct such business by majority decision, each having one vote. The quorum required for taking such decisions shall be two. If so requested by any one member or members (p.444) together holding at least 20 per cent of the shares of the company they shall vote on the basis of one vote per share. Otherwise, subject to the requirements of the Regulation and these articles, they may conduct their business as they think fit.

9.3 Any two members acting jointly shall represent the company in making commitments to third parties and before the courts. If a manager or managers are appointed, a sole manager acting alone or, if more than one manager is appointed, any two acting jointly, shall so represent the company.

Shareholders’ Rights

10.1 Profits allocated for distribution and surplus assets in a liquidation shall be distributed to shareholders in the proportion in which they hold shares in the company.

10.2 Where the share capital of the company is increased the shares shall first be offered to the members of the company in proportion to their existing holdings. If any member declines to purchase any such shares they shall be offered to the other members of the company in proportion to their existing holdings. If any of the shares then remain unsold they shall be offered to any members willing to purchase them. Any remaining shares shall be issued in accordance with a collective decision of the members.

10.3 Shareholders shall be entitled to one vote per share on decisions taken collectively by them.

10.4 If a manager or managers are appointed the following decisions shall neverthless be taken collectively by the shareholders:

  1. (i) the dismissal or re-appointment of a manager;

  2. (ii) the appointment of a new manager or managers;

  3. (iii) the approval of the annual accounts and other documents required by the applicable national law;

  4. (iv) the allocation of profits;

  5. (v) the appointment of a statutory auditor as required by the applicable law;

  6. (vi) any variation of the articles of association;

  7. (vii) any increase, redemption or reduction of capital;

  8. (viii) any merger or division of the company;

  9. (ix) the mortgaging or charging of any assets of the company;

  10. (x) the disposal of all or a substantial part of the company’s business undertaking;

  11. (xi) decisions, other than those in the ordinary course of business, which may materially affect the company or its shareholders;

  12. (xii) that the company be dissolved or enter into insolvency proceedings.

10.5 The shareholders may at any time by unanimous resolution in writing notify the manager or managers of any further matter that is to be decided by the shareholders collectively or upon which they wish to be consulted.

(p.445) 10.6 One or more shareholders holding at least ten per cent (10%) of the votes may at any time call for a consultation of the shareholders holding voting rights. This consultation may either take place at a meeting in respect of which all shareholders have been given sufficient notice to enable them to attend or, if no member dissents, by written or other permanent means of communication signed or otherwise authenticated by them.

10.7 Collective decisions may either be taken at a meeting in respect of which all shareholders have been given sufficient notice to enable them to attend or, if no member dissents, by written or other permanent means of communication signed or otherwise authenticated by them and acceptable as good evidence of the decision made. Such communication shall be returned to the registered office of the company within a reasonable time of receipt of notification of the decision to be taken.

10.8 Members may vote at any meeting either in person or by proxy. Members may appoint a shareholder or a manager to act as their proxy, and the instructions in such proxies shall be binding upon the person so appointed. An instrument appointing a proxy shall be in writing, executed by the member and must be delivered to the registered office of the company at least 48 hours before the meeting in respect of which it is to be exercised.

10.9 The quorum for any meeting at which a collective decision is to be taken shall be two members present in person or by proxy.

10.10 Except as otherwise provided in these articles, collective decisions shall require the approval of shareholders holding a majority of the votes attaching to the shares of the company.

10.11 Collective decisions adding, removing or amending the terms of the articles of association provided for under Articles 20, 21 and 22 of the Regulation may only be made by the shareholders acting unanimously.

Note: A reference to the articles of association would be preferable to a reference to the Regulation once this document is printed.

10.12 A collective decision of the members to dissolve the company or to make any alteration to the articles of association other than those specified above may only be made by shareholders representing three-quarters of the shares in the company.

10.13 Minutes of the collective decisions of the shareholders shall be recorded in writing or other permanent legible form.

10.14 Collective decisions of the shareholders are binding on the manager or managers and other officers if any.

10.15 Whether a manager or managers are or are not appointed, the shareholders shall have access at all reasonable times to the company’s principal management documents and to such books, accounts and other documents and records of the company as are necessary to enable them to carry out their (p.446) managerial duties and to assert their rights under the Regulation and these articles.

Financial Year

11. The financial year of the company runs from … to … each year.

Transmission of Shares

12. On the death of any shareholder, the surviving shareholders may not object to the transmission of shares to a spouse, an ascendant or descendant of the deceased shareholder, but in the case of transmission to any other person they may exercise the same rights over these shares as if the personal representatives of the deceased shareholder had requested approval of a transfer of shares under Article 8 above.

Compulsory Assignment and Withdrawal of a Shareholder

13.1 If a shareholder has seriously damaged the company’s interest or if the continuation of the shareholder as a member of the company is detrimental to its proper operation, the shareholder may be required to assign their shares as appears below and one or more shareholders holding a majority of voting rights in the company may apply to the Court of competent jurisdiction for an order that the offending shareholder assign their shares as directed.

13.2 The continuation of a shareholder as a member of the company shall be considered detrimental to its proper operation inter alia in the following circumstances:

  1. (i) if a creditor of a shareholder becomes entitled to any interest in the shares or in their proceeds of sale by reason of a legal process for the enforcement of a debt or other obligation;

  2. (ii) if any insolvency proceedings or proceedings for the realization of any security are instituted against any shareholder;

  3. (iii) if a shareholder pledges all or part of their shares without the prior consent of the other shareholders;

  4. (iv) if a shareholder commits a serious breach of any obligation arising under these articles;

  5. (v) if there is any change in the control of any corporate shareholder, except where the new shareholders of that corporate member to whom control passes are either the spouses or descendants of the previous shareholders.

13.3 In the circumstances specified in Article 13.2 above, or in the event that an order of a competent Court under Article 21.1 of the Regulation requiring the (p.447) assignment of any shares is not immediately complied with, the non-pecuniary rights attaching to those shares may immediately be suspended by a collective decision.

13.4 A shareholder who considers their interests to have been damaged may petition the Court of competent jurisdiction for the acquisition of their shares in the circumstances and in the manner appearing in Article 21.2 of the Regulation.

13.5 Where shares are assigned or acquired under this article the price shall be determined in accordance with Articles 8.6 and 8.7 above, but may not be less than the actual value of the shares.

Redemption of Shares

14.Either The shares issued by the company shall not be redeemable

or Without prejudice to Article 15 of the Regulation, the company may redeem its shares in compliance with the laws of of the place of its registered office regulating the equivalent form of company specified in Schedule 2 of the Regulation.

Note: See Regulation Article 12. It is suggested that the italicized words should be added to Article 27.1 of the Regulation. In the United Kingdom, for example, there are rules to protect creditors in the case of companies buying their own shares and it would be highly desirable for the EPC to comply with something resembling these.

Auditors

15.1 In the circumstances required by the legislation in force in the state of the company’s registered office applicable to the equivalent form of company in that jurisdiction specified in Schedule 2 of the Regulation, the company shall appoint an auditor.

15.2 In other cases the company may appoint an auditor if the members by collective decision so decide.

15.3 Every appointment of an auditor shall be made by a collective decision of the members.

15.4 The terms of appointment, qualifications, function and duties of such auditors shall be as required by the applicable legislation.

Formation Expenses

16. The reasonable expenses of forming the company shall be borne by the company.

(p.448) Dispute Resolution

17. In cases other than where a shareholder is entitled under the Regulation or these articles of association to bring a matter before a Court of competent jurisdiction, in any dispute arising between members or between members and the company the parties will use their best endeavours to settle it by voluntary mediation involving the non-binding intervention by a neutral third party who helps the disputants to negotiate an agreement [for alternative wording see below] and no party may commence any court procedings in relation to any such dispute until they have in good faith attempted to settle it by mediation and that mediation has terminated.

Note: Reference to a more precise procedure for such a mediation may be thought desirable in some cases, e.g. for a British EPC, and a clause like the following which refers to the known and established rules of the Centre for Dispute Resolution even though it is a commercial organization may be used as an alternative, e.g. ‘in accordance with the Centre for Dispute Resolution (CEDR) Model Mediation Procedure or such other procedure having effect to employ the services of a suitably qualified mediator in the settlement of the dispute’.

(p.449) Model B

Articles 1–8 are the same as in Model A.

Management and Representation

9.1 The first members of the management body are … They are appointed for a period of three years, but are eligible for re-appointment. The shareholders may remove, appoint or re-appoint any member of the management body by a simple majority of votes east at a collective decision, each member to be voted upon individually.

Either

9.2 The management body is the manager or managers, natural persons, who is/are responsible for the management of the business of the company.

9.3 Subject to the provisions of these articles and to the matters reserved by them for the collective decision of the shareholders and to any direction given to the manager(s) by collective decision of the shareholders restricting their authority or limiting their discretion in management, each manager shall have the most extensive powers to act in all circumstances in the name of the company.

9.4 Each manager may represent the company in making commitments to third parties or before the courts.

9.5 The manager or managers may delegate any of their management functions (except those that are required to be performed by the management body as a whole either by the Regulation or by these articles) to such person or persons as they choose.

9.6 The manager(s) shall ensure that written minutes are kept of all formal decisions.

9.7 The managers shall devote their whole time and give their undivided attention to the affairs of the company.

9.8 Any decisions by the company to enter into a contract of employment with a manager and to determine the terms of such a contract shall be taken collectively by the shareholders.

9.9 The office of manager is vacated:

on removal by collective decision of the shareholders;

on being made bankrupt or otherwise entering formal insolvency proceedings;

on being prohibited by the law of any Member State from holding office as a director or manager of a company; on suffering mental incapacity.

Or

(p.450) 9.2 The management body is the board of directors which is responsible for the management of the business of the company. The board of directors shall transact business as a board, the directors acting together by board resolution.

9.3 Subject to the provisions of these articles and to the matters which are reserved by them for the collective decision of the shareholders and to any direction given to the board of directors by collective decision of the shareholders restricting their authority or limiting their discretion in management, the board of directors shall have the most extensive powers to act in all circumstances in the name of the company.

9.4 The board of directors may appoint a member of the board to be chief executive on such terms as it thinks fit and may delegate any management functions to such person or persons as it chooses.

9.5 The board of directors acting as a board may represent the company in making commitments to third parties or before the courts. However, if a sole chief executive is appointed, such a person shall so represent the company. If more than one chief executive is appointed, any two acting jointly shall so represent the company.

9.6 The board of directors may regulate its proceedings as it thinks fit except

that it shall ensure that written minutes are kept of all formal decisions.

9.7 The board of directors may enter into a contract of employment with a chief executive on such terms as it thinks fit.

9.8 The office and employment of a chief executive shall terminate if the chief executive ceases for any reason to be a director.

9.9 The office of director is vacated:

on removal by collective decision of the shareholders;

on. being made bankrupt or otherwise entering formal insolvency proceedings;

on being prohibited by the law of any Member State from holding office as a

director or manager of a company;

on suffering mental incapacity.

All

9.10 The management body and each member of it shall act in the interests of the company.

9.11 No member of the management body or any other officer of the company shall put themselves in a position where their interest may conflict materially with the interest of the company.

9.12 If any member of the management body or any other officer of the company profits from any circumstance in which their interest conflicts with that of the company they shall be liable to account to the company for all profits arising.

9.13 If any member of the management body or any other officer of the company enters into a contract or other transaction with the company whereby their (p.451) interest conflicts with that of the company, the company may in its discretion affirm or avoid the contract or other transaction,

9.14A transaction entered into by any member of the management body or any other officer with the company shall be valid and such persons may retain the benefit of any transaction notwithstanding a conflict of interest in either case if at least seven days before its conclusion they gave notice in writing to the management body, the person specified in Article 29.2 of the Regulation and the shareholders of their interest and of the nature of the transaction and no shareholder within that period of seven days requests the board to call a meeting of shareholders to resolve as a collective decision that the company shall not enter into that transaction or that such a person may not retain the benefit of the transaction.

9.15 If such a transaction referred to in Article 9.1.4 is not within the ordinary course of the business of the company the period of seven days in that article shall run from the time of the receipt by the shareholders of a copy of the report referred to in Article 29.2 of the Regulation.

9.16 By a resolution of shareholders representing a majority of the share capital, the liability to the company of any member of the management body or of any other officer of the company in respect of a conflict of interest may be waived and any contract with the company affirmed either prospectively or retrospectively.

9.17 The members of the management body are jointly and severally liable to the company in respect of serious management errors where they fail to exhibit the care, skill and diligence reasonably to be expected of a business person under the circumstances, except that they shall not be so liable if they acted honestly and reasonably having duly obtained sufficient information before making any relevant decision.

9.18 On any collective decision of the shareholders to exempt a member of the management body from liability for any breach of duty to the company, such a member, being a shareholder, shall be disqualified from voting and shall not be counted in the quorum present at any meeting at which they are so disqualified.

9.19 The management body is responsible for ensuring that the company complies with the accounting rules referred to in Article 32 of the Regulation and that the shareholders are consulted in the circumstances set out in Article 28 of the Regulation.

Shareholders’ Rights

10.1 Profits allocated for distribution and surplus assets in a liquidation shall be distributed to shareholders in the proportion in which they hold shares in the company.

10.2 Where the share capital of the company is increased the shares shall first be offered to the members of the company in proportion to their existing holdings.

(p.452) If any member declines to purchase any such shares they shall be offered to the other members of the company in proportion to their existing holdings. If any of the shares then remain unsold they shall be offered to any members willing to purchase them. Any remaining shares shall be issued in accordance with a collective decision of the members,

10.3 Shareholders shall be entitled to one vote per share on decisions taken collectively by them.

10.4 The following decisions shall be taken collectively by the shareholders and not by the management body:

  1. (i) the dismissal or re-appointment of a member of the managing body;

  2. (ii) the appointment of a new member of the managing body;

  3. (iii) the approval of the annual accounts and other documents required by the applicable national law;

  4. (iv) the allocation of profits;

  5. (v) the appointment of a statutory auditor as required by the applicable law;

  6. (vi) any variation of the articles of association;

  7. (vii) any increase, redemption or reduction of capital;

  8. (viii) any merger or division of the company;

  9. (ix) the mortgaging or charging of any assets of the company;

  10. (x) the disposal of all or a substantial part of the company’s business undertaking;

  11. (xi) decisions, other than those in the ordinary course of business, which may materially affect the company or its shareholders;

  12. (xii) that the company be dissolved or enter into insolvency proceedings.

10.5 The shareholders may at any time by a three quarters majority resolution notify the management body of:

any further matter in addition to those listed in Article 10.4 that is to be decided by the shareholders collectively;

any matter, whether specific or general, about the occurrence of which they wish to be individually informed.

10.6 The shareholders may by a three-quarters majority resolution give a direction which shall be binding on the management body with regard to the exercise of its management powers or discretions.

10.7 One or more shareholders holding at least ten per cent (10%) of the votes may at any time require the management body to arrange for a meeting or other consultation of the shareholders holding voting rights, and shall have the right to propose any item to be considered. The management body shall either call a meeting in respect of which all shareholders have been given at least fourteen days notice or, if no member dissents, arrange for a consultation of all of the shareholders by written or other permanent means of communication signed or otherwise authenticated by them.

(p.453) Shareholders’ Proceedings

11.1 Except where procedures are specifically provided by these articles or the law applicable under the Regulation, collective decisions may either be taken at a meeting in respect of which all shareholders have been given at least fourteen days notice or, if no member dissents, at a meeting held with shorter notice or by a consultation in writing of all of the shareholders.

11.2 When a decision is taken by consultation in writing the text of the resolution proposed is sent by the managing body to each shareholder by a letter sent by recorded delivery [lettre recommandée AR]. Shareholders shall indicate their acceptance or rejection of the resolution so communicated by written or other permanent means of communication signed or otherwise authenticated by them and acceptable as good evidence of the decision made which shall be returned to the registered office of the company within fourteen clays of receipt of notification of the resolution.

11.3 Shareholders may vote at any meeting either in person or by proxy. Shareholders may appoint another shareholder or a member of the managing body to act as their proxy, and the instructions in such proxies shall be binding upon the person so appointed. An instrument appointing a proxy shall be in writing, executed by the member and must be delivered to the registered office of the company at least 48 hours before the meeting in respect of which it is to be exercised.

11.4 The quorum for any meeting at which a collective decision is to be taken shall be two members present in person or by proxy.

11.5 Except as otherwise provided in these articles, collective decisions shall require the approval of shareholders holding a majority of the votes cast at that collective decision.

11.6 Collective decisions adding, removing or amending the terms of the articles of association provided for under Articles 20, 21 and 22 of the Regulation may only be made by the shareholders acting unanimously.

Note: A reference to the articles of association would be preferable to a reference to the Regulation once this document is printed.

11.7 A collective decision of the shareholders that the company be dissolved or enter into insolvency proceedings or to make any alteration to the articles of association other than those specified above requires the approval of shareholders holding a three-quarters majority of the votes cast at that collective decision.

11.8 Minutes of the proceedings including the collective decisions of the shareholders shall be recorded in writing or other permanent legible form.

11.9 Collective decisions of the shareholders are binding on the management body and on all other officers of the company.

(p.454) 11.10 A general meeting in respect of which all shareholders have been given at least twenty-one clays notice shall be held once each year for the approval of the annual accounts and other documents required by the applicable national law unless by a unanimous collective decision the shareholders elect to dispense with holding annual general meetings for this purpose. A collective decision made by shareholders holding a majority of the votes cast may subsequently require the holding of annual general meetings for the approval of the accounts and other documents specified above.

11.11 The shareholders shall have access at all reasonable times to the company’s principal management documents, including minutes of the decisions and proceedings of the management body and of the shareholders and to such books, accounts and other documents and records of the company as may be necessary to enable them to carry out their managerial duties and to assert their rights under the Regulation and these articles.

11.12 Any period of notice of any meeting or other proceeding referred to in these articles shall be exclusive of the day upon which the notice is given and of the day upon which or by which the meeting or other proceeding is to take place.

11.13 Any requirement for the giving of notice under these articles shall mean the service of notice in writing, and a notice sent by facsimile transmission to a number given by the shareholder to the company for that purpose or by any other electronic process approved for the purpose by unanimous decision of the shareholders shall be deemed to be in writing.

11.14 Where a meeting is called under these articles the chairman shall be as follows:

a chief executive if appointed or the sole member of the management body (where there is only one), if present within fifteen minutes of the time appointed for the meeting, shall preside as chairman;

failing which the members of the management body present at the meeting shall appoint a chairman;

failing which the shareholders present at the meeting shall appoint a chairman.

11.15 In the case of an equality of votes at any such meeting the chairman shall/shall not be entitled to a casting vote in addition to any other vote that they may have.

Articles 12–17 are the same as Articles 11–16 in Model A apart from the numbering.

Dispute Resolution

18. In cases other than where a shareholder is entitled under the Regulation or these articles of association to bring a matter before a Court of competent jurisdiction, in any dispute arising between members or between members and the (p.455) company the parties will use their best endeavours to settle it by voluntary mediation involving the non-binding intervention by a neutral third party who helps the disputants to negotiate an agreement. [for alternative wording see below]

Note: Reference to a more precise procedure for such a mediation may be thought desirable in some cases, e.g. for a British EPC, and a clause like the following which refers to the known and established rules of the Centre for Dispute Resolution, even though it is a commercial organization, may be used as an alternative, e.g. ‘in accordance with the Centre for Dispute Resolution (CEDR) Model Mediation Procedure or such other procedure having effect to employ the services of a suitably qualified mediator in the settlement of the dispute’. (p.456)