Most Hong Kong companies are incorporated with model articles and nothing else. That works until two shareholders disagree about something the articles never contemplated.
The two documents do different jobs, and neither substitutes for the other. Understanding which does what is the difference between a solvable disagreement and an expensive one.
Key Takeaways
- Articles of association are public, registered with the Companies Registry and binding under section 86 of the Companies Ordinance.
- A shareholders’ agreement is a private contract and does not need to be registered.
- Section 86 makes articles enforceable by a shareholder against the company and against every other shareholder.
- Some statutory provisions override both documents, including the power to remove a director by ordinary resolution.
- Vesting, pre-emption, drag and tag rights and deadlock mechanics usually sit in the shareholders’ agreement.
- Most companies with more than one owner benefit from having both documents rather than choosing between them.
Two Documents, Two Functions
The articles are the company’s constitution. They are filed with the Companies Registry, publicly searchable, and govern how the company operates, covering share classes, director powers, meetings and resolutions.
A shareholders’ agreement is a contract between the shareholders. It does not need to be registered, which means commercially sensitive terms stay private rather than becoming a matter of public record.
That privacy point matters more than founders expect. Investor terms, valuation mechanics and exit arrangements are exactly the things you would rather competitors and future counterparties could not simply look up.
What Section 86 Actually Does
This is the provision that gives articles their force. Under section 86 of the Companies Ordinance, the articles have effect as a contract under seal between the company and each member, and between the members themselves.
The practical consequence is enforceability in two directions. A shareholder can enforce the articles against the company and against every other shareholder, which is stronger than most assume of a document they never read again after incorporation.
Note also that for companies incorporated before March 2014, the old Memorandum was absorbed into the articles under section 98. Those companies are generally advised to review and update their constitution rather than assume it still fits.
What Articles Cannot Do?
Model articles are designed to be workable for any company, which means they address none of the situations that actually cause disputes between founders.
They say nothing about what happens if a founder leaves after eight months. They do not address whether a shareholder can be forced to sell alongside a majority, or protected from being left behind when others exit.
They also create no obligations between shareholders personally. Commitments about funding, non-competition, or continued involvement belong in a contract between the individuals rather than the company’s constitution.
The Clauses That Do the Work
Founder vesting is usually the first. Shares earned over time rather than issued outright means a founder who leaves early does not retain a full stake in a company they no longer build.
Pre-emption rights control who can become a shareholder. Existing shareholders get first refusal before shares can be sold to an outsider, and these restrictions sit in the articles or the shareholders’ agreement rather than arising automatically.
Drag and tag rights handle exits. Drag-along lets a majority compel minority shareholders into a whole-company sale, while tag-along lets a minority join on the same terms rather than being stranded with a new majority owner.
Reserved matters set the decision threshold. Certain actions, typically issuing shares, taking on debt, or changing the business, require a higher level of consent than a simple majority.
Deadlock provisions matter most in fifty-fifty companies. Without an agreed mechanism, two equal shareholders who cannot agree have very few options short of litigation.
Where Statute Overrides Both
This surprises people who assume a well-drafted agreement covers everything. Certain provisions of the Companies Ordinance apply regardless of what the articles or the shareholders’ agreement say.
Director removal is the clearest example. Under section 462, a company may remove a director by ordinary resolution despite anything in its articles or any other agreement, so entrenching a director contractually does not achieve what it appears to.
Director liability is another. Any provision purporting to exempt a director from liability to the company for negligence, default, breach of duty or breach of trust is void under section 468.
What Happens When It Goes Wrong
Hong Kong law gives shareholders several routes, and knowing they exist changes how disputes get negotiated.
The unfair prejudice remedy under section 724 allows a shareholder to apply to court where the company’s affairs are being conducted in a manner unfairly prejudicial to members generally or to particular members.
Conduct capable of qualifying includes breach of the Companies Ordinance, breach of the constitutional documents or shareholders’ agreement, breach of directors’ fiduciary duties, and mismanagement.
Statutory derivative actions sit alongside it, allowing a claim in the company’s name against directors or other wrongdoers.
A petition to wind up on just and equitable grounds is the final option, and as drastic as it sounds.
When to Put One in Place
Before you need it, which in practice means at incorporation or at the first outside investment. Negotiating a shareholders’ agreement while everyone still agrees is straightforward, and negotiating one during a dispute rarely succeeds.
Instructing a firm offering commercial law services rather than using a template is worth the difference here.
TITUS Solicitors, an independent Hong Kong firm regulated by the Law Society of Hong Kong, notes that a lawyer earns their place where the structure is non-standard, meaning multiple founders, outside investors, intellectual property to assign, or a group structure.
Templates fail on the specifics. A vesting schedule, a deadlock mechanism, and a set of reserved matters have to reflect how your business is actually owned and run.
Conclusion
The articles and the shareholders’ agreement solve different problems, and the gap between them is where founder disputes live.
Model articles cover the mechanics of running a company and almost nothing about the relationship between the people who own it.
Put the agreement in place while the relationship is good. It costs a fraction of what resolving the same questions costs once positions have hardened.
Frequently Asked Questions
Do I need both documents? Most businesses with more than one owner benefit from both. The articles govern the company and the shareholders’ agreement governs the relationship between owners.
Is a shareholders’ agreement public? No. Unlike the articles, it is not registered with the Companies Registry and remains a private contract.
What happens if the two conflict? This is a drafting problem worth avoiding. Well-drafted agreements address the interaction directly, and statutory provisions can override both regardless.
Can we add a shareholders’ agreement later? Yes, and many companies do at their first funding round. It is easier to agree terms before a disagreement rather than during one.
Can a shareholders’ agreement stop a director being removed? Not reliably. Section 462 permits removal by ordinary resolution despite anything in the articles or any other agreement.
What if a co-founder simply leaves? Without vesting or leaver provisions, they generally keep their shares. That outcome is what vesting is designed to prevent.