WHY COMPANIES SHOULD SUPPLEMENT MEMORANDUM AND ARTICLES OF ASSOCIATION WITH SHAREHOLDERS’ AGREEMENTS

In Uganda, companies are primarily governed by the Companies Act, Cap106, and their  regulations there under are outlined in two key documents i.e. the Memorandum of Association which Defines the company’s relationship with the outside world, including its objectives, share capital, and liability of members and the other key document is the  Articles of Association which Contains rules for internal management, such as director appointments, shareholder rights, and meeting procedures. 

While these documents are mandatory, they are often generic and may not address specific shareholder arrangements. This is where a Shareholders’ Agreement (SHA) becomes crucial. A Share Holders Agreement  is a private contract among shareholders that supplements the Memorandum of Association and Articles of Association , providing clarity, preventing disputes, and protecting minority interests. 

This brief article highlights on the need for Companies in Uganda to supplement their Memerts with Shareholders’ Agreement as detailed below.

1.    Customized Governance Beyond Standard Provisions  Wellas the Articles of Association is a standard document that may not cover unique shareholder arrangements. A Share Holders Agreement allows shareholders to agree on: Voting rights (e.g. veto powers for minority shareholders). Dividend policies (how and when profits are distributed) and among others Management roles (specific duties of directors appointed by certain shareholders). 

For instance  a Ugandan joint venture between a local entrepreneur and a foreign investor, the Share Holder´s Agreement can specify that major decisions require approval from both parties, even if the Articles of Association allows simple majority voting. 

2.    Protection of Minority Shareholders

Ugandan company law does not always adequately protect minority shareholders a Share Holder´s Agreement on the other hand  can include:  -Tag-along rights(if a majority shareholder sells their stake, minorities can join the sale).  - Drag-along rights (majority can force minorities to sell in a buyout).  - Pre-emptive rights (existing shareholders get first refusal on new share issues). Such clauses can effectively protect minority Shareholders in a Company than the traditional Memerts. 

3.    Dispute Resolution Mechanisms Much as the Articles of Association  may not detail how disputes should be resolved, a Share Holder´s Agreement can include dispute resolution Mechanism such as Mediation/Arbitration clauses (avoiding costly court cases and Deadlock-breaking mechanisms such as casting vote or third-party mediator). 

This could in the long run  provide an out of Court dispute settlement which is precise, cost friendly and time saving  instead of prolonged court battles over shareholder disagreements. 

4.Transfer of Shares and Exit Strategies

The Articles of Association  may have basic transfer restrictions, but a Share Holders 'Agreement  can enforce the following:  - Right of first refusal (existing shareholders must be offered shares before outsiders).  - Shotgun clauses(a mechanism for one shareholder to buy out another at a fair price).  - Valuation methods (how shares are priced in case of exit or death of a shareholder). 

5. Confidentiality and Non-Compete Clauses Unlike the Articles of Association , a Share Holders Agreement can include:  - Confidentiality agreements(preventing shareholders from leaking sensitive information).  - Non-compete clauses (stopping exiting shareholders from starting rival businesses). 

For example a Ugandan Tech company startup’s Share Holding Agreement can  prevent a departing co founder from launching a competing app within 3 years, protecting the company’s interests and thus giving the company stability in the initial stages. 

6. Flexibility and Future-Proofing  A Share Holders Agreement is easier to amend/update than the Articles of Association which requires meetings and filing resolutions with the Uganda Registration Services Bureau (URSB). Companies can amend and update the Share Holders  Agreement as business needs evolve. 

7. Legal Enforceability of Shareholders’ Agreements in Uganda  Under the Contracts Act, Share Holders 'Agreements s are binding if they:  - Do not contradict the Companies Act or the provisions of the  Memorandum of Association/Articles of Association.  - Are signed by all shareholders. . 

In Conclusion while the Memorandum and Articles of Association provide a basic legal framework, a Shareholders’ Agreement is essential for: 

·      Tailored governance beyond standard rules. 

·      Protecting minority shareholders from unfair treatment. 

·      Resolving disputes efficiently without court intervention. 

·      Regulating share transfers and exits smoothly. 

·      Ensuring confidentiality and business stability. 

Companies in Uganda especially startups, joint ventures, and family businesses should adopt a well-drafted Share Holders 'Agreement (SHA) alongside their Memorandum of Association (MoA) and Articles of Association (AoA) to prevent conflicts and ensure smooth operations. By doing so, companies can avoid costly disputes and ensure long-term stability in Uganda’s competitive business environment. 

Do you find this article helpful or you would wish to have a SHA supplemented to your Memerts, don’t hesitate to reach me out.