Introduction to articles
A company's articles of association are its main constitutional documents. The articles set out the rules for running the company. Typically the articles will contain regulations covering the following areas, together with many more minor matters:
Typical areas covered by company articles
Directors’ powers and responsibilities, directors’ meetings, appointing and removing directors, directors’ remuneration, types of shares, issuing shares, share certificates, share transfers, paying dividends, organisation of general meetings, such as notice of meetings, voting rights and proxies right to speak, quorum, etc.
Table A and the Model Articles
Until the provisions of the Companies Act 2006 came into effect, companies had two documents, the memorandum of association and the articles of association (collectively known as the memorandum and articles). Most companies had articles based on a specimen set of articles called Table A (originally to be found in earlier Companies Acts, but since 1985 set out in successive statutory instruments).
From 1st. October 2009 completely new documents came into effect. The traditional memorandum of association was abolished, so that all the constitutional provisions are now contained in the articles. Nearly all companies set up after that date will not have the statement of objects or an authorised share capital, which were the main contents of the memorandum, as these are no longer statutory requirements. The new articles are based on a new standard document called the Model Articles. Of course many companies still exist with the memorandum and articles they had before that date.
Companies registered from 1st. October 2009
Ordinary commercial companies registered under the new Act will have articles based on the new Model Articles. They set out the rules for running the company and are a contract between the company and its shareholders, broadly the equivalent of a partnership agreement. Because the contain the shareholders' rights in the company, it is essential that they contain the right provisions for this particular company.
Most companies are set up using standard documents belonging to the company registration agents or solicitors undertaking the formation. Such documents are based on the new Model Articles (a government approved standard document), but are inevitably a compromise. They work perfectly well for a single person company or where the shareholders and directors are never going to fall out about the running or ownership of the company. Where two or more people are going into business together, they really do need to ensure that their agreement is contained in appropriate articles and/or a separate shareholders' agreement. Not having the right provisions in the articles could have serious consequences at some future stage, particularly if a dispute should arise between the directors and/or shareholders of the company.
The following is a guide to the key elements of company articles, outlining the most important provisions to consider when setting up a company. They outline the main features of the standard documents used by Incorporation Services Limited and some suggested alternative provisions. Drafting articles is a complex business. The suggestions below will, between them, deal with the majority of cases, but there may be other options which can be considered if they appear not to be suitable. In many cases a shareholders' agreement will also be essential. If you require further advice, please contact us.
CONTENTS OF THE ARTICLES
The articles are the detailed regulations for running the company, including, for example, rules on the allotment and transfer of shares, the appointment and removal of directors, conduct of board and general meetings, etc. When drafting articles, the following areas usually need to be considered:
Classes of shares
Most companies have just £1 ordinary shares. There can be many reasons for creating different classes of shares, including for tax reasons, such as when special shares are created for employees, or members of the shareholders' families. Company Law Solutions can advise on and create special classes of shares for particular purposes and their website gives further details about share classes.
Different arrangements suit different companies, such as:
(1) giving the directors maximum freedom over share allotments, so that they can allot shares they wish to anyone they wish (our standard provision); or
(2) pre-emption provisions so new shares must be offered to existing shareholders; or
(3) requiring the written consent of all existing shareholders before new shares can be issued.
Company Law Solutions can advise on share allotments and their website gives further details about allotment procedures, etc .
The Model Articles give the board of directors an absolute discretion to refuse to register any share transfer (our standard provision), but other common alternatives are:
(1) pre-emption provisions on any transfer so that shares have to be offered to existing shareholders before they can be sold to anybody else; or
(2) that all shareholders must consent to any transfer.
In some cases, special transfer provisions are drafted, e.g. to ensure that shares can be passed to members of a shareholder's family, or that some classes of shares are treated differently from others. Company Law Solutions have many years of experience of drafting such provisions and more details can be found on their website.
General meetings are meetings of the shareholders where the most important decisions are made. Most decisions are made by passing an ordinary resolution, which requires just a simple majority of those who vote. Some decisions, e.g. to alter the articles, require a special resolution, which has to be passed by a three-quarters majority of those who vote. At this meeting, each shareholder has the number of votes conferred by the shares they hold (usually one vote per share). A frequently amended provision is to fix the quorum as something other than two (the standard provision). This can be very important as a means of protecting shareholders from an important meeting being conducted without them.
Board meetings comprise the directors of the company (who may be the same people as the shareholders, but need not be). The board has control of the day to day running of the company, including all commercial decisions. At a board meeting every director has one vote (regardless of the number of shares held). Typical amendments are:
(1) to fix a quorum other than two;
(2) to remove the chair's casting vote;
(3) to remove the restrictions on a director who has an interest in a transaction from voting and counting in the quorum for the meeting.
Appointment and removal of directors
The Model Articles' provisions on the appointment of directors are that the board or the general meeting can at any time appoint an additional director.
As to removal of directors, a very important provision of the Companies Act 2006 (s. 168) is that any director can be removed by an ordinary resolution of the members. The Model Articles also provide for automatic cessation of office in certain circumstances (e.g. where a director becomes bankrupt or disqualified from acting).
These provisions can be very important. Take, for example, a typical three-person company in which all three are directors holding one-third of the shares each. Under the standard provisions any two of the three can appoint additional directors to the board against the wishes of the third shareholder, and can even remove that third person as a director.
Typical amendments to the Model Articles are:
(1) to provide that no person may be appointed as a director without the written consent of all the shareholders; and/or
(3) to include 'enhanced voting rights' so that a director who is also a shareholder cannot in practice be removed by ordinary resolution.
The above comments are just a guide to some of the more common amendments to the standard articles. A company's articles should be drafted to suit the particular company.
Companies registered before 1st. October 2009
A company registered before that date will have memorandum and articles until such time as it decides to adopt new articles. The memorandum will contain the company's name, situation of registered office, objects, a statement of limited liability and authorised share capital. Statements of objects and authorised capital are no longer required, but a company with a memorandum will still be bound by these statements until it alters the documents to remove them. The company can continue to operate under its old memorandum and articles, but the references to Companies Acts before 2006 will be to now outdated provisions, and there will often be provisions in the memorandum and articles that are now contrary to the current statutory rules.
Changes to existing companies' memoranda and
The coming into effect of the provisions of the Companies Act 2006 relating to memoranda and articles does not, of itself, affect existing companies. A company registered before 1st. October 2009 will retain its memorandum and articles. The provisions in the memorandum are deemed to have become part of the articles on that date (Companies Act 2006, sec28). See our separate page on updating articles.
If the company wants to update its articles to take advantage of the new provisions, it can do so by adopting new articles. This can be done by passing a special resolution. A company that does not do this will continue to be regulated by its existing memorandum and articles and, in particular, will still be bound by its objects clause and cannot issue shares beyond its authorised capital. All companies should review the existing provisions of their memorandum and articles. In some cases it will be important to update the documents by adopting new articles. In other cases, the existing articles may well serve without amendment for the time being, though there will be some provisions that are now contrary to new legislation.