The Model Articles are the most common form of articles for companies in the UK, as they are applied to all companies by default, unless the company chooses to adopt other articles.
The Companies (Model Articles) Regulations 2008 prescribe default model articles of association for:
- private companies limited by shares;
- private companies limited by guarantee; and
- public companies.
Pursuant to section 20 Companies Act 2006, these model articles will apply to a company in their entirety if that company doesn’t adopt any articles. If the company does adopt bespoke articles which don’t exclude or modify the relevant model articles then the relevant model articles will (so far as applicable) form part of the company’s articles of association.
Consequently, the model articles are the most common form of articles for companies incorporated since 1 October 2009 (when the regulations came into force). Although it should be decided on a case by case basis, the model articles are most applicable to small companies where there is little risk of a dispute between either the shareholders or the shareholders and the directors.
Set out below is a summary of the main provisions included in the Model Articles for private companies limited by shares (for the purposes of this article, the “Model Articles“) which are fully set out in schedule 1 of the Companies (Model Articles) Regulations 2008.
The Model Articles were updated as of 28 April 2013 and for a companies incorporated on or after 28 April 2013 with the Model Articles, the new version will apply. The new version has deleted article 18(e) which allowed the termination of a director on grounds of mental health.
For companies incorporated between 1 October 2009 and 27 April 2013 (inclusive) the old Model Articles will apply that can be found here.
Shareholders’ Reserve Power (Article 4)
By a special resolution (ie a resolution requiring 75% or more of the votes in favour) the shareholders may direct the directors to take or refrain from taking, specified action.
Number of Directors (Articles 7)
The Model Articles do not contain any minimum or maximum number of directors. If there is only one director then that director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
Decision Making by Directors (Articles 7-8)
The general rule about decision making under the Model Articles is that decisions should be taken unanimously or by a majority decision at a meeting of the directors. It is important to note that a majority decision cannot be made by the directors other than at a properly called directors’ meeting.
Directors’ Meetings (Articles 9-13)
A directors’ meeting can be called by any of the directors or the company secretary (if appointed) by giving notice to each of the other directors. A directors’ meeting will be validly held if:
– the meeting has been called and takes place in accordance with the articles; and
– each director can communicate to the others any information or opinions they have on any particular item of the business at the meeting.
This means that a meeting held by tele-conference or video-conference will be validly held if it meets the other relevant requirements.
The quorum for a directors’ meeting is two unless it is otherwise fixed by a decision of the directors (but it must never be less than two). The directors’ may appoint a chair of the meeting in which case the chair will have a casting vote if the vote on a decision is tied.
Conflicts of Interest (Article 14)
Section 177 Companies Act 2006 stipulates that if a director is interested in any way, directly or indirectly, in a proposed transaction or arrangement with the company he must declare the nature and extent of the interest to the other directors. Article 14 of the Model Articles states that, if a director is so interested in a proposed transaction then that director shall not be counted in the quorum and their shall not vote on the matter unless:
– the shareholders have disapplied the relevant provision in the articles;
– the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest;
– the director’s interest came about because of:
- a guarantee given, or to be given, by or to a director in respect of an obligation incurred by or on behalf of the company or any of its subsidiaries;
- a subscription, or an agreement to subscribe, for shares or other securities of the company or any of its subsidiaries, or to underwrite, sub-underwrite, or guarantee subscription for any such shares or securities; and
- arrangements pursuant to which benefits are made available to employees and directors or former employees and directors of the company or any of its subsidiaries which do not provide special benefits for directors or former directors.
It should be noted that section 175 Companies Act 2006 states that a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possible may conflict, with the interests of the company. Such a situational conflict can be authorised by the independent directors if nothing in the company’s constitution prohibits it and, as the Model Articles are silent on this area, this power does lie with the independent directors.
Appointment of Directors (Article 17)
A new director may be appointed by an ordinary resolution of the shareholders or by a decision of the directors.
Shares (Articles 21-29)
Other than the subscriber shares issued on incorporation, all shares must be fully paid up. The Model Articles only provide for ordinary shares to be issued, but they do permit shares of different classes to be issued with such rights or restrictions as may be determined by an ordinary resolution or the shareholders.
The company must issue, free of charge, a share certificate to each shareholder and, subject to certain conditions, must issue a replacement certificate if that certificate has been damaged, defaced, lost, stolen or destroyed.
Upon a transfer of share(s), the instrument of transfer needs to be lodged with the directors for registration. The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent. Section 771 Companies Act requires that the directors must give reasons for the refusal to register the transfer and failure to comply with this requirement is an offence.
Dividends and other Distributions (Articles 30-36)
A final dividend must be first recommended by the directors and then authorised by an ordinary resolution of the shareholders. An interim dividend may be paid following a decision of the directors.
Any dividend must be declared and paid in accordance with the shareholders’ respective rights and, unless the shareholders’ resolution or directors’ decision or the terms on which the shares were issued, specify otherwise, a dividend must be paid by reference to each shareholders’ holding of shares on the date of the resolution or decision to declare or pay it.
Unless specified in a separate agreement or in the terms on which the share was issued, no interest shall accrue on a dividend.
If they are so authorised by an ordinary resolution of the shareholders, the directors may decide to capitalise any profits of the company which are not required for paying a preferential dividend, or any sum standing to the credit of the company’s share premium account or capital redemption reserve. Such capitalised sum should be used for the benefit of the same persons and in the same proportions as would otherwise have been the case for either:
(a) paying up and issuing as fully paid new shares in the capital of the company; or
(b) paying up and issuing as fully paid new debentures of the company.
The Model Articles do not specify when profits are available for distribution and this is set out in Part 23 of Companies Act 2006.
Organisation of General Meetings (Articles 37-41)
Private companies are no longer required to hold Annual General Meetings under the Companies Act 2006 and the Model Articles do not contain any provisions relating to AGMs. The following relates to general meetings of the shareholders. The notice provisions for general meetings are included in the Companies Act 2006 and not the Model Articles.
The directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. The Model Articles are drafted widely so that if a person is able to communicate to the others and vote then they shall be counted as attending and voting at the meeting. Consequently, attendance by phone or video link is permitted.
The Model Articles do not set a quorum for a general meeting and therefore the quorum is two qualifying persons (section 318 Companies Act 2006) unless there is only one member of the company in which case the quorum is one. If a quorum is not present within half an hour of the time at which the meeting was due to start or if during the meeting a quorum ceases to be present, the chair must adjourn the meeting.
There must be a chair of the meeting (which shall be the chair of the directors if they have appointed one and they are willing to act) but the chair does not have a casting vote.
Directors may attend and speak at a general meeting by right and the chair of the meeting may permit other persons to attend and speak at a general meeting.
Voting at General Meetings (Articles 42-46)
Unless a poll is demanded, a resolution put to the vote of a general meeting must be decided on a show of hands. A poll may be demanded in advance of the general meeting or at a general meeting either before a show of hands or immediately after the result of a show of hands on that resolution is declared.
A poll may be demanded by:
(a) the chairman of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.
Shareholders may deliver proxy notices in respect of their shares but they will only be valid if they:
– state the name and address of the shareholder appointing the proxy;
– identify the person appointed to be that shareholder’s proxy and the general meeting in relation to which that person is appointed;
– are signed by or on behalf of the shareholder appointing the proxy, or are authenticated in such manner as the directors may determine; and
– are delivered to the company in accordance with the articles and any instructions in the notice of the general meeting to which they relate.
Administrative Arrangements (Articles 48-51)
The Model Articles permit any form of communication allowed under Companies Act 2006 which includes, subject to certain conditions, communication by email or via a website.
There is no requirement for a company to have a company seal but, if it does, then the Model Articles give the directors the power to direct how it is used.
Other than as required by law or authorised by the directors or an ordinary resolution of the shareholders, no person is entitled to inspect of the company’s accounting or other records or documents merely by virtue of being a shareholder of the company.
The directors may make provision (normally a payment) for the benefit of employees (other than directors) in connection with the cessation or transfer to any person of the business of the company.
Directors’ Indemnity and Insurance (Articles 52-53)
The Model Articles provide that a director may be indemnified out of the company’s assets in certain circumstances, but this will require a positive decision by the directors. There is no automatic indemnification. The relevant liabilities that can be indemnified are:
- any liability incurred by that director in connection with any negligence, default, breach of duty or breach of trust in relation to the company or an associated company;
- any liability incurred by that director in connection with the activities of the company or an associated company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Companies Act 2006); and
- any other liability incurred by that director as an officer of the company or an associated company,
The Model Articles permit the company to purchase and maintain insurance at the cost of the company for the benefit of the directors.
This summary of the Model Articles has been provided for general information only. It does not purport to be complete and does not include many relevant provisions that should be considered from the Companies Act 2006 and other legislation (although where particularly relevant these have been included). This summary should not be relied upon and advice should always be taken if you are in any doubt as to the relevant rules. Please contact one of our company secretarial experts if you would like any specific advice.