Articles of Association; every company has one and it is arguably its most important document, but people often aren’t aware of how they work or what they can do. Here we try and simplify it all a bit though inherently we can only scratch the surface so if you have any specific questions please see the drafting services we can provide for articles of association or get in touch with us to discuss your specific needs.

About articles of association

Key terms in the articles of association

About Articles of Association

01. What are articles of association?

They are the constitutions and governing document of a company and include the rules for the company relating to various areas including:

  • shares and dividends;
  • proceedings of directors;
  • proceedings of shareholder meetings; and
  • various administrative matters.

They can range from relatively simple and standard documents to very long and bespoke documents dealing with different types of share rights and decision making processes.

It is a public document which anyone can view through Companies House.

02. Who does it affect?

Every shareholder and every director of a company needs to act in accordance with a company’s articles of association.

03. What does a shareholders’ agreement do?

Not all companies have a shareholders’ agreement but it can add an extra layer of rules on top of the articles if so desired. They tend to govern the relationship between different shareholders though they often include rules governing the company and the directors as well.

A shareholders’ agreement is not a public document and so it is sometimes used to include commercial details that the shareholders don’t want to be publicly available.

04. What is a memorandum of association?

Prior to 1 October 2009, the memorandum formed part of a company’s constitution just like the articles, but it is now simply a document used on the incorporation of a company and the provisions that used to be in the memorandum are now all included in the articles of association.

05. How do you change the articles of association?

A company can change its articles by passing a special resolution. This means that shareholders with at least 75% of the votes need to approve the change.

06. What are model articles?

Since 1 October 2009, any new company will have the model articles as a default unless they choose to adopt different articles. The model articles have been drafted and approved by the government and are a good standard set out articles. However, they are inevitably a compromise and are best suited to companies with just one shareholder or where there is no chance of the shareholders disagreeing.

07. What if a company was formed prior to 1 October 2009

The Companies Act 2006 have changed many of the provisions relating to articles of association yet a company that was formed prior to 1 October 2009 will still have the same articles as it did before then, unless they have changed it. This means that its articles of association may well not work as they should.

Elemental CoSec can review a company’s articles of association and advise on whether it’s sensible to update the articles.

08. What articles should I adopt?

It depends on the type of company and the nature of the shareholders and directors.

The model articles are the most simple and straightforward of the standard articles and generally the easiest to use, although the compromise with this is that they exclude a lot of standard provisions. These articles are best suited for a company with just one shareholder or where the shareholders are not going to disagree.

Elemental CoSec’s precedent articles are designed for a company with just one shareholder, but do have provisions that can be applicable for multiple shareholders. They do not contain any minority protections and are therefore not suitable for shareholders who want to protect their rights against the others. They give the directors more discretion than the wholly owned articles.

Bespoke articles of association are almost always the best option, if you can afford them. They allow you to set out exactly the rights, obligations and procedures that the shareholders wish to have. They can also be tailored to fit with a shareholders’ agreement if needed.

If you are unsure which articles you require or whether you need bespoke articles then please contact us as the choice of articles is one of the most important decisions for a company.

Key Terms in the Articles of Association

01. Classes of shares

Most companies have just one class of ordinary shares, often with a nominal value of £1. However, a company can have multiple classes of ordinary shares, preference shares and redeemable shares. These classes of shares can have any combination of rights and responsibilities within the parameters of the Companies Act and these would generally be set out in the articles of association.

The model articles allow the directors to issue shares with such rights or restrictions as may be determined by ordinary resolution.

02. Allotment of shares

Generally directors require specific authorisation, either from the shareholders or in the articles, to allot shares. However, under the Companies Act 2006, the directors of a company with only one class of shares may allot shares of that class unless the articles prohibit it.

The model articles do not prohibit the directors from allotting shares so, assuming the company has only one class of shares, the directors may allot further shares.

03. Pre-emption rights

Pre-emption rights require that a new allotment of shares must be offered to all ordinary shareholders in the same proportion as they currently hold them.  The Companies Act 2006 includes some standard pre-emption rights which will apply unless:

  • the articles of association exclude them;
  • the company passes a special resolution excluding them;
  • the shares are issued for non-cash consideration; or
  • the shares are within an employees’ share scheme.

The model articles do not dis-apply the standard pre-emption rights so unless one of the other exceptions applies, the pre-emption rights will apply to any allotment.

04. Members’ reserve power

Articles sometimes contain a reserve power for the shareholders (or members) whereby they can require the directors to do (or not to do) anything that is within the power of the directors.

The model articles do contain this reserve power.

05. Transfer of shares

Articles of association generally contain details of whether and in what circumstances, directors may refuse to register a transfer of shares. It should be noted that section 771 Companies Act 2006 states that if directors do refuse to register a transfer of shares then they must provide the transferee with the reasons for the refusal to register.

The model articles allow the directors to refuse to register a transfer for any reason they see fit though they must act in the best interests of the company when doing so (and not the best interests of a particular shareholder).

06. Shareholders’ decision making

The articles of association sets out the various rules and procedures for a shareholder general meeting including such things as:

  • quorum;
  • notice requirements;
  • attendance and speaking rights;
  • adjournment;
  • chairing of general meetings; and
  • voting and proxies.

The Companies Act 2006 permits private companies to pass shareholders resolutions by written resolution (other than in relation to certain exceptions).

The model articles contain basic information about general meetings but most private companies using the model articles will use the written resolution procedure and therefore the model articles are not that detailed on general meetings.

07. Directors’ decision making

The articles need to set out provision relating to directors’ meetings, quorum and notice period as well as how they make their decisions.

The model articles provide that directors may make a decision:

  • by majority decision where they have had a directors’ meeting; or
  • by unanimity where they pass a written resolution.

08. Conflicts of interest

Sections 175-177 and 182 Companies Act 2006 place obligations on directors to avoid and/or declare certain conflicts of interest. A company’s articles of association can provide provisions for the authorisation of a director’s conflict of interest. Depending on the type of conflict and the terms of the articles, a conflict can be authorised by the shareholders or by independent directors.

The model articles provide provisions dealing with when a conflicted director can vote but are quite limited in the ability for a director’s conflict to be authorised.

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