Articles of association

This page explains in outline what a company's main constitutional document will contain and why it is important to ensure that your company has the right provisions in its articles.

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 a statement of objects or an authorised share capital as these are no longer statutory requirements. The new articles will be based on a new standard document called the Model Articles.

This page deals with:
Companies registered from 1st. October 2009
Companies registered before 1st. October 2009
Changes to existing companies' articles

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.

Standard documents
When we set up a company, we use standard documents. These are prepared to a high standard, and 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. Thye outline the main features of our standard documents 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. At Incorporation Services Limited we can advise on and create special classes of shares for particular purposes (though we do not give tax advice). Please contact us to discuss your requirements.

Share allotments
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.

Share transfers
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 differenntly from others. At Incorporation Services we have many years of experience of drafting such provisions.

General meetings
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
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 to the standard articles 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. Our standard articles remove these restrictions but do not amend the quorum or casting vote provisions of the Model Articles.

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 standar articles. A company's articles should be drafted to suit the particular company. Contact us to discuss your requirements. Typical drafting costs are £50 - £200 plus VAT (depending on the complexity) and we will always provide a firm estimate before proceeding with any work.

Companies registered before 1st. October 2009
A company's memorandum and articles are its constitution. They set out the rules for running the company and are a contract between the company and its shareholders, the equivalent of a partnership agreement. They set out the rules for running the company and it is essential that they contain the right provisions for this particular company.

Standard documents
Very many companies registered before 1st. October 2009 will have memorandum and articles supplied by company registration agents or solicitors. These can work very well when the company is owned and run by just one person. Where two or more people are in 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.

Changes to existing companies' memoranda and articles
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.

If the company wants to update its articles to take advantage of the new provisions, it can do so by adopting new articles. 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.

At Incorporation Services Limited, we provide a service for updating articles, and can advise whether this would be necessary or desirable for your company. Contact us if you would like us to review your existing documents

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