Memorandum and articles

The memorandum and articles of association are a company's constitutional documents. It is vital that these documents, which set out the rules for running the company, have the right provisions for this particular company. More often than not a set of standard documents, though cheap to provide, do not meet the requirements of the directors or shareholders. Not having the right provisions in the memorandum and 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 memorandum and articles, outlining the most important provisions to consider when setting up a company or reviewing the existing documents. Like all registration agents, we have a standard set of memorandum and articles which is used for all our ready made companies and all company formations where no special instructions have been received. The notes below outline the key features of our standard documents, the position under any relevant legislation and Table A, and some suggested alternative provisions which are commonly encountered.

Drafting memorandum and 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.

At Incorporation Services Limited we provide the level of service you require:

Standard documents
A company formation or a ready-made company using our standard documentation, without amendment. This is the cheapest option.

Pick and mix options
A fixed price set of variations on the standard articles, providing a range of commonly used provisions which will, between them, cover most situations. This is useful for those who wish to review the options themselves and devise the best combination of options to suit their company, at the modest additional cost of £35.

Tailor made memorandum and articles
Devising documents to meet the very specific requirements for a particular company.

Advisory report and recommendations
If in doubt about the provisions which should be included in any particular case, we can prepare a detailed report, with recommendations and an analysis of the options, in response to our Memorandum and Articles Questionnaire. Our charge for such a report is £80 plus VAT.

CONTENTS OF MEMORANDUM AND ARTICLES

In theory the memorandum and article comprise two separate documents: the memorandum of association and the articles of association, but they are always bound together and treated as one.

Memorandum of Association
Every company's memorandum must contain the following details and, in practice, there is little choice as to its contents. It must state the following:

The company's name (please refer to our factsheets on company names and trade marks.)

The situation (i.e. country) of the registered office (the actual address is not stated in the memorandum but is notified to Companies House on an official form and may be changed from time to time).

The objects of the company.

A statement that the liability of members is limited

The authorised share capital

Objects
The practice of setting up each company with a specially drafted (and very lengthy) objects clause is now obsolete for most purposes since the 'general commercial company' was brought in by the Companies Act 1989. A general commercial company can carry on any trade or business whatsoever, and has power to do all such things as are incidental or conducive to the carrying on of any trade or business by it. Nearly all new companies are set up in this way.

Authorised (or nominal) capital
This is the maximum amount of share capital which may be issued by the company (unless it goes through a procedure to increase the figure). There is no obligation to issue all the capital and the amount stated does not affect the shareholders' liability in any way. It must be a sum of money divided into shares of a fixed amount, e.g. £1,000 divided into 1,000 shares of £1 each. It is important that the amount stated is sufficient to cover all share allotments which may be required.

Articles of Association
The articles contain 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.

Nearly all companies' articles are based on a standard statutory set of regulations called 'Table A'. Many of the rules in Table A are routine regulations that do not need to be amended, but some of them will be completely unsuitable. Preparing the articles for a particular company is therefore a question of deciding which provisions of Table A need to be changed. Click here for a copy of the current version of Table A

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, such as preference shares (which usually carry the right to a preferential dividend of a fixed amount) or non-voting shares or shares with multiple votes. Sometimes special shares are created for employees, or members of the shareholders' families, or to enable dividends to be paid for tax reasons. 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
The effect of Table A articles is that the directors will always need authority from the shareholders before they can allot any new shares in the company, and the existing shareholders have pre-emptive rights, so any new shares must be offered to the present shareholders in proportion to their present holdings.

These provisions are often amended, and a range of options is available. The possibilities include:

(1) giving the directors maximum freedom over share allotments, so that they can allot shares they wish to anyone they wish for up to five years; or
(2) putting pre-emption provisions in the articles to strengthen them instead of relying on the statutory rights (which do not apply to all circumstances); or
(3) making share allotments subject to the written consent of all existing shareholders.

Our standard articles are a compromise. Directors are given complete freedom for five years (the maximum period allowed) to allot any shares up to the authorised share capital with which the company is incorporated, but any shares beyond that amount must be offered to existing shareholders before being sold to anyone else.

Share transfers
Table A has no restriction on the transfer of fully paid shares. As most shares in most companies are fully paid up at the time of issue, the Table A provision is really not suitable for most private companies. There are many different transfer provisions that can be used, but the most usual ones are:

(1) to give the board of directors an absolute discretion to refuse to register any share transfer. This is very widely used and is to be found in our standard articles. It is, however, completely inappropriate in some circumstances, such as a two-person company; or

(2) 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

(3) that all shareholders must consent to any transfer.

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, change the company's name, etc. 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).

The most frequently amended provisions are:

(1) to fix a quorum other than two (as laid down by Table A). This can be very important as a means of protecting shareholders from an important meeting being conducted without them; and/or

(2) to remove the chairman's casting vote. Under Table A the person chairing the meeting has a casting vote (in addition to his or her own vote) if the voting on an ordinary resolution is tied. Depending on the number of shareholders in the company, and their relative voting strengths, it may be important to take away this power.

Our standard articles do not include either of these amendments.

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 Table A are:

(1) to fix a quorum other than two;

(2) to remove the casting vote;

(3) to remove the restrictions in Table A on a director who has an interest in a particular 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 Table A.

Appointment and removal of directors
The Table A provisions on the appointment of directors are that the general meeting can at any time appoint an additional director (by ordinary resolution) and that the board of directors can also appoint, but in this case the director holds office only until the next general meeting.
As to removal of directors, Table A requires one-third of the directors to retire each year, in rotation, and, if they wish, stand for re-election. This is excluded in our standard articles. There are also provisions for resignation and removal if a director cannot act or is absent for six months, etc. A very important provision of the Companies Act (s. 303) is that any director can be removed by an ordinary resolution of the general meeting.

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 (quite apart from the retirement by rotation provisions) can even remove that third person as a director.

Typical amendments to Table A are:

(1) to remove the retirement by rotation provisions (as in our standard articles); and/or
to provide that no person may be appointed as a director without the written consent of all the shareholders; and/or

(2) 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 Table A. A company's articles should be drafted to suit the particular company. Contact us to discuss your memorandum and articles.