Henry Catchpole takes a look beyond the model articles of association.
Together with the memorandum, the articles of association make up the governing documents for UK companies. The articles set out how a company is managed, overseen and owned, including detailed provisions relating to matters such as:
• The appointment/removal of directors.
• Directors’ powers and responsibilities.
• Directors’ meetings and voting.
• Share particulars, rights and liability.
• The process for and any restrictions on issuing and transferring shares.
• Members’ decision-making, including shareholder meetings.
• Dividends and other distributions to shareholders.
• Means of communicating with members.
Particularly where there is more than one director or shareholder, the articles serve to protect the different parties’ rights and interests in the company. They ensure the directors have the powers they require to manage the company day to day, but that shareholders’ interests are protected and they retain an appropriate degree of control over the direction of the company.
The directors and any company secretary should have a good working knowledge of the articles of association, in part so they always act within their powers. Before taking any action that affects the company, such as allotting shares or appointing a new director, they should consult the articles to check any processes, formalities or restrictions laid down there.
Most companies are set up using the model articles set out in The Companies (Model Articles) Regulations 2008, as amended. Different model articles are available for a private company limited by shares, private company limited by guarantee and public limited company. The model articles are generally versatile, and allow a company to be set up quickly, easily and without the additional cost of drafting alternative articles.
Sometimes advisers recommend that a new company uses an amended version of the model articles or its own bespoke articles. This might be because a potential investor makes certain provisions within the articles a condition of their investment.
More generally, areas where companies often look for enhanced provisions beyond the model articles include:
• To provide for the issue of nil or partly paid shares, which the model articles only cover at the time of the company’s formation;
• To make specific provision for multiple classes of shares, including details of their differing rights to vote, receive dividends and return of capital on winding up of the company;
• To put in place clear pre-emption provisions, giving existing shareholders first refusal on shares that become available. These rights can apply on share allotments, transfers or both and may be particularly important in the absence of a shareholders’ agreement;
• To cater for the appointment of alternate directors;
• More specifically to support the appointment and powers of a company secretary.
Some matters might instead be covered in a shareholders’ agreement, which doesn’t form part of the articles of association but sits alongside them. While the articles of association are a public document, available for anyone to inspect online, a shareholders’ agreement may remain private between the parties to it.
If a company is started with articles other than the model articles, then the chosen articles must be sent to Companies House with the application to form the company. The regulator will undertake a check of the articles, but only a basic one. Therefore, it’s important that those forming the company have already ensured the articles are internally consistent and give the different parties involved the appropriate mix of powers and protections.
While many companies will keep the same articles throughout their lifetime, it’s also possible to amend them later. A change can be implemented by:
• Amending the wording of one or more clauses in the existing articles;
• Adding in new or removing clauses from the existing articles; or
• Adopting an entirely new set of articles (completely replacing the previous articles).
Unless the company has just a single director and shareholder, any of these changes require a special resolution to be passed, which needs the consent of 75% of shareholders rather than a simple majority. A special resolution can be passed either at a shareholders’ meeting or by a shareholders’ written resolution.
If the company changes its articles other than to the model articles then a copy of the new articles should be sent to Companies House for review within 15 days of the agreement to update them. A copy of the amending resolution must also be sent. There’s no requirement to tell Companies House why the company is changing the articles of association.
• Henry Catchpole, CEO Inform Direct. For information call 0844 409 9494 or go to www.informdirect.co.uk
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