Many, if not most, founders of start-ups and early-stage businesses aren’t that interested in legal nitty-gritty. That’s understandable. Their focus is on attracting customers and growing their brand.
When you launched your business, your lawyer or accountant probably took care of the details and set up a limited company so that you can trade with limited liability, protecting your personal assets against losses. So what more do you need to know about owning a company?
We’d say, a great deal. If you’re new to entrepreneurship and company ownership or have invested in a company as a shareholder, we’d strongly recommend you get on top of the legals and seek expert corporate legal advice, in particular, understanding the rules that dictate how your company is run. These rules are contained in its articles of association or articles for short, and they’re essentially a ‘user manual’ for the company.
The contents of the articles can have a major impact on your ability to attract finance. New investors will be extremely interested in them because their terms can affect the value of their investment and their ability to realise the value of their shares.
Please note, if you’re a sole director company with the model articles for private companies adopted (without amendments), you need to take action now and amend your articles. You need to do this to make sure any decisions you have previously made and will make are valid and not void as a result of the ruling in a recent court case. Find out more about what you need to do in our update for sole directors.
Read on to find out more about the ins-and-outs of articles of association.
Jump to:
- What are articles of association?
- Why does your company need articles of association and what happens if you don’t have any?
- What do you need to include in the articles of association?
- Where can you find a company’s articles of association?
- What are the key terms in the articles of association?
- What are the ‘model’ articles and when shouldn’t I use them?
- What’s the difference between the articles of association and the memorandum of association?
- How are shareholders' agreements different from articles of association, and why might I want one?
- What articles of association are used for holding companies and subsidiary companies?
- Articles of association and joint ventures
- Can I change my company’s articles and if so, how?
- Can articles of association override the law?
What are articles of association?
Articles are a necessary part of company formation. They represent a contract between the shareholders of a company and the company itself, as a legal entity in its own right. They dictate the way the company is run on a day-to-day basis and are designed to protect the interests of shareholders. Directors are bound by their provisions, despite the fact that they don’t sign them. Their duties as directors mean that they have to abide by them in order to fulfil their obligations to the shareholders, as company owners.
A company’s articles are registered at Companies House, which together with its certificate of incorporation and other fundamental corporate documents form the the company’s ‘constitution’.
The articles deal, among other things, with how directors are appointed and run the company, how shares are issued and change hands, how dividends are paid and how decisions are made by directors and shareholders alike.
Why does your company need articles of association and what happens if you don’t have any?
Under English law, articles are a prerequisite to forming a company. This is the case whether you’re forming a private company limited by shares or guarantee or a public limited company.
Articles don’t have to be in any particular format, but certain provisions have to be included by law. Companies formed before 1 October 2009 may have adopted the standard articles known as ‘Table A’ articles. These articles were updated by legislation, and companies incorporated after that date may adopt the standard ‘model’ articles. You can find the model articles on the government website.
If you haven’t adapted the model articles to suit your particular needs, you or your advisor will have formed your company based on the standard model articles.
This is quite normal. Most people setting up companies for the first time buy an ‘off-the-shelf’ package – that means the company has been set up beforehand using model articles. These can be adapted once the business grows and its business strategy becomes clearer.
The fact is, you can’t start a company without articles of association.
What do you need to include in the articles of association?
A company’s articles must be contained in a single document and divided into consecutively numbered paragraphs.
The Articles cover the following key areas:
- Shareholder liability: owners of a limited company have restricted exposure to any financial losses incurred by the company. This is the nominal amount they’ve paid for their shares, or the amount of their guarantee if it’s a company limited by guarantee. This is usually £1 per share or per guarantor.
- Directors: the number of directors, their appointment, the director decision-making process and their powers and responsibilities.
- Shares: the number of shares, types and classes of share, rights attaching to the shares, the allotment and transfer of shares and the payment of dividends. Shareholders: the decision-making process for shareholders, how many need to be present before a meeting can be valid (the quorum) and the voting process.
- Other administrative arrangements: how notices and documents should be communicated by the company. .
Our corporate solicitors can provide legal advice on drafting or amending your articles of association and other constitutional documents.
Where can you find a company’s articles of association?
You can find a company’s articles of association at Companies House as these are, by law, public documents open for inspection. As an example, take a look at Tesco PLC’s original Articles and subsequent amendments.
A copy of the company’s articles should also be kept at its registered office.
What are the key terms in the articles of association?
Classes of shares
A company may decide to issue different types of share (for example, ordinary shares and preference shares) and different classes of each type of share, for example A ordinary shares and B ordinary shares, often known as alphabet shares.
The creation of varying types and classes of shares allows a company to allocate different rights to different shareholders which may be necessary to reflect the level of investment in the company or for tax reasons. The rights attaching to these shares should be set out clearly in the articles.
The shareholders’ rights section of the articles generally covers the following:
- Entitlement to dividends: how dividends are apportioned between the shareholders
- Entitlement to vote: how the voting rights are weighted between the shareholders
- Entitlement to capital on a winding up or disposal: how certain classes of shares may rank higher in priority when it comes to claims
- Pre-emption rights: whether existing shareholders have the right of first refusal before new shares can be offered to third parties
Allotment of shares
Any restrictions or conditions on the allotment or issue of shares should be contained in the articles. Companies incorporated under the Companies Act 2006 with only one class of shares automatically have an authority to allot shares provided there is no restriction in the articles. All other companies will need to obtain authority to allot shares which can be done by including a general authorisation in the articles.
Pre-emption rights
Even where the directors have the authority to allot shares, they still have to check whether any pre-emption rights apply before allotment can take place. The Companies Act 2006 states that where shares are issued in exchange for cash, those shares must first be offered to existing shareholders as per their existing apportionment unless, amongst other methods, the articles of association exclude these rights.
Members’ reserve power
Some articles (including the model articles) include a reserve power under which the shareholders may instruct the directors to take, or refrain from taking, a particular action, by passing a special resolution.
Transfer of shares
Any restrictions on the ability of shareholders to transfer their shares should be found in the articles. Directors cannot refuse to register a transfer of shares unless they are given this power in the articles.
Under the model articles, directors do have the power to refuse to register a transfer but will still need to act in a way they consider would be most likely to promote the success of the company for the benefit of all shareholders.
Some articles may contain a special power allowing shares to be transferred freely to certain categories of people, for example family members or other shareholders of the company.
Shareholders’ decision making
The shareholders of a company with more than one share will generally take decisions as either written resolutions or at a shareholder general meeting. The articles set out the key rules and processes for a general meeting such as notice requirements, voting and attendance rights, quorum and adjournment.
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If you’d like to know more about Articles of Association or would like further information about starting a company contact our team of expert corporate lawyers.
What are the ‘model’ articles and when shouldn’t I use them?
As we’ve seen, there are standard templates of articles of association known as model articles. This makes the process of setting up a company much easier. There are different types of model articles but for a private company with shareholders, the template articles would be the model articles for private companies limited by shares.
The model articles are not compulsory, however, they can be a useful starting point which can be adapted to suit the requirements of your company,. Because the model articles are designed to be a ‘one size fits all’ solution, they may not always be appropriate for your business.
Model articles may not be suitable if:
- you’re planning to create more than one class of share
- you need to allow for alternate directors
- you want to have a company secretary
- you want to give rights of pre-emption (a right of first refusal) to existing shareholders when new shares are issued
- you want to give notices and hold meetings virtually. This is especially important post COVID-19, as virtual meetings have become easier to organise and manage.
Even if the model articles are suitable, sometimes company owners choose to remove certain provisions, for example to:
- allow board meetings to be quorate when there’s just one director
- remove the right of the chairman to have a casting vote
- to allow directors to vote if they have a conflict of interest
If you don’t want to use the model articles at all, you or your advisor will need to draft bespoke articles which will be tailor-made to fit the needs of your company.
In summary there are three options for a company when adopting articles:
- standard unamended model articles
- amended model articles
- bespoke articles.
What’s the difference between the articles of association and the memorandum of association?
You need both articles and a memorandum of association to form a company. Unlike the articles, the memorandum is pretty brief and it describes:
- The name of the company and the date it was incorporated
- Whether it’s limited by shares or guarantee
- Who the subscribers (shareholders) are, and how many shares each will have (must be a minimum of one each)
The memorandum comes in a standard form, and you can get the template from the UK government website. The subscribers need to sign to say that they want to form a company.
Unlike the articles, you can’t amend or update the memorandum during the lifetime of the company. It’s just a ‘snapshot’ of the company at the time it was formed.
How are shareholders' agreements different from articles of association, and why might I want one?
While a company has to have articles by law in order to form the company, a shareholders’ agreement isn’t mandatory.
However, shareholders’ agreements are useful to cover important points that aren’t in the articles and you may want to keep private. They can also provide a means of resolving disputes in a pre-agreed way.
Here are some of the main reasons to have a shareholders’ agreement in addition to your articles:
- The articles don’t really deal with what happens if shareholders fall out. If a difference of opinion does occur, it’s simpler to sort out if you’ve agreed on a set procedure for resolving disputes in a shareholders’ agreement
- A shareholders’ agreement is a private document, so outsiders won’t be able to see it. Articles are a public document and can be viewed online
- The company’s directors are responsible for day-to-day operations. A shareholders’ agreement can provide that certain decisions must be approved by the shareholders too
- A shareholders’ agreement can give additional protections for minority shareholders who might otherwise be at the mercy of the majority when it comes to decision-making. For example, a minority shareholder may be given the right to sell their shares at the same time as the majority when the company is sold. Equally, majority shareholders may want to force the minority to sell their shares to a buyer if they receive a good offer for sale of the company
- Shareholders’ agreements often give a right of pre-emption to existing shareholders where new shares are issued or shares are transferred. This gives them in essence a right of first refusal, so they’re not forced to accept outsiders into their business
- Shareholders’ agreements can provide for what happens if a shareholder dies or becomes incapacitated through illness
- Shareholders’ agreements can be used alongside employment or service contracts to link shares to employment, or to restrict shareholders from setting up competing businesses
- Having a shareholders’ agreement is a good way to demonstrate to potential investors that your business is stable and credible
- You can expand on your dividend policy in your shareholders’ agreement.
What articles of association are used for holding companies and subsidiary companies?
A holding company is generally one whose sole purpose is to own or manage other companies called subsidiaries. A holding company is often called a ‘parent company’.
A company is a subsidiary of another if its parent company holds the majority of voting rights over it or can appoint or remove the majority of the directors.
You wouldn’t normally use the model articles to set up a holding company orsubsidiary but would use tailor-made articles to account for this type of structure.
Articles of association and joint ventures
The term joint venture (JV) is used to describe either a contract, partnership or a company that’s set up by two individual businesses to run a common venture or project.
Often, joint venture partners will choose to set up a company for their JV, so that it can exist in its own right, employ staff, own assets and so on. If this is the case, then the JV company’s articles will lay down the rules that govern the relationship between the shareholding businesses and the company, and between the individual shareholders. Because JV companies can sometimes be complicated, often the parties will use a shareholders’ agreement to supplement the articles.
You wouldn’t normally use model articles to run a JV company but develop a bespoke set to deal with things like disputes, deadlock, different classes of shares and how shares can be transferred.
Can I change my company’s articles and if so, how?
Companies grow and change, and it might be that once you’ve been in business for a while your articles are no longer suitable.
Provided you have a genuine reason to change the articles, you can normally do this by having the shareholders pass a special resolution – one that’s agreed by at least 75% of them. This can be done either by written resolution or in a shareholder meeting.
If you want to change your articles by written resolution, you need to send a copy of the new articles plus a copy of the written resolution to Companies House within 15 days of the resolution being passed. To change your articles at a shareholders meeting, the directors need to call a general meeting of the shareholders, circulate the proposed special resolution, hold the general meeting and get the required 75% approval. You then send the new articles and copy of the special resolution to Companies House within 15 days of the resolution being passed.
Failure to send the new articles within 15 days constitutes an offence by the company and its directors and can be punishable by a fine. The articles will still be valid, however.
Usually, the Companies House Registrar will send a notice to make the required filing before issuing a fine.
Can articles of association override the law?
Whatever your articles say, they will still be governed by the law, in particular the Companies Act 2006. Usually the Companies Act therefore overrides any conflicting provisions in the articles, but there are some instances where this isn’t the case.
For companies formed before October 2009 and who have articles based on Table A, certain provisions may be out of date and not compliant with the law. Most companies have changed their articles to reflect this. Let us know if you have concerns around this, and we’d be happy to help.
If you’d like to know more about articles of association, would like help drafting a bespoke set of articles or would like further information about starting a company or putting in place a shareholders’ agreement, contact our team of expert corporate lawyers. Get in touch on 0800 689 1700, email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
