Articles of association are the internal rules that govern how a company is run. They set out the powers of its directors, the rights of its shareholders and the procedures that must be followed when important decisions are made.
Every UK company must have articles. Many businesses adopt the standard model articles when they are incorporated, but those provisions will not suit every company. As a business grows, takes on investment or introduces a more complex ownership structure, it may need articles tailored to its commercial requirements.
In this guide, our corporate lawyers explain what articles of association cover, when they should be amended and how they work alongside a shareholders’ agreement.
Jump to:
- Why do you need articles of association?
- When should I amend the articles?
- 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?
- 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 joint ventures?
- Can I change my company’s articles and if so, how?
- How can Harper James help with articles of association?
Why do you need articles of association?
Articles of association form part of a company’s constitution. They bind the company and its shareholders in much the same way as a contract and provide the framework within which the company must operate.
The articles usually govern how directors make decisions, how shares may be issued or transferred, how shareholders vote and how profits may be distributed. They can also determine the rights attached to different classes of shares. Appropriate articles help directors and shareholders understand their powers and responsibilities. They are a statutory contract between the company and its members. They can reduce uncertainty, support efficient decision making and provide a process for dealing with changes in ownership. Articles are particularly important where a company has several shareholders. Without suitable rules, disagreements about control, investment or share transfers can become difficult and expensive to resolve.
When should I amend the articles?
You should review your articles whenever there is a significant change to the company’s ownership, management, funding arrangements or future plans.
An amendment may be needed when the company brings in an investor, creates a new class of shares or agrees new rights with an existing shareholder. Changes may also be appropriate when a founder leaves, employees acquire shares or the company prepares for a sale.
A review is particularly important if the company intends to:
- give an investor the right to appoint a director
- introduce minority shareholder protections
- restrict or control transfers of shares
- add drag along or tag along rights
- change voting, dividend or capital rights
Articles drafted for a simple owner managed business may no longer be suitable once the company has external investors, several founders or a more complicated board structure.
You should also check that the articles remain consistent with any shareholders’ agreement. Conflicting provisions can create uncertainty about which process the company and its shareholders should follow. Where the two documents conflict, the articles (as a public constitutional document) will usually prevail on matters of company procedure, while the shareholders’ agreement may still be enforceable as a private contract between the parties.
What do you need to include in the articles of association?
The content will depend on the company’s structure and commercial needs. Articles for a private company limited by shares will normally deal with directors, shares, distributions, shareholder decisions and administrative arrangements.
The provisions relating to directors may explain how they are appointed and removed, how board meetings are called and what is required for a valid decision. They may also deal with conflicts of interest, delegation and the chair’s powers.
The share provisions should explain the rights attached to the company’s shares, the process for issuing new shares and any restrictions on transfers. If the company has more than one class of shares, the articles should clearly describe the voting, dividend and capital rights attached to each class.
The articles should also set out how shareholders make decisions. This may include rules governing general meetings, written resolutions, voting and proxies. Bespoke articles can contain additional protections and procedures, including compulsory share transfers, reserved matters and rights that apply when the company is sold.
Where can you find a company’s articles of association?
A company’s articles are usually available through its public filing history at Companies House. If a company adopted bespoke articles when it was incorporated, a copy should appear with its incorporation documents. If it later amended its articles, the updated version should also have been filed. Where the company uses the model articles without amendment, the public record may simply state which version applies rather than displaying a separate copy.
The company should also keep an up to date copy with its own corporate records. Directors should check that they are referring to the latest version before making decisions involving shares, voting rights or board procedures. Articles are public documents. Commercially sensitive arrangements are often found in a shareholders’ agreement instead.
What are the key terms in the articles of association?
The most important terms will depend on the company’s ownership and plans. Businesses and investors should pay particular attention to the provisions dealing with shares, decision making and changes in ownership.
Classes of shares
A company may create different classes of shares and give each class different rights. Ordinary shares will often carry rights to vote, receive dividends and participate in the proceeds of a sale. A company may also issue preference shares, non voting shares, growth shares or redeemable shares.
The name given to a share class does not determine its legal rights. Those rights must be set out clearly in the articles and any relevant shareholder resolutions. Different classes can be useful when founders, employees and investors require different economic or voting rights. Poorly defined class rights can cause serious problems during an investment round, dividend payment or company sale.
Allotment of shares
Allotment is the process through which a company creates and issues new shares. The directors must have the appropriate authority to allot shares under the articles or a shareholder resolution. The rules that apply will depend on the company’s existing share capital, its articles and the requirements of the Companies Act 2006. Statutory pre-emption rights will usually apply to an issue of equity securities for cash unless they have been disapplied.
Bespoke articles may require shareholder approval before directors issue shares or securities that can be converted into shares. This gives shareholders greater control over dilution, but the restrictions should not prevent the company from raising funds efficiently. Before any allotment, the company should also check whether statutory or contractual pre emption rights apply.
Pre emption rights
Pre-emption rights give existing shareholders an opportunity to acquire shares before they are offered to another person. Statutory pre-emption rights usually apply when a company issues new equity securities for cash. Additional contractual rights can also be included in the articles (or shareholders’ agreement) to cover new share issues or transfers of existing shares.
These provisions help shareholders protect their percentage ownership. The articles should explain how shares are offered, how long shareholders have to respond and what happens to shares that are not taken up.
Suitable exceptions may be needed for employee share schemes, transfers within a corporate group or investments approved by the shareholders.
Members reserve power
Under the model articles, shareholders can pass a special resolution directing the directors to take, or refrain from taking, a specified action. This is known as the members’ reserve power. The articles may also require shareholder consent for specific matters. These are often described as reserved matters.
Reserved matters might include issuing shares, borrowing above an agreed limit, changing the nature of the business, acquiring a significant asset or selling a substantial part of the company.
These controls can protect investors and minority shareholders. An extensive list may make it difficult for directors to manage the company’s ordinary business. The balance should reflect the size and structure of the company.
Transfer of shares
The transfer provisions determine whether a shareholder can sell or give shares to another person. The model articles give directors some discretion to refuse to register a transfer. Bespoke articles often include more detailed restrictions, particularly where the shareholders want to control who can own part of the business.
The articles may give existing shareholders a right of first refusal, permit transfers to family members or group companies and require an employee or founder to transfer shares when they leave.
They may also contain drag along and tag along rights. Drag along rights allow a specified majority to require the remaining shareholders to sell as part of a company sale. Tag along rights allow minority shareholders to participate in a sale on equivalent terms. These rights are often set out in both the articles and the shareholders’ agreement; the articles version binds the company and is publicly visible. The transfer provisions should work alongside the shareholders’ agreement and any employee share arrangements.
Shareholders’ decision making
Shareholders make decisions by passing resolutions. Some decisions require an ordinary resolution, while more significant matters require a special resolution.
An ordinary resolution normally requires more than 50 per cent of the votes cast. A special resolution normally requires at least 75 per cent.
Private companies can make many decisions using a written resolution instead of holding a general meeting. A written resolution cannot, however, be used to remove a director or an auditor before the end of their term of office. The articles should also address notice periods, voting rights, proxies, and participation in meetings.
Bespoke articles may give a particular shareholder or class of shareholders consent rights over important decisions. These rights can provide valuable protection, but they should be drafted carefully so that routine business is not unnecessarily delayed.
What are the ‘model’ articles and when shouldn’t I use them?
The model articles are standard articles prescribed by the Companies (Model Articles) Regulation 2008. Separate versions exist for private companies limited by shares, private companies limited by guarantee and public companies. Most founder-owned private limited companies start with the model articles for private companies limited by shares.
They provide a useful starting point and may be sufficient for a straightforward company with one shareholder, one class of ordinary shares and no external investment.
They are less likely to be suitable where a company has several founders, different share classes, employee shareholders or external investors. They also contain limited provisions for dealing with founder departures, transfers of shares, minority protection and shareholder deadlock.
A company expecting to raise investment should review its articles before beginning the process. Investors will usually expect the constitutional documents to reflect the rights agreed as part of the investment. Adopting bespoke articles at the appropriate stage can avoid the need for urgent and potentially costly amendments later.
How are shareholders’ agreements different from articles of association, and why might I want one?
Articles of association form part of the company’s constitution and are publicly available. They bind the company and its shareholders in their capacity as members. A shareholders’ agreement is a private contract between some or all of the shareholders and, commonly, the company. It does not usually need to be filed at Companies House.
The agreement can cover commercially sensitive matters that the parties do not want to place on the public record. These may include business plans, funding obligations, management responsibilities, dividend policy, confidentiality, restrictive covenants and exit arrangements. It can also provide a more detailed process for resolving disputes or deadlock.
A shareholders’ agreement does not replace the articles. Certain provisions, particularly those relating to shares and company decision making, may need to be reflected in both documents. The two documents should be prepared or reviewed together to avoid inconsistencies.
What articles of association are used for holding companies and joint ventures?
There is no single set of articles that must be used by every holding company or joint venture. A holding company with one corporate shareholder may be able to use relatively simple articles. More detailed provisions may be required if it has several investors, different share classes or financing arrangements that require particular controls. A joint venture company will usually need bespoke articles because two or more parties share ownership and control.
The articles may regulate board appointments, voting rights, quorum requirements, funding decisions and transfers of shares. They may also identify matters that require the consent of every joint venture party or a specified majority.
Deadlock provisions are especially important where two shareholders own the company equally and they want to avoid a shareholder dispute. Without an agreed process, the business may be unable to act when the parties disagree. Joint venture articles are usually supported by a shareholders’ agreement that deals with the wider commercial relationship between the parties.
Can I change my company’s articles and if so, how?
A company can normally amend its articles by passing a special resolution. This usually requires at least 75 per cent of the votes cast. A private company can pass the resolution at a general meeting or use the written resolution procedure.
After the resolution has been passed, the company must send a copy of the special resolution and the amended articles to Companies House. The special resolution must be filed within 15 days of being passed and the amended articles within 15 days of the amendment taking effect.
Before making the amendment, the company should check whether any further consent is required under its existing articles, shareholders’ agreement or investment documents. Changes affecting the rights attached to a particular class of share will usually also require the consent of the holders of that.
The amended articles should accurately reflect the agreed commercial position and remain consistent with the Companies Act 2006. Legal advice can help the company avoid conflicts, unintended restrictions and uncertainty over shareholder rights.
Practical checklist for founders and directors
- Review the articles before any investment round, founder exit, introduction of an employee share scheme or significant change to the board.
- Ensure the articles and any shareholders’ agreement are consistent; resolve conflicts before they arise.
- Confirm the directors have authority to allot shares and check whether statutory or contractual pre-emption rights apply before issuing new shares.
- Check any reserved matters or consent rights that may restrict ordinary business decisions.
- File any special resolution and the amended articles at Companies House within the statutory deadlines.
- Keep a clean, up to date copy of the current articles with the company’s statutory books and ensure the directors are working from the latest version.
How can Harper James help with articles of association?
Your articles should reflect the way your company is owned, managed and financed. Standard documents may be suitable when a business is first incorporated, but they can become restrictive as the company grows, takes on investment or introduces new shareholders.
Our corporate lawyers can review your existing articles, identify provisions that no longer suit your business and prepare amendments that support your commercial objectives. We can also draft bespoke articles for investment rounds, joint ventures, holding companies and businesses with several share classes. In addition, we also advise on the interaction between the articles and any shareholders’ agreement so that the two documents work together.
Where you have or need a shareholders’ agreement, we can make sure that it works alongside your articles and does not create conflicting rights or procedures. We can also help with the necessary shareholder resolutions, Companies House filings and updates to your company records.
Speak to our corporate lawyers for advice on adopting, reviewing or changing your company’s articles of association.
