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, and they’re essentially a ‘user manual’ for the company.
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 private 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 this ruling. 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.
- 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 ‘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.
The Articles are registered at Companies House. Together with the Memorandum of Association, they form the basis of the company’s ‘constitution’.
The Articles don’t need to be in any particular format, although they do need to contain certain key provisions, by law. In reality, most companies are set up using standard or ‘model’ articles.
The Articles deal, among other things, with the following:
- How shareholders appoint and remove directors to run the company
- How to issue new company shares
- How dividends are paid
- How shares change hands
- How directors’ and shareholders’ meetings are organised and run
Why does your company need Articles of Association and what happens if you don’t have any?
In the UK, 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 them.
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 are adapted once the business grows and its business strategy becomes clearer.
The fact is, you can’t start a business 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 five essential 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
- What the directors are able to do in the company’s name, and any limits on their powers
- The number of directors and the method of appointing them, plus their decision-making process
- The number of shares, types of shares, rights attaching to shares, and the way they can be issued and transferred
- The payment of dividends
- The decision-making process for shareholders, how many need to be present before a meeting can be valid (the quorum), and the voting regime
- Other administrative arrangements, such as how notices of future meetings should be given to shareholders
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.
You can also find a copy of the company’s Articles at its registered office.
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.
The model articles are not compulsory; you can change them to suit the needs of your business and as the company develops. However, they’re a useful starting point.
If you don’t want to use the model Articles, you or your advisor will need to draft bespoke Articles to suit your needs.
There are three types of model Articles available at Companies House:
Because model Articles are designed to be a ‘one size fits all’ solution, they may not suit 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 (essentially, a right of first refusal) to existing shareholders when new shares are issued
- You want to give notices and hold meeting 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
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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’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 (members) are, and how many shares each shareholder will have (must be a minimum of one each, if this is a share company)
The Memorandum comes in a standard form, and you can get the template from Companies House. 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 areas that aren’t in the Articles, to keep certain aspects of the running of the company private, and to avoid damaging disputes.
Here are some of the main reasons to have a shareholders agreement as well as 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 resolve it 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 people like 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/subsidiary but would use tailor-made Articles to account for this type of structure.
Articles of Association and joint ventures
The term joint venture 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 (JV) partners will choose to set up a company for their joint venture, 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 JVs 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’ve 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.
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 needed 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 of their 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 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 email@example.com, or fill out the short form below with your enquiry.