Companies don’t stand still. As a result, neither should your articles of association. In this article we explain the relevance of these important records, the reasons you might have to change from the standard model articles of association and the painstaking process of updating the articles while bringing shareholders with you.
What are the articles of association?
When you launch a company in the UK, you must fill in two documents to explain details of your new business. The memorandum of association is signed by all initial shareholders and presented at the beginning of your business’ journey.
The articles of association, created at the same time, gives further details about the purpose of your business, its format, its operations and its ownership.
The document describes the parameters of action permitted by directors, the main business activities of your organisation – advertising, farming, manufacturing etc – and the nature of the business itself, for example, a charity, social enterprise or partnership.
This system was brought in via the Companies Act of 2006, which made changes to the ways in which directors and shareholders interact with a business in a legal sense. If your business was founded before this time, then it’s likely you will have made changes to your articles of association already.
Why do articles of association change?
Directors will change their company articles for several different reasons. For example, to add, remove or change problematic clauses, to change the company’s area of operation, or appoint a new chairperson.
You may have these changes forced upon you, by a sudden change with your business, or perhaps by government intervention via a change in legislation.
If you started your business in the last 10 years, it’s likely you adopted what’s called standard model articles of association, which are an easy template for small businesses to comply with. But as your business grows and diversifies, it’s possible these articles will need updating.
The model articles of association are designed to be ‘catch all’, thereby simplifying what can be a complicated process of starting a new business, especially if there are multiple owners and directors.
The model sets out basic legal rules covering decision-making powers, paying dividends, voting rights, appointing and removing directors, as well as the legal proportion of votes needed for your organisation to pass a resolution.
By and large, these basic principles suit most businesses, especially those with uncomplicated structures. But this may not always be the case, especially to if you’re successful and grow well beyond your start-up roots.
You may want to issue new and varied share classes, giving different powers to people working in the business to those with a financial interest but no decision-making power, for example.
Alternatively, you might want to increase the protections afforded to shareholders or, as mentioned earlier, to replace outdated default rules which can be complex, hard to understand and open to dispute.
It’s a good idea to review your articles of association regularly to ensure they haven’t fallen out of date. Failure to do so could give rise to disputes between directors and shareholders or create room for poor decisions that are against the business’ best interests.
How to change your articles of association away from the model
There are three main ways in which you can go about updating your articles of association:
- By adapting a clause or clauses
- By inserting entirely new clauses
- By rewriting the document in its entirety to reflect the new reality
To bring about these changes, you must seek approval from at least 75% of shareholders in a special resolution. This goes well beyond the simple majority principle (51%) to protect shareholders and to prevent too many changes and reversals taking place when it’s a close call.
For small businesses, the best way to create a special resolution is to agree to one in writing. Draw up the resolution, detailing the intended changes and have all shareholders sign it. The changes should be communicated to Companies House within 15 days of the document being signed.
For large scale businesses, a shareholder meeting is probably more appropriate. This can be the annual general meeting or an extraordinary general meeting if the timing is more pressing.
Directors of businesses in private hands – ie not yet listed on a stock market – should meet to agree on the timing of a general meeting and to communicate it through a circular message to shareholders. The message should describe reasons for the changes and illustrate what the changes will be.
At the general meeting, ask shareholders to vote yes or no to the changes. If three-quarters or more agree, then the motion is passed. If not, it has failed. If it passes, then the directors should arrange to send the update to Companies House as soon as possible.
Last on the list of steps is to send copies of the new articles to directors, auditors and shareholders, ensuring that everyone is on the same page.
Invalid reasons for changing from the model articles of association
While it may be tempting to update your articles of association for whatever reason, there are legal restrictions on the circumstances in which you are permitted to do so.
You cannot, for example, change the articles to restrict shareholders’ ability to change them again in future. You can’t act outside the best interests of the company, and while you don’t need 100 per cent approval from shareholders, articles of association cannot be manipulated to prejudice a minority, infringing or removing their statutory rights.
While it is not a legal obligation, it’s a good idea to seek approval from shareholders before a formal vote or signature. Getting feedback from your team is always a good idea, and technical, legal documents like your articles of association are no different.
Your articles of association is a vitally important document and you may feel overwhelmed weighing up amendments or the words you should use. It’s always good practice to seek legal advice before or during this process. Get in touch with us today for expert help.