If you want to set up a company or are already a shareholder, you’ll need to understand how the Articles of Association work. The Articles are a contract between the shareholders of a company and the company itself. They are a set of rules that dictate how the company should be run. While the directors of a company don’t sign the Articles, their duties as directors mean that they are bound by them during the company’s operation.
All companies need Articles, and these are registered at Companies House when the company is formed. The Articles, together with the Memorandum of Association, forms the basis of the company’s ‘constitution’.
You don’t need to use any particular form for the Articles, although you do have to include certain provisions, by law. In reality, most companies are set up using standard or ‘model’ articles developed for this purpose, and these are available online. The model articles are different depending on the type of company being set up.
The Articles deal, among other things, with the following:
- How directors are appointed and removed
- How new shares are issued
- How shares change hands, and when you can force someone to sell their shares
- How directors’ and shareholders’ meetings are organised and run
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?
As we’ve seen in the intro, the Articles are essentially a rule-book for the running of a company and create a contract between the company and its shareholders. You need a set of Articles to form a company, and they regulate how the company should work, mainly so that the rights of the shareholders and the company itself are protected.
Why does your company need Articles of Association and what happens if you don’t have any?
The law of England and Wales (and many other common law jurisdictions) dictates that a company must have Articles in order to be formed as a legal entity. 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’ that are laid down in the new legislation. You can find sets of model articles here.
If you don’t choose a bespoke set of Articles when you form a new company, it will be formed on the basis of the model Articles.
Many people setting up companies for the first time buy an ‘off-the-shelf’ package – that means the company has been set up beforehand using a set template and with generic subscribers. They then change the Articles and Memorandum of Association to suit their own business needs and shareholdings.
If you don’t have any Articles of Association, you won’t be able to start a company.
What do you need to include in the Articles of Association?
A company’s Articles must be contained in a single document and be divided into consecutive numbered paragraphs.
The Articles covers five essential areas:
- The fact that the shareholders liability in the case of losses incurred by the company is limited to 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
- How many directors there will be, what their powers and duties are, and how they must go about making decisions
- How many shares there will be, what rights attach to particular shares, how shares are issued and transferred, and how dividends are paid
- How shareholders make decisions, how many need to be present before a meeting can be valid (the quorum), how votes take place and various other matters relating to decision-making and
- Other administrative arrangements such as how notices 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, you can find Tesco PLC’s original Articles and subsequent amendments here.
You can also find a copy of the company’s Articles at its office.
What are the ‘model’ Articles and when shouldn’t I use them?
As we’ve seen, the law has provided some 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 and companies can be formed, online, within minutes using them.
To form a company with bespoke Articles, you need to submit a paper version when you form the company, and you can’t do this online. You attach a copy of the Articles with your other company formation documents like the Memorandum of Association and send these to Companies House.
There are three types of model Articles available at Companies House, for:
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 to existing shareholders when new shares are issued
- You want to give notices and hold meetings electronically
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
What’s the difference between the Articles of Association and the Memorandum of Association?
As we’ve seen, you need both Articles of Association 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 from the outset
- A shareholders agreement is a private document, so outsiders won’t be able to see it
- The company’s directors and not its shareholders are responsible for day-to-day operations. However, there may be certain decisions that shareholders want to oversee or veto, particularly if there are directors who aren’t shareholders
- 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 out at the same time as the majority if a 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 third-parties who may be strangers into their business
- Shareholders agreements can provide for what happens if a shareholder dies
- 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 them as a basis 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 the shareholders. 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.