Articles of Association are integral to the legal formation of a company and set out the basic rules of operation. However, many business owners are unclear on the specifics of this constitutional document. Our corporate solicitors explain the basics with this Articles of Association FAQs.
- What are Articles of Association?
- Why does your company need Articles of Association and what happens if you don’t have any?
- What needs to be included in the Articles of Association?
- How do you find Articles of Association?
- What are standard Model Articles and when are they not suitable?
- Articles of Association and Memorandum of Association – what is the difference?
- Shareholders’ Agreement and Articles of Association
- Articles of Association and holding companies and subsidiary companies
- Articles of Association and joint ventures
- Can Articles of Association be changed?
- Can Articles of Association override the Companies Act?
What are Articles of Association?
Articles of association, also called ‘articles’, are essentially a rule-book for the running of a company and create a contract between the company and its shareholders in their capacity as shareholders. Articles are fundamental to the formation of a company and are designed to regulate various matters of the internal workings of a company. They are governed by the Companies Act 2006 (‘Companies Act’).
Why does your company need Articles of Association and what happens if you don’t have any?
Every company formed in England and Wales is required to have articles, without which a company cannot legally be formed. This requirement applies whether the company is public or private and whether limited by shares or by guarantee.
Companies generally have freedom in drafting their articles although they are subject to provisions contained in the Companies Acts. Companies limited by shares and formed before 1 October 2009 may have adopted the standard articles prescribed in earlier legislation and known as ‘Table A’ articles. All companies incorporated on or after 1 October 2009 may adopt the standard ‘model articles’ prescribed in the current legislation.
A new company will be formed on the basis of model articles if it has not registered a set of its own articles and unless and until the model articles are excluded, amended or modified.
What needs to be included in the Articles of Association?
The articles must be contained in a single document and be divided into paragraphs numbered consecutively. Companies House provides default model articles but they are by no means compulsory and companies are generally free to tailor articles to suit their particular business needs.
The format of articles broadly covers five essential areas:
- Limited liability of shareholders – a fixed sum limited to the nominal value of their shares;
- Directors – number of directors, their powers and responsibilities and procedures for decision making;
- Shares and distributions – rights attaching to particular shares, issues and transfers of shares, payments of dividends and other dealing with shares;
- Decision making by shareholders – quorum and voting at general meetings of shareholders and various decision-making options; and
- Administrative arrangements.
Our corporate solicitors can provide legal advice on drafting or amending your articles of association and other constitutional documents.
How do you find Articles of Association?
All companies are required to have articles so they are available to be seen, checked and updated, as necessary, at Companies House. They are public documents.
Whether forming a company for the first time and requiring a set of model articles or checking the company’s latest set to ensure the company is complying with its internal rules or whether they need amending to reflect its current business needs, the defining authority of a company’s current constitution should be the latest set of articles which should be filed at Companies House.
A copy of a company’s current articles should also be kept at its registered office.
What are standard Model Articles and when are they not suitable?
In providing a set of a model articles, Companies House recognises that it eases the process for those wishing to form a company. The model articles are by no means compulsory and indeed companies may later change them to suit their particular needs as the company develops but they are a useful starting point and can be formed, online, within minutes.
To form a company with bespoke articles, the articles must be completed in paper form and cannot be completed online. A copy of the bespoke articles must be attached to the formation documents and sent to Companies House.
Model articles provided by Companies House are available in three forms, aimed at different types of companies, namely:
- private companies limited by shares;
- private companies limited by guarantee; and
- public companies.
Whilst model articles are widely applied and easily changed post-formation, if required, they are indeed suitable to many companies as a foundation before their businesses flourish into their own bespoke needs. However they are not a ‘one size fits all’ answer and should be tailored on a company-by-company basis to avoid facing invalid decisions and creating disputes.
As such, model articles may not be suitable from the outset and bespoke articles may be appropriate when:
- there is to be more than one class of share;
- there are to be alternate directors;
- there is to be a company secretary;
- there is a requirement for pre-emption rights on allotment of shares; or
- there is a requirement to give notices and hold meetings by electronic means.
Additionally, even if model articles are substantially suitable to a business, they are often adopted with certain provisions removed from the outset to enable, for example:
- a board meeting of the directors to be quorate where there is just one director – where model articles require two directors for a quorum;
- the removal of a casting voting by the chairman of a board; or
- the removal of conflict provisions which, under model articles, prevent a director from voting if he or she has a conflict of interest.
Articles of Association and Memorandum of Association – what is the difference?
Both the articles and the memorandum of association (‘memorandum’) are essential documents to forming a limited company. But unlike the articles and, contrary to its substantial form years ago, the memorandum is now a short document setting out few details:
- company name and date of incorporation;
- whether the company is limited by shares or guarantee; and
- names of the subscribers to the memorandum forming the company at that point and, in the case of a company limited by shares, the number of shares taken by each shareholder which is to be a minimum of one share each.
The memorandum is in a prescribed form, the template for which can be obtained from Companies House. It should only contain the few details listed above and be signed by the subscribers to authenticate that they wish to form a company.
Unlike the articles, the memorandum cannot be amended or updated during the lifetime of a company and now merely serves as a ‘snapshot’ of the company as at the point of formation.
Shareholders’ Agreement and Articles of Association
Whilst not a prerequisite to forming a company, a shareholders’ agreement is, nevertheless, a very useful document; it is an agreement between some or all of the company’s shareholders and is often used to regulate the relationship between the parties.
A shareholders’ agreement will likely cover some of the areas covered by the company’s articles but can be, and is often, used as an extension to the articles in the sense that it covers additional areas and can be a useful tool to resolve any issues or disputes which may arise on particular points on which the articles may be silent.
Articles are a public document so, in order to keep private matters between the company and its shareholders private, and to add an extra layer of rules between the parties, companies are often advised to have in place a shareholders’ agreement, confidential to the shareholders, to detail the roles, rights and obligations of the parties to it.
A shareholders’ agreement can be seen as a document to complement the articles and one which sits in the background but is incredibly useful as a tool to protect shareholders’ interests and efficiently deal with any conflict among shareholders ensuring smooth running of a company’s business.
Articles of Association and holding companies and subsidiary companies
A holding company is generally a private limited company which exists merely to own assets, invest and manage a subsidiary company and therefore hold shares in that subsidiary and perhaps other subsidiaries. It is often called a parent company. A subsidiary company is one where the business, sale and trade lies and is carried on day to day and a subsidiary reports to its holding or parent company which, in turn, oversees its operations and may provide funding.
For the purposes of company legislation, a company is a subsidiary of another company (its holding or parent company) if the latter:
- holds the majority of the voting rights in it; or
- is a shareholder of it and has the right to appoint or remove a majority of its board of directors; or
- is a shareholder of it and controls, alone, under an agreement with other shareholders, a majority of the voting rights within that company.
Model articles are not generally utilised in their entirety where there is a holding/subsidiary model but can be based on the model articles to allow for this type of group structure.
Articles of Association and joint ventures
The term ‘joint venture’ has no specific meaning in English law and simply refers to the commercial relationship between two or more independent entities coming together for a conventional business joint venture or one to carry out a single project.
Joint ventures can take one of four basic forms being: a limited liability company, a limited liability partnership, a partnership or a purely contractual co-operational agreement.
Very often a company structure is implemented as the medium for a joint venture and, as a separate legal entity, it can then own and deal in its own assets, sue and be sued and enter into contracts in its own right.
If a company structure is used then the relationship between the participants and between them and the newly-formed company is largely governed by the articles of the joint venture company (and usually supplemented by a shareholders’ agreement or a joint venture agreement).
Model articles are unlikely to be appropriate for a joint venture company as they do not cover provisions which would be suitable for dealing with the governance between different entities coming together. Among other matters, provisions such as different classes of shares, pre-emption provisions on transfers of shares would need to be implemented so a bespoke set of articles would be appropriate.
Can Articles of Association be changed?
A company’s articles are not set in stone. With evolving business needs a company may want to change certain wording in its current articles, add or remove wording or replace the articles with an entirely new set better suited to the business at that time.
Provided that a legitimate reason for a change is established, the general rule under company legislation is that a company may change its articles when its shareholders agree to a change by passing a ‘special resolution’.
A special resolution (one requiring agreement of at least 75% of the shareholders) to change a company’s articles can be passed in one of two ways:
- a written resolution signed by the shareholders; or
- a special resolution passed at a meeting of the shareholders.
The written resolution is probably the most common way of changing a company’s articles. It avoids the need to call and hold a meeting of the shareholders so is quick and efficient.
Changing articles by way of a written resolution requires:
- shareholders to sign the written resolution to change the articles;
- attach a copy of the new or amended articles to the written resolution; and
- send both documents to Companies House within 15 days of the resolution being signed (and thereby passed upon signing).
To change articles by special resolution at a meeting of the shareholders requires:
- holding a meeting of the board of directors to arrange calling of a ‘general meeting’ of the shareholders to circulate the proposal to change the articles;
- hold the general meeting at which the resolution to change the articles will be passed by a voting majority of at least 75% of shareholders;
- the directors then note that a special resolution has been passed and that they have decided to send it with the new articles to Companies House;
- a certified copy of the special resolution, along with a copy of the new articles is to be sent to Companies House within 15 days of the general meeting at which it is passed.
Failure to send the changed articles to Companies House within 15 days amounts to a criminal offence committed by the company and its officers and can be punishable by a fine. However, it does not alter the validity of the articles.
In practice, the Registrar of Companies House has the power to give notice to a defaulting company to rectify the filing within 28 days before resorting to any criminal proceedings. If the company does not rectify its default still then it is liable to a £200 civil penalty recoverable by the Registrar as a debt, in addition to any criminal sanction that may be imposed.
Can Articles of Association override the Companies Act?
Whether a company incorporates the model articles, modified model articles or bespoke articles, their contents will generally be subject to the provisions within the Companies Act. In most circumstances, the Companies Act which will override a company’s articles. However, it is recognised that not all of the Companies Act provisions will be suitable to every company so there are a number of places, within the Companies Act, where it will allow for a company’s articles to vary or exclude some of its provisions.
The parts of the Companies Act which are discretionary when drafting a company’s articles can be divided into three areas:
- provisions which may be varied or excluded by a company’s articles;
- provisions that will not apply unless expressly included in the articles; and
- other provisions that may be affected by the articles
and these relate to companies formed after 1 October 2009. Legal practitioners will be able to advise businesses on which provisions of the Companies Act will need to form part of a company’s articles and which may be excluded if not suitable for the intended business.
In the case of existing companies, in so far as their articles are inconsistent with the Companies Act, the requirements of the Companies Act will override those of the existing articles.
Formerly known as an extraordinary general meeting. It can be either a non-routine meeting of the company called for a specific purpose or an annual general meeting. A general meeting may be called by the directors of the company or requisitioned by a certain number of the shareholders.
Rights for existing shareholders to have first refusal on the issue of new shares by a company. These rights are deemed to be necessary to protect shareholders against dilution of their shareholdings.
The number of people required to conduct valid business at a meeting. If there are insufficient people the meeting is said to be inquorate and resolutions passed at the meeting will be invalid. Both shareholder and board meetings require a quorum.
Shareholders are the owners of companies limited by shares. They are also called ‘members’ and they agree to become part of a company by taking a minimum of one share in it. The quantity of shares held by each person represents how much of the business they own. In turn, this determines their decision-making power, their profit entitlement, and the extent of their personal liability for debts. A shareholder can be an individual person, a group of people, a partnership, another company, or any other kind of organisation or corporate body.
A resolution of shareholders (or a class of shareholders) of a company passed by:
- On a show of hands at a general meeting, a majority of not less than 75% if it is passed by not less than 75% of the votes cast by those entitled to vote.
- On a poll at a general meeting, a majority of not less than 75% if it is passed by shareholders representing not less than 75% of the total voting rights of the shareholders who (being entitled to do so) vote in person, by proxy or in advance.
- On a written resolution, a majority of not less than 75% if it is passed by shareholders representing not less than 75% of the total voting rights of eligible shareholders.
The default articles of association under the old Companies Act 1985 that automatically applied to any company that did not adopt its own articles on incorporation before 1 October 2009. Most private companies incorporated before 1 October 2009 adopted articles in the form of Table A with perhaps minor alterations. Table A can be found in the Companies (Tables A to F) Regulations 1985 (SI 1985/805) (as amended by the Companies (Tables A to F) (Amendment) Regulations 2007 (SI 2007/2541) and the Companies (Tables A to F) (Amendment) (No. 2) Regulations 2007 (SI 2007/2826) for companies incorporated on or after 1 October 2007 and before 1 October 2009.
Table A continues to apply to companies limited by shares incorporated before 1 October 2009, unless and until those companies specifically adopt the model articles or other articles