The constitution of a company is made up of the agreed rules and principles that govern its structure, composition and conduct. This article talks about the most common and important constitutional documents for a company incorporated under the Companies Act 2006 (‘CA 2006’) and gives you a guide on what to do if you are changing a company’s constitution.
- What is a company’s constitution?
- Articles of Association
- Memorandum of association
- Resolutions and agreements affecting shareholders when changing a company’s constitution
- What were the changes to the constitutional documents of a company made under the Companies Act 2006?
- When should you consider changing a company’s constitution?
- Notifying Companies House when changing a company’s constitution – what, how and when?
What is a company’s constitution?
For a company incorporated under the CA 2006, its constitution consists of the rules governing how it is formed, its structure and how it should operate. There are various types of company that can be formed under current companies’ legislation. These include:
- limited companies: a company is a ‘limited company’ if the liability of its members is limited. This can be by way of shares (a member’s liability it limited to the amount as yet unpaid on the shares held by that person) or by way of guarantee (a member’s liability is limited to the agreed amount that they will contribute in the event that the company goes into liquidation). It’s important to note a company limited by guarantee cannot have a share capital;
- unlimited companies: a company is an ’unlimited company’ if there is no limit on the liability of its members;
- public companies: a company is a ‘public company’ if it has chosen to raise capital by offering shares to the general public. It has limited liability and its shares are available to be bought or sold by a range of people in a range of ways. The company’s certificate of incorporation also has to state that it is a public company;
- private companies: a company is a ‘private company’ if it is not a public company;
- community interest companies: a limited company can also become a community interest company. These companies often carry out work of a social or benevolent nature.
Articles of Association
Every company that is governed by the CA 2006 must have articles of association (‘articles’) that set out the regulations for that company. This is a key document for a company – the articles are a fundamental cornerstone of how a company is run and managed.
They set out the rules that are chosen by the company’s members on how to govern the company’s affairs. The articles also instruct the company’s officers how to manage and operate the company on a day to day basis. A company’s articles act as a statutory contract between the company and its members, and also between each of the members themselves.
The kind of topics can you expect to be contained in the articles will be information governing:
- the limit of the liability of a company’s members;
- the powers and responsibilities of directors (including who the directors may be able to delegate their powers to);
- the process for decision-making by the directors (for example, which decisions need to be taken unanimously, how to call a director’s meeting and who can vote at it, and what to do if there is a conflict of interest for a director);
- the process for the appointment and removal of officers (for example the directors) of the company;
- shares and classes of shares (including when shares can be transferred);
- distributions (such as on the liquidation of the company or by dividend);
- capitalisation of profits;
- the process for decision-making by members and the organisation of general meetings of members (including voting at general meetings); and
- indemnities and insurances for directors of the company.
You can read more about Articles of Association here.
Memorandum of association
A memorandum of association is an important document in forming the constitution of a company, as it notes who will be forming the company and the role they intend to take. A memorandum of association states that the first members named on the form of incorporation (called ‘subscribers’) intend to form a company under the CA 2006, and that they agree to become members of the company and, in the case of a company that is to have a share capital, to take at least one share each.
Resolutions and agreements affecting shareholders when changing a company’s constitution
As well as the articles of association, there are a number of other types of resolutions and agreements that can make up a company’s constitution:
- any special resolution;
- any resolution or agreement that is passed by all of the company’s members that would have needed to have been passed as a special resolution;
- any resolution or agreement agreed to by a class of members that would have needed to have been passed by some particular majority or in some other specific manner;
- any resolution or agreement that effectively binds a class of members even if it has not been agreed to by all of them; and
- any other resolution or agreement which applies because of any law or legislation.
What were the changes to the constitutional documents of a company made under the Companies Act 2006?
|Constitutional document(s)||Relevant section of CA 2006||Previous legislative reference in Companies Act 1985||Change made|
|Articles of association||Section 18||Sections 7(1) and (3) and section 744||Updated to reflect the fact that some types of company (such as a company limited by guarantee) are no longer required to register their articles with the registrar of companies if they adopt the relevant standard model articles under the CA 2006.
For companies already in existence at the time the CA 2006 was implemented that have already adopted a version of the model articles, that version will continue to apply to that company. A company could however decide to adopt certain provisions of the latest model articles by reference into their existing articles.
|Amendment of articles||Section 21||Section 9||The CA 2006 makes it clear that the general principle that articles can be amended by a special resolution is subject to certain rules in charities legislation.|
|Entrenchment||Sections 22, 23 and 24||Section 17(2)(b)||Sections 22, 23 and 24 are new. Under the Companies Act 1985, a company could entrench provisions in its memorandum of association that could not be amended. Under the CA 2006, companies incorporated under the rules of the CA 2006 are not allowed to entrench a provision in a company’s articles that cannot be amended or removed.
A company needs to notify the registrar when its articles contain an entrenchment provision or any prohibition on amendment of a company’s articles by an order of the court or other authority, or when an entrenchment provision or prohibition on amendment is being removed.
|Provisions of memorandum of association treated as provisions of articles for existing companies||Section 28||N/A||Companies existing prior to the implementation of the CA 2006 are likely to have detailed memoranda of association containing important provisions about the company’s constitution. Section 28 makes it clear that for those companies, the memoranda will be treated as part of the company’s articles (including any provisions of entrenchment).|
|Memorandum of association||Section 8||Section 3(1)||The memorandum of association has been simplified. The changes to the memorandum of association are designed to move the key information about how a company should operate and be governed into one place (the articles) and so the memorandum of association under the CA 2006 is a much shorter document that cannot be amended.|
When should you consider changing a company’s constitution?
Changing a constitution can come about for a variety of reasons, but essentially the change will be made as a result of the company either wanting to change or needing to change.
A company will need to change its constitution when:
- its members want to change the constitution and approve a resolution to do so;
- there is a change in the law that means the existing structure or constitution of the company is no longer valid or legal; or
- if a company is ordered to do so by a court or other authority.
A company might want to change its constitution when:
- it wants to add or remove entrenchment provisions to its articles. Under the CA 2006, entrenchment provisions are provisions in a company’s articles that can only be amended or repealed if certain conditions are met or procedures complied with. These conditions and procedures are more restrictive than the requirement to amend the articles by special resolution. Conditional entrenchment provisions can only be made when the articles are first adopted (on incorporation of the company) or by an amendment of the company’s articles that is passed by a unanimous vote. However, entrenchment of a provision can also occur when a court or other authority makes an order prohibiting (or requiring) certain amendments to the articles;
- it undergoes a reorganisation, sale, acquisition or other restructuring (whether internal, such as a reorganisation at board and management level, or external, such as a restructuring of the group of companies of which it is a member);
- it wants to update its governing rules to better reflect the current operations of the company; or
- it has entered into or is thinking of entering into arrangements with funders or lenders.
Notifying Companies House when changing a company’s constitution – what, how and when?
Once a company has formally approved a change to its articles, it must send a copy of the resolution approving the change and the new articles that were passed to Companies House. There are also a number of forms that might need to be sent, if applicable. Additional forms will be needed in the following cases.
- If a company’s articles contain provision for entrenchment on its incorporation or are amended to include a provision for entrenchment.
- If a provision for entrenchment or any other restriction on amendment to the articles is removed from a company’s articles.
- Where a company’s articles are subject to provision for entrenchment, or amendments of its articles has been restricted by a court or other order, a company must send a statement of compliance in accordance with section 24 of the CA 2006 on notification of a change. The statement of compliance certifies that an amendment to the articles complies with the rules set out in a company’s articles or any applicable order of a court or other authority.
- If a company has changed the objects (the objectives and purpose of the company) in its articles.
- If a company has changed its constitution because of a legal instrument, a copy of that legal document must be submitted along with a form.
- If a company has changed its constitution because of an order of the court or other authority.
It is important to note there are some deadlines for submitting this information to Companies House.
- A copy of the resolution must be submitted within 15 days of it being agreed.
- A copy of the amended articles of association must be submitted within 15 days of them taking effect.
- Any applicable forms (see above) within 15 days of the changes.
If these deadlines are not met, the company and every officer of the company who is in default will be criminally liable and subject to a fine, or multiple fines if the registration continues to be delayed. However Companies House can sometimes give notice to a company requiring it to submit the necessary documentation within 28 days, and if a company does this, it will avoid the criminal penalty for not doing so initially. If a company does not submit the documentation, then it will incur a fine of £200 in addition to any criminal penalties.