All companies are required by law to have articles of association. Whether you are the director, company secretary or shareholder of an existing company, or considering forming a new company, a set of articles of association will need to be in place from the point the company is incorporated. But what are articles of association? What is the Companies Act? How do articles of association relate to the Companies Act? In his article, Jonathan Masucci addresses these queries, together with some of the more commonly asked questions surrounding a company’s articles of association, looking first at the main legislation governing companies.
What is the Companies Act?
The Companies Act 2006 is the main piece of legislation governing company law in the United Kingdom. In brief, the principal aim of the Companies Act 2006 is to simplify company law, codify directors’ duties, grant improved rights to shareholders and simplify the administrative burden carried by companies in the United Kingdom. The legislation also sets out that upon applying to register a company, the application must contain a copy of the company’s proposed articles of association.
What are articles of association?
Articles of association are a company’s governing document and set out written rules about how the basic management and administrative structure of the company are conducted. They are a contract between the company and each of its members and as mentioned above, all registered companies are required by law to have articles of association. Generally speaking, they are agreed by the shareholders, directors and company secretary and are used to regulate the internal affairs of a company including matters such as, for instance, the issue and transfer of shares, board and shareholder meetings, powers and duties of directors, dividends and borrowing powers.
How are articles of association created and submitted?
An application to Companies House to incorporate a company will need to include an incorporation form and both a memorandum of association, which is a legal statement signed by all initial shareholders agreeing to form the company, together with articles of association. Articles of association can be created by either using a set of standard articles (known as “Model Articles”), Model Articles with amendments, or by writing a set of bespoke articles. If no preference is specified, then the Model Articles for that type of company (i.e. private company limited by shares, private company limited by guarantee or public limited company) will apply by default. Where a company uses Model Articles, it will be given unlimited powers by default which may not be appropriate if members or the board of directors want to put restrictions on what the company has the power to do. As a result, it is common for either a set of Model Articles with tailored amendments, or entirely bespoke articles to be submitted upon incorporation.
In terms of submitting articles of association to Companies House, together with the rest of an application to form a new company, there are two principal ways of going about this. The first is to submit the documentation, online through the government’s webpage. At the time of writing, this costs £12 and can be paid by debit or credit card or PayPal account. The company is then usually registered within 24 hours. Alternatively, an application can be submitted by post to Companies House. Postal applications typically take 8 to 10 days and currently cost £40 which is paid by a cheque made out to ‘Companies House’.
How does the Companies Act influence the contents of the articles of association?
Regardless of whether a company incorporates with Model Articles, Model Articles with amendments or a set of bespoke articles, their contents will generally be subject to the provisions of the Companies Act. In most circumstances, the Companies Act will override a company’s articles.
That said, due to the vastness of the legislation contained within the Companies Act, not all of its provisions will be suitable to every company. As a result, in order to cater for the multitude of companies in existence, there are a number of places within the Companies Act that allow for a company’s articles of association to vary or exclude some of the provisions of the Companies Act.
In brief, for companies formed after 1 October 2009, the parts of the Companies Act which are discretionary when drafting a company’s articles of association can be divided into three areas:
- provisions which may be varied or excluded by a company’s articles of association
- provisions that will not apply unless expressly included in the articles, and
- other provisions that may be affected by a company’s articles of association.
In terms of deciding the particular provisions of the Companies Act that are suitable or required within a company’s articles of association, this will very much depend on the nature of the intended business and a legal practitioner will be able to advise you on how to proceed in this respect.
It is also worth mentioning that in relation to existing companies, in so far as their articles of association are inconsistent with the Companies Act, the requirements of the Companies Act will override those of the existing articles of association.
Can articles of Association be amended at a later date?
In short, yes. As a company evolves, the directors and shareholders may find that elements of the company’s articles of association, which were once thought to be suitable, are no longer so. For instance, the company may have taken on more directors and shareholders since its incorporation, be in the process of succession planning or be a shelf company that has been use to start up a new business and as a result, the articles dealing with director and shareholder decision making my need updating. Whatever the reason, circumstances can change, resulting in a company’s articles of association requiring amendment to reflect this.
To amend or replace the articles of association, shareholder approval is required. The amendments or new set of articles of association will need to be proposed to the members as a special resolution, which will require at least 75% of the votes, in order to pass. If successful, any changes to a company’s articles of association must be filed with the Registrar of Companies within 15 days of the members’ resolution being passed. This will involve sending a copy of the members’ resolution, together with the new or updated articles of association to Companies House.
Are articles of association public documents?
Articles of association are indeed a public document which is open to inspection at Companies House. If the shareholders of a company wish to expand their articles of association or include provisions that are not available for inspection by the public, they can instead choose to include such provisions in a private contractual agreement, known as a shareholders’ agreement.
How do articles of association relate to and/or differ from Shareholders’ Agreements?
As mentioned above, the articles of association for a company are a public document and as a result, their contents are available for inspection. By comparison, a shareholders’ agreement is a private agreement between the contracting parties and as a result, no third party has a right to view it.
One of the key differences between articles of association and a shareholders’ agreement, is how they can be amended. As we have seen, articles of association (subject to limited exceptions) will require 75% of the shareholders to agree to vary the terms of the articles. By comparison, shareholders’ agreements typically require all of the contracting parties to agree for the document’s contents to be amended. For this reason, minority shareholders often prefer to enter in to a shareholders’ agreement for peace of mind that they will have a say in any proposed changes to the agreement they have entered into.
Unlike articles of association which are governed by statutory law, shareholders’ agreements are governed by contract law, which gives the parties to such an agreement more flexibility in terms of what private arrangement they wish to agree. This difference also has a major impact in terms of the remedial or enforcement options available to the parties, where another party is in breach of either the articles of association or the shareholders’ agreement. In general, an action for breaching a company’s articles of association will result in that action being invalid. On the other hand, a breach of a shareholders’ agreement gives rise to contractual remedies, such as damages or specific performance.
Another key point to note is that when a new shareholder joins a company, they will be automatically bound by its articles of association but not by any shareholders’ agreement. To become a party to a shareholders’ agreement, they will either have to enter into a Deed of Adherence in respect of an existing shareholders’ agreement, or a new shareholders’ agreement will need to be entered into. As a result, if the identity of the shareholders is likely to change frequently, to avoid having to keep re-signing the agreement, it may be more practical for the important provisions which are intended to bind all of the shareholders, to be included in the company’s articles of association (that is, providing the shareholders do not mind the provisions being available for public inspection).
It is also important to avoid conflicts between the articles of association and any shareholders’ agreement. Either document can prevail over the other depending on the stated intention of the parties although, in practice, it is common to provide that the shareholders’ agreement will prevail as the parties tend to spend more time drafting and negotiating bespoke terms for a shareholders’ agreement.
So… can articles of association override the Companies Act?
Back to our original question and as we have seen, a company’s articles of association are generally subject to the Companies Act. Notwithstanding this, there is a degree of flexibility and freedom for businesses to vary or exclude certain provisions of the Companies Act. Companies and their shareholders also have the ability to amend or submit entirely new articles of association as the business evolves as well as enter into shareholders’ agreements, should they wish for particular arrangements to be kept out of the public domain.