Company Articles of Association

When registering a company one of the necessary elements is to have internal rules known as the company’s articles of association.

This constitutional document will govern the way in which the company is run. A key initial point to take on board is that, whilst there are a number of Companies Acts, other statutes and of course case law regulating companies, in terms of the inner workings of a company, regulation is light. It is up to the shareholders to decide certain fundamental and key issues which, depending on circumstances, may not be adequately or fairly covered by the standard Articles of Association or without a shareholder agreement.

Many start ups, even when advised by lawyers or accountants that it is important to plan ahead and get the right rules in place to deal with issues which invariably arise as a company grows, choose not to and one or more shareholders or directors, or the company itself may pay the price for this later.

Some of the more important details within the articles of association will typically  :-

  • Director’s powers and responsibilities
  • How directors and shareholders make decisions (including the rules on voting)
  • How directors are appointed and removed
  • The organisation of company meetings
  • The issue and transfer of shares including pre-emption rights and protections for minority shareholders
  • Dividends
  • Loans and other borrowing

There are two types of articles of association: (i) you can either buy “model” articles (i.e. a standard / off the shelf document) which was produced on 16 December 2008 and applies to all companies formed under the Companies Act 2006 on or after 1 October 2009 (prior to 1 October 2009 this was known as “Table A”); or (ii) you can draft you own “bespoke” articles provided that the proposed rules are within the scope of the law.

Unless a company registers its own articles then the model articles will apply by default and there are different model articles for company’s limited by shares and company’s limited by guarantee; there are also different model articles for public companies.

A company’s articles of association, regardless of whether they use the model form or bespoke articles, are open to public inspection and therefore must be registered with Companies House. Equally, any changes to the articles must also be registered at Companies House.

Shareholder Agreement

In addition to having articles of association a company’s members will sometimes enter into a shareholder agreement. This is an agreement between some or all of the company’s shareholders and will deal mainly with the relationship between these parties.

A shareholder agreement will cover some of the same areas as the company’s articles of association but will also cover other areas and therefore could help to resolve any dispute where the company’s articles are silent on a particular point.

A shareholder agreement is more flexible than the articles of association as the articles have to comply with statute (as the companies are a creation of statute).  The two documents should not conflict, however where they do, the one that takes precedent will depend on the intention of the parties, which will usually be for the shareholders agreement to prevail.

Shareholder agreements are very rarely registered and its terms will not usually be open for public inspection. This is a major reason why some companies prefer to use shareholder agreements as a method of regulating matters more than Articles (although shareholder agreements may not cover all points needed).

 Amending a Company’s Constitutional Documents

A shareholder agreement can be amended at anytime provided that all the parties are in agreement (regardless of the size of their respective shareholding) whereas a company’s articles of association (if the company has adopted the model articles) will usually only be amendable by way of a “special resolution” which requires a voting majority of 75% (unless the articles state otherwise).

However a shareholders agreement and the articles of association can work in tandem, for example, the shareholder agreement may state that a special resolution can be blocked by a minority shareholder with a right of veto either for all resolutions or for certain resolutions.

New Members

An important difference between the articles of association and a shareholder agreement is the way in which it is adopted by new parties. A person that wishes to buy shares in the company will automatically be bound by the company’s articles, however, that party will not be bound by the terms of the shareholder agreement.

More about articles of association and associated services here.