February 24, 2023
In the founding, running, and incorporation of your business, you’ll come across Articles of Association. But what are they? Why are they so important? And what do they need to include?
In this article, we tackle the A to Z of your Articles of Association, from what they are, to the scope of impact they can have on a company. You’ll come away with a clear understanding of your legal obligations, your legal opportunities, and importantly, a clear strategy for building fit-for-purpose Articles of Association. So, let’s kick things off…
Your Articles of Association can be thought of as the constitution of your company. They set out the rules and regulations of running the business, the powers of directors, and shareholders, how directors and shareholders make decisions, and the rights associated with shares.
Under company law, limited companies in the UK are legally required to have Articles of Association. Beyond the legal obligation to have Articles, this document also acts as the rules and regulations of the business. For example, what are the powers and obligations of a director? What are the rights that come with shares? How are decisions made within the business? Your Articles will set out the blueprint for the internal affairs of your business.
The model articles are default Articles provided by the state. While these aren’t compulsory, they have been designed to equip forming companies with Articles of Association from the get-go. Model articles have been created for private companies limited by shares, private companies limited by guarantee, and public companies.
The model articles for companies limited by shares cover:
While it might be tempting to rely on the model Articles of Association, the reality is that oftentimes, those articles are not fit-for-purpose. Applicable for specific circumstances and specific kinds of businesses, the model Articles of Association won’t always achieve their purpose. For startups and scaleups, it’s important to ensure company Articles are bespoke to you, in addition to aligning with core documents within the business, such as your shareholders’ agreement. Below, we tackle just some of the components you might want to include in your company Articles.
Directors guide the business through strategic opportunities, looming risks, and potential pitfalls. As a result, they’re an important bunch with influential power over the business. Articles of Association are an important part of defining director powers and where required, limiting them. Your Articles of Association will want to address how a director can be brought on board, what happens when a director terminates their post, the process for director decision-making, and what’s needed to make a board meeting valid.
Your Articles of Association will want to address the ins and outs of shares. From the voting rights attached to shares to the distribution of dividends, your Articles of Association will need to include the rules, rights, and regulations attached to shares. Similarly, your Articles of Association will need to address how shares are to be issued when shares are to be transferred, and the shareholders’ rights when shares are issued. For example, what happens if a shareholder leaves the business? Do their shares go with them? Your Articles of Association will want to address in clear terms the circumstances that would force a shareholder to sell their shares – for example, a departing employee shareholder - to ensure value is kept within the business.
Your articles will need to address the procedures for directors’ decision-making and shareholders’ decision-making. For example, how are meetings of the shareholders to be conducted? How are board meetings to be conducted? What voting rights do shareholders have at shareholder meetings? When is a board meeting or a shareholder meeting quorate? Your articles will need to set out the core decision-making rules that will need to be complied with. Liability and objectives of the company
Where there are legal obligations, there’s liability. Your Articles of Association will need to address directors’ indemnity and insurance, and the shareholders’ liability (which is limited to the amount they pay for their shares.)
A shareholders’ agreement is a private agreement between shareholders and the company. This agreement regulates the relationship between the shareholders and the business, outlines the actions a company can take, the level of shareholder consent required to do so, and which matters require shareholder consent before a company can action them. A shareholders’ agreement typically sets out contractual rights and obligations of the shareholders, which aren’t already set out in the articles of the Companies Act. Articles of Association and shareholders’ agreements are two documents that define and regulate the rights of shareholders, meaning you’ll want to ensure these documents align closely with each other to strengthen their impact.
The time will invariably arise when your Articles of Association will need to be amended. However, the process is not quite as simple as one would hope. To amend Articles of Association, you need shareholder authority in the form of a special resolution. In simple terms, a special resolution is a decision of the shareholders that requires a vote of 75% or over to pass. A special resolution can be passed in two ways:
More often than not, private limited companies will prefer to use a written resolution to avoid the time and procedural expense that can come with calling a shareholders’ general meeting. So, what are the steps towards amending Articles of Association via written resolution?
To simplify the process, we’ve put together a step-by-step infographic for amending Articles of Association.
Given the complexity of the process - and the potential for pitfalls - it can be invaluable to work with a lawyer when you opt to amend your Articles of Association. As the legally required constitution of your business - with the potential to impact decision-making, directors' powers, and shareholder rights - it’s crucial to get it right. Get in touch to see how we can support you with bespoke Articles of Association.