Articles of Association: What are they and why should I care?
The Articles of Association are a company's key constitutional document, setting out rules for the internal running of the company. Sarah Carter, from our company secretarial team, discusses why every company needs to be familiar with theirs.
Importance of Articles
Every company incorporated in England and Wales - whether limited by shares or by guarantee, whether a public company or a private one and whether incorporated in 1900 or 2018 - will have a set of Articles of Association (Articles).
Although many companies will be familiar with the concept of Articles and their significance, for others they are just one of several documents required on incorporation and then filed away never to be looked at again. Since Articles set out regulations covering many issues which arise on a day to day basis - including the management of the company, how meetings are held and how decisions are made by directors and shareholder members – the company, its directors and members must ensure that the provisions of the Articles are understood and closely followed at all times.
Form of Articles
The Articles chosen by a company on incorporation will take one of the following basic forms:
- bespoke Articles - where a specialist creates a set of Articles designed especially for the company's business;
- statutory Articles – also known as 'Model Articles' under the Companies Act 2006 (the Act) which are standard sets of Articles [provided under the Act] and differ for the type of company (public/private/limited by shares or by guarantee). (Note that companies incorporated before 2006 would have had, and may still have, Articles known as Table A, Table B etc depending on the type of company); or
- amended Model Articles - where a specialist tailors the Model Articles slightly to meet the needs of the company.
Companies limited by shares which are incorporated via the Companies House website will automatically be given Model Articles in their full format, as will companies which fail to provide a set of Articles to Companies House with their incorporation documents. Companies incorporated through our company secretarial service at Blake Morgan LLP will be provided with amended Model Articles which are tailored to the needs of a general trading company.
The Articles must be read together with the Act. Generally, the terms of the Act overrule any inconsistent provisions in the Articles, but the Act does acknowledge that not all of its provisions are suitable for all companies and the Articles may include, vary or exclude certain of its provisions, as appropriate.
Examples of provisions commonly included in bespoke Articles are:
- Number of directors: The Articles may specify the minimum and maximum number of directors of a company. The default position under the Act is that the minimum number of directors is one, but for many companies it is advantageous to increase this to a higher figure (often two). The Act does not specify a maximum number of directors but some companies may decide that a maximum number is useful and include one in their Articles.
- Appointment of directors: The Articles may state that only members have rights to appoint directors, or only those holding certain classes of share.
- Board Meetings: The Articles will often state the quorum requirements and may stipulate how many meetings are held each year.
- Share rights: Some companies have different classes of share (e.g. Ordinary, A Ordinary, B Ordinary, Deferred, Preference, etc) and different classes may carry different rights as set out in the Articles, such as rights to dividends or rights to vote.
- Share allotments or transfers: The Articles may set out special requirements for allotments or transfers. Share transfers are generally unrestricted under the Act and so companies can restrict a member's ability to transfer shares in the Articles. Transfer provisions in particular can be complex and specialist advice should be sought if a company is considering these.
- General Meetings: The Articles may state whether a company must hold an annual general meeting, the quorum for general meetings and proxy notice requirements.
This list is not exhaustive and the Articles may cover these points and others and can go into great detail as to how events should be dealt with.
Failure to follow the Articles
What perhaps is not always appreciated by the officers of a company is that if the Articles set out procedures for certain events or circumstances then the company must adhere to them as failure to do so puts the company in breach of its Articles.
All directors of a company should be aware that one of a director's duties set out in the Act is to 'act in accordance with the company's constitution' which, as previously mentioned, includes the Articles. In addition, the Articles are in essence a contract between the company and its members and should the directors breach the Articles then the members can take action against them, which may include removing the directors who allowed the breach to occur.
Breaches of Articles might include not following share transfer provisions or appointing directors who are not eligible under the Articles.
Some directors take a relaxed approach to breaches of the Articles in the belief that the members can simply ratify any such breaches later. Whilst this may be true in some circumstances, it will not always be the case and is never an advisable course of action. In other circumstances, directors may inadvertently breach the Articles because they are not familiar with their provisions. For example, if a company has two directors, and its Articles set the minimum number of directors at two, the retirement or resignation of one of the directors would mean that the remaining director, by continuing to act alone, will put the company in breach of its Articles.
In any circumstances where a breach of the Articles is known to have occurred, it is important that the company takes legal advice before putting any resolution to ratify the breach before its members, to ensure that the relevant decisions are capable of ratification and that the correct wording is used.
Checking the Articles
Companies House runs a free company search site https://beta.companieshouse.gov.uk/ (still in BETA set-up mode at the date of this article) which allows you to enter a company's name or number and then view its filing history, where many of the documents are freely available to view, including its Articles.
Changing your company's Articles
If, following a review of your company's current Articles, you decide that they do not reflect either how the company is currently working or how you would like the company to work going forward, please email us at email@example.com and we will be happy to discuss your requirements and how we might assist.