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What are Articles of Association?
Articles of Association (Articles) are the backbone of a company’s existence, dealing with everything from company governance, powers of directors, frequency and arrangements for shareholder meetings, voting and capital rights.
Directors should ensure that a company’s Articles are tailored to its specific needs, requirements and intentions.
What are Model Articles?
If a company does not adopt bespoke or tailored Articles, then standard “Model Articles” (set out in the Companies (Model Articles) Regulations 2008) will apply. Prior to 1 October 2009, the standard articles were known as “Table A” Articles. Model Articles (or previously Table A articles) are a set of default rules; however, those rules will not necessarily reflect how the company is structured or how it is intended to be run.
Model Articles will not be suitable for many companies and we generally do not recommend that a company adopts Model Articles without amendments. Tailored articles are required for companies that:
- have more than one class of shares;
- allow for alternate directors to be appointed;
- provide for specific rules around share transfers;
- empower the board to be able to expel directors;
- set specific voting thresholds for particular events (e.g. unanimous approval to make certain decisions);
- include an asset lock for a not-for-profit company;
- ensure that particular people are present at all board meetings; or
- have particular arrangements for conflicts of interest.
In this article, we look at some of the pitfalls of the Model Articles for private companies limited by shares.
How do standard Table A and Model Articles apply to companies with a sole director and sole shareholder?
Companies with a sole director who is also the sole shareholder may run into problems with standard Articles. In particular, companies incorporated with Table A Articles will not be able to transfer shares or appoint new directors if the sole director/shareholder dies or is unable to act. In this case, a court order would be required to update the statutory share register, and that shareholder would then usually be able to appoint a director. This could take some months, result in significant expense, and during this time the company would be unable to function. There are a number of solutions if this issue arises, however, adopting bespoke Articles before any such issue arises is the best course of action.
Can a sole director validly run a company with Model Articles?
Recent cases have raised concerns that unamended Model Articles do not always permit sole directors of companies to validly act. These cases suggest that where a company has only ever had one director, the provisions of the Model Articles permit that sole director to act. However, there is concern that a company which results in a sole director but has had two or more directors in the past would not be able to rely on these provisions.
Sole director companies are recommended to disapply the provisions of the Model Articles which establish a minimum quorum requirement and restrict decision making at directors’ meetings where this requirement is not met, so that there is no risk of challenge to the validity of decisions.
Companies that have adopted untailored Model Articles also risk disruption to business continuity in the event of a director’s absence (whether for example ill health or holiday). To address this issue, companies can amend the Model Articles to include provisions allowing for the appointment of alternate directors.
What provisions do Model Articles include regarding the removal of directors?
Whilst the Model Articles do include some provisions regarding the removal of directors, the circumstances for removal are quite narrow. Therefore, if a company wishes to remove a director from the board, the statutory procedure to remove a director under the Companies Act 2006 may need to be followed, which requires special notice and the ordinary resolution of the shareholders at a general meeting.
With tailored Articles, a company could include straight forward provisions to remove directors in certain circumstances or to ensure that their board tenure is linked to their employment at the relevant company.
What can companies do regarding untraceable shareholders?
Many companies have a large shareholder base, which includes members gathered over many years and this may include shareholders who can no longer be traced. Untraceable shareholders can leave companies without engagement from their stakeholders and are unable to pass key resolutions.
The Model Articles do not include provisions addressing the problems that can be caused by untraceable shareholders. However, tailored Articles can include provisions that enable a company to take action to mitigate the problems caused by untraceable shareholders.
Can a company have more than one class of shares?
A company may wish to issue multiple classes of share for many reasons. For example, to permit dividends to be paid at different rates, or different rights to vote to be granted. However, the Model Articles assume that there will be one class of share in issue. If a company has more than one class of share in issue, it is very important that relevant articles are adopted clearly setting out the rights attached to those shares.
How can you hold virtual or hybrid general meetings?
The Model Articles include some very broad provisions that enable companies to hold virtual or hybrid general meetings. However, the Model Articles do not include a lot of detail, so we recommend the Model Articles are updated. For example, we recommend provisions to ensure the validity of meetings in the event of tech failures, and specific instructions for participation in questions and voting. More detail is available on this topic in our article “Participation by shareholders in virtual meetings and electronic voting | Michelmores“.
Conclusion
As illustrated by the pitfalls noted above, the potential issues arising from a company’s adoption of the Model Articles are varied. Rarely will there be a “one size fits all” situation; so, we suggest that specific legal advice is sought.
Directors must ensure that a company’s articles are well suited to the company; both initially and throughout key stages of a company’s life. For example, investment might require specific share rights to be introduced; and growth might result in a need for a larger board and more formality surrounding meeting arrangements.
This should not be considered legal advice, and guidance should be sought on your specific circumstances. If you would like us to review your company’s Articles or require assistance in setting up a new company with bespoke Articles, please contact Victoria Miller or our Corporate Services Team.
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