Does my company need articles of association?
All limited companies registered in the UK are required to have articles of association. Agreed upon by the company members and adopted during the incorporation process, these articles establish the rules and regulations for managing the company. Both the members, directors, and company secretary must adhere to these articles at all times.
The default ‘model’ articles, as set out by the Companies Act 2006, are suitable for most new and small private companies. Alternatively, companies can modify the model version or create entirely custom articles to meet their specific needs.
In this article, we discuss the significance of the articles of association, what they include, and when it might be necessary to amend them.
What are articles of association?
The articles of association are a set of rules that govern a company’s management, its internal structure, decision-making processes, and the interests of its members.
As a fundamental part of a company’s constitution, these articles act as a statutory contract and regulate the relationship between:
- The company’s members (shareholders or guarantors) in their role as members.
- The members and the company’s officers (directors and company secretary).
- The company itself, as a separate legal entity, and its members and officers.
The officers (directors and company secretary) are responsible for managing the company on behalf of its members, who own and control the company. The members set the scope of the officers’ powers and influence the company’s activities.
Articles of association typically cover important areas such as:
- The rights of company members
- The limited liability of members
- The duties and powers of directors
- Procedures for appointing and removing directors
- Decision-making processes for directors and shareholders
- Procedures for issuing and transferring company shares
- Approving and issuing dividends
- Procedures for board meetings and general meetings
A company’s articles must be contained in a single document, divided into consecutively numbered paragraphs. The document may be stored either in hard copy or electronic format.
To ensure compliance, all officers and members must be familiar with the articles. Companies should keep a copy at their registered office or a designated alternative inspection location (SAIL address). A company’s articles, along with other essential company information, are available on the Companies House register. This public register is accessible online, meaning anyone can view the articles of any UK company.
If no PDF copy of the articles is available on the register, it indicates that the company is using the default ‘model’ articles of association.
What are ‘model’ articles of association?
The model articles of association are the default, standard articles used by most companies.
While generic and limited in scope, model articles provide a solid foundation, especially for small companies with only ordinary shares, where the likelihood of disputes between shareholders or between shareholders and directors is minimal. However, the model articles may not suit your company if you intend to:
- Issue any share class other than ordinary shares.
- Operate with a sole director.
- Provide pre-emption rights on the allotment of new shares or restrict pre-emption rights on share transfers.
- Apply specific rules or restrictions on share transfers, such as compulsory transfers in certain situations, transferring shares upon the death of a shareholder, or restricting transfers in a family-owned business to immediate family members.
- Issue partly-paid or nil-paid shares.
- Limit or expand the decision-making powers of directors.
- Allow for the appointment of alternate directors.
- Make it easier for shareholders to remove directors.
- Set different voting thresholds in certain circumstances, such as requiring unanimous approval from directors or shareholders for specific company decisions.
- Include an asset-lock provision if the company operates on a not-for-profit basis.
- Implement specific arrangements for dealing with directors’ conflicts of interest.
- Remove the chairperson’s casting vote in board or general meetings during a deadlock.
- Establish a joint venture with another business.
- Set up a holding company or subsidiary.
Unless you amend the default model or create custom articles, your company will automatically adopt the model articles during the incorporation process.
The Companies Act 2006 provides different model articles for private companies limited by shares, private companies limited by guarantee, and public limited companies (PLCs). You can view and download the model articles online.
Understanding the key terms in your company’s articles
When setting up a company, especially for the first time, you may encounter unfamiliar terminology. Here are some key terms you might come across in the articles of association:
1. Classes of Shares
A company limited by shares can issue different classes (types) of shares, each with its own rights or restrictions. Ordinary shares are the most common, offering equal voting rights, dividend rights, and capital distribution rights per share.
However, other types of shares may be necessary, such as preference shares, non-voting shares, management shares, or growth shares. Issuing multiple share classes can be useful if your company has several shareholders with differing levels of investment, seniority, or contributions to the business.
The rights attached to these shares should be outlined in your company’s articles of association and, if applicable, in a shareholders’ agreement.
2. Company Resolutions
Company resolutions are formal, legally binding decisions made by directors or members. Key decisions beyond day-to-day operations typically require a resolution, such as:
- Changing the company name
- Appointing or removing a director
- Amending the articles of association
- Changing the share structure (e.g., issuing more shares or creating new share classes)
- Issuing dividends
Board resolutions are decisions made by directors, which can be voted on during board meetings or via written resolutions. Ordinary resolutions are used for routine matters, requiring a simple majority (over 50%) of members’ votes. Special resolutions are for significant decisions, usually requiring a 75% majority vote.
3. Dividends
A dividend is a distribution of a company’s profits to its shareholders, typically in cash. If your shares carry dividend rights, you are entitled to receive a share of the company’s profits. Dividends can be issued regularly (e.g., monthly or quarterly) or at the end of the financial year, depending on the company’s profit and dividend policy.
4. Fully Paid Up
“Fully paid up” refers to shares for which the shareholder has paid the full nominal value. This means that the company has received the entire amount owed for those shares.
5. General Meeting
A general meeting is a formal meeting of shareholders or guarantors where important company matters are discussed and voted on. These meetings are optional for private companies but must follow the procedures set out in the Companies Act 2006 if held.
6. Members’ Reserve Power
Members’ reserve power refers to the ability of shareholders or guarantors to instruct directors to take or avoid certain actions. This power requires a special resolution but only applies to future actions, not those already taken by the directors. This clause is included in the model articles but can be retained or amended in bespoke articles.
7. Pre-emption Rights
Pre-emption rights give shareholders the right to first refusal on the allotment of new shares or the transfer of existing shares. This ensures that existing shareholders have the opportunity to purchase additional shares in proportion to their current holdings before the shares are offered to outsiders.
Under the model articles, pre-emption rights apply to the issue of new shares but not to the transfer of existing shares. You can adjust this in your company’s articles if you wish to change or remove these rights.
8. Share Transfers
A share transfer occurs when a shareholder sells or gifts some or all of their shares to another person.
Under the model articles, shareholders can transfer their shares freely, but directors have the right to refuse registration of any transfer if it’s in the company’s or shareholders’ best interest. If you wish to impose restrictions on share transfers or apply specific rules, you will need to update the articles accordingly.
Can I change my articles of association?
You can modify your company’s articles of association at any time. There are three primary ways to do this:
- Amending the wording of existing provisions.
- Inserting new provisions or removing existing ones.
- Creating entirely custom articles.
To make changes to the articles, the members must pass a special resolution at a general meeting or via a written resolution. For the resolution to pass, at least 75% of the shareholders’ votes must be in favor of the proposed amendments.
Once the changes are approved, you must notify Companies House within 15 days. You will need to submit a copy of the special resolution along with the updated articles. In certain cases, additional documentation may be required:
- Statement of company objects: If the company’s objects (its purpose) change in the articles.
- Change of constitution by enactment: If the amendments were made due to changes in the law.
- Change of constitution by order of court or other authority: If the amendments were made as a result of a court order or a directive from a regulatory authority (e.g., the Charity Commission).
You can submit the required documents digitally through the Upload a document to Companies House service or mail them to the Companies House office in Cardiff.
What is the memorandum of association?
The memorandum of association is another crucial constitutional document required for all UK-registered limited companies.
Created during the company formation process, the memorandum acts as a snapshot of the company’s membership at the time of incorporation. It lists the names of the initial subscribers (founding shareholders or guarantors) and certifies that each person agrees to:
- Form the company under the Companies Act 2006.
- Become a member of the company.
- Take at least one share (for companies limited by shares).
The document also includes the company’s name, the date of incorporation, and specifies whether the company is limited by shares or by guarantee.
If you form your company online, Companies House will generate the memorandum as part of the incorporation process, and you won’t need to provide it yourself. However, if you opt to register the company by post, you’ll need to submit a memorandum along with your application. Companies House provides templates for this purpose.
- memorandum of association for companies limited by shares
- memorandum of association for companies limited by guarantee
Once incorporated, the memorandum becomes a historical document of the company. As such, its contents cannot be altered, except for the company’s name (where applicable).
Both the memorandum of association and articles of association are publicly accessible through the Companies House register.
The difference between articles and a shareholders’ agreement
Articles of association are a legal requirement and form part of the public record, whereas a shareholders’ agreement is an optional private contract between the shareholders of a company. Creating a shareholders’ agreement is highly recommended for companies with two or more shareholders. This agreement supplements the articles of association and outlines the rights and responsibilities of all members in relation to the company.
A well-drafted shareholders’ agreement ensures clarity for all parties, reduces the risk of misunderstandings or conflicts, and establishes clear procedures for handling any future disputes that may arise.
Do you have any other questions?
So, in this article, we covered the importance of articles of association for UK limited companies, including their role in governing the company’s structure, decision-making processes, and relationship between members and officers. We also discussed when it might be necessary to amend the articles, what they typically contain, and the differences between model articles and custom articles.
Additionally, we explored key terms such as share classes, company resolutions, dividends, and pre-emption rights, and provided insight into the process of changing your company’s articles of association.
If you have any further questions about articles of association, modifying them, or any other aspect of company formation, feel free to ask.
For more detailed guidance, check out the Startxpress Help Center and Blog. If you need further assistance, don’t hesitate to contact us at support@startxpress.io!
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