Articles of Association

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Articles of Association are required by any company being formed in the UK under Companies Act 2006 and previous Companies Acts.  It sets out how the company is run, governed and owned.  As you can imagine it is quite long written in terms not often understood and bottom of your list of priorities of things to read.  But should it be?

The thing is if you do not know the rules you are playing to how can you ensure you are getting things right?  More importantly how do you know what you can do when things go wrong such as removing a fellow Director who is not pulling their weight.

By default the Companies Act 2006 gives the company unlimited powers.  The articles can put restrictions on the company’s powers – it might therefore be sensible for shareholders to restrict certain powers of Directors or require shareholders agreement.

There are no prescribed format for the Articles of Association but there are provisions that must be contained within it.  In order to make life easier for most companies being formed there are 3 model articles that can be adopted.  This article looks at private company limited by shares.  Copies of the model articles can be found on the HMRC website in full.  Below we have highlighted some of the provisions you will want to read (you would be advised to read the document in full).

  • Shareholders reserve power – Directors can be stopped from doing things but only after a Special Resolution has been passed.  Think long and hard when forming the company about items you may not wish to happen and set them in place first.
  • Directors to take decisions collectively – decisions of the Directors must be by majority so what do you do in the event of a 2 Director company who disagree?
  • Quorum for Directors Meetings
  • Casting Vote – very important if only 2 Directors in the company.  You may wish to consider a third impartial Director to aid the decision making process.
  • Directors discretion to make further rules – as a Shareholder are you happy that the people elected to run the business are free to set rules as they please?  Be wary as to not stifle Directors from performing their duties.
  • Share transfers – the Directors have the right to refuse the registration of a transfer of shares
  • Procedure for declaring dividends
  • Attendance and speaking at General Meetings
  • Quorum for General Meetings
  • No right to inspect accounts and other records

The articles can be amended by a special resolution of the members. If a company changes its articles other than to the model articles a copy of the articles should be sent to Companies House within 15 days of the change for review. A copy of the amending resolution must also be send within 15 days of being passed. You do not need to tell Companies House why you are changing the articles of association.

As stated elsewhere in this posting don’t leave things to chance and read this after the horse has bolted.  Know what is right from the off and what can be done in the event that things do go wrong and be prepared for it.  All Directors should have a good understanding of the constitutional documents of the company to ensure you are working within the constraints of the Articles of Association.  The Articles of Association should be reviewed and updated on a regular basis to ensure the balance between Directors powers and protecting Shareholders interest are maintained.

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