The question every director needs to ask is “are our company’s Articles of Association still fit for purpose?”
A private company limited by shares must be incorporated with articles of association, which are the company’s constitutional document, the “Bible” of the company, setting out the management and administrative conditions which the directors must follow when making decisions on behalf of the company, in relation to the quorum required, board and shareholder meetings, the appointment and powers of directors and the company’s borrowing powers, share transactions, dividends and capital distribution.
Modernising Articles for Business Needs
There are still companies which are incorporated with statutory default articles, which are not changed, some dating back to Table A Companies Act 1948! And companies incorporated pre the Companies Act 2006 will probably have been incorporated with default articles Table A articles Companies Act 1985. if your company’s articles fall into these categories, or bespoke articles under these Acts, then as a director your question should be are these still fit for purpose for the company’s needs now?
The Companies Act 2006, brought in the Model articles, which apply on formation of a company, unless bespoke or amended model articles are filed on incorporation.
It is not unusual for directors to neglect the articles and in some cases realise the importance of the articles when making decisions on behalf of the company, and issues arise in relation to the articles effectiveness when big changes are required within the company, such as changes to the company’s shareholders, by way of allotment, transfer, capital reduction or buyback of shares by the company. Another common example is the removal of a director.
In a lot of cases the current articles are not appropriate or fail to reflect the intentions of the directors or shareholders.
This can lead to expensive legal fees and leave the Board in a position where they are powerless to achieve their desired outcome.
When deciding if your articles are fit for purpose the below should be considered:
To remove any inconsistencies with the current legislation and avoid the company acting unlawfully.
There are a number of provisions in your company’s articles which could now, be challenged and result in a potential claim against the company. For example: model article 14 prevents a director from voting on a proposal (and as counting in the quorum for a vote on that proposal) if they are personally interested in that proposal; model article 18 removing non-performing directors can be a challenge under the model articles; and model articles 21, companies with model articles can only issue shares which are fully paid up.
To avoid bureaucracy under old Companies Acts.
Changes made to your company’s articles could streamline certain corporate procedures and help your company take advantage of the various deregulatory provisions introduced by the Companies Act 2006. These are the ability to: remove an obligation for your company to hold AGMs; amend the minimum notice period for a shareholders’ meeting from 21 days to 14 days; remove the statutory right of pre-emption and extend the directors’ authority to allot shares; and allow board meetings to take place over Teams and/or the phone.
To ensure your company’s articles reflect its current needs.
There may be discrepancies between what your company’s articles provide for and how your company is actually conducting itself. For instance, your company’s articles may contain rights attaching to shares that are no longer in issue. Alternatively, your company may be falling foul of the provisions in its articles which specify the minimum or maximum number of directors allowed or quorum required for meetings. To streamline group companies, you can simplify the company secretarial duties and provide consistency across the group by ensuring that all of the subsidiary companies have the same form of articles.
Please contact our Company Secretarial Team if you wish to discuss your company’s articles.
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