Setting up a limited company is one of the most common routes entrepreneurs take when they start their business. If you have decided to take this route, under the Companies Act 2006 your company will be required to define the rules that will govern its management.
The document which compiles and formalises these rules are the Articles of Association. They are the basis of the agreement between the company and each shareholder.
What are Model Articles of Association?
The Model Articles are Articles of Association developed by the Secretary of State which will apply by default if a company does not adopt a specific set of Articles of Association when it is incorporated.
There are Model Articles for private companies limited by shares, private companies limited by guarantee and public companies. These may be amended from time to time.
The Model Articles for private companies limited by shares are the most relevant to SMEs and their current version can be found on the Companies House website.
What do Articles of Association include?
The Articles of Association are usually divided by topics into sections and paragraphs numbered consecutively. These sections and paragraphs will commonly include provisions on:
- The liability of the shareholders
- The powers and duties of the directors
- How the directors make decisions
- How to deal with directors’ conflict of interests
- How directors are appointed and removed from office
- The issue of new shares
- The transfer of existing shares
- When and how dividends are paid
- How shareholders make decisions
- Means of communication that can be used between the company, the directors and the shareholders
- Directors and officers' indemnity and insurance
In addition to these more standard provisions, Articles of Association may also deal with the following topics:
- Good leavers and bad leavers
- Drag along and tag along
- Pre-emption rights on the issue of new shares
- Non-competition and non-solicitation
- de minimis exemption for share buybacks below £15,000
These topics are not included in the model articles and do not apply automatically under the Companies Act 2006. This means that, if you want to have these provisions, you need to expressly include them in the Articles of Association (or in a Shareholders Agreement) otherwise they will not apply.
Once adopted, the Articles of Association must be followed by all directors and shareholders of the company. They will be the rules that will govern the governance of the company.
Therefore, thinking about each of these topics carefully and assessing how you should approach each of them considering the nature and size of your company and your arrangements with your business partners is essential for a smooth operation of the company.
How to amend Articles of Association
After they are adopted, the Articles of Association may be amended by at least special resolution (i.e. a resolution passed by the holders of at least 75% of the shares of the company which have voting rights).
The Articles of Association and/or a Shareholders Agreement may increase this percentage. However, considering the relevance of the Articles of Association to the governance and management of the company, this threshold cannot be reduced. In the absence of a higher threshold, the requirement of a special resolution will apply.
Are the Model Articles a good option for your company?
If you are the only director and only shareholder of your company, the model articles are likely to be a good option for you. However, if the company has more than one director or shareholder, the model articles may not be the best option for your business.
The model articles will be a great starting point. Its approach to several relevant topics is fair and balanced and it is well known by investors. But you should not accept it in full before assessing if they reflect how you and your business partners want to run the company.
In addition to the topics that are not included, the model articles are not designed for companies which have different classes of shares - in particular, it does not cater for preference shares (including shares with liquidation preferences, which are often requested by investors).
It is particularly relevant to SMEs the fact that the model articles do not have provisions that deal with what happens to the shares held by directors that do not deliver what they have agreed with the company or that decide to leave. That’s a common source of disputes between business owners and the model articles do not help with that.
Get legal assistance from LawBite
Do not underestimate the importance of the Articles of Association of your company. It's a document that should be drafted and reviewed carefully to ensure that it reflects the arrangements you and your business partners want to put in place for the management of your company.
At LawBite we have a team of expert corporate lawyers who will guide through these topics and help you make an informed decision about your Articles of Association. To book a free 15 minute consultation, just click ‘Get started’ below.