The UK was one of the first countries to establish rules for the operation of companies. Today, more than 6 million businesses in the UK benefit from a system of company law and corporate governance that decides how they are formed and run, and how business is conducted.
The Companies Act 2006 is the primary source of UK company law and superseded the Companies Act 1985. It introduced new rights for shareholders to act against directors of their company for alleged breach of their duties to the company. It also required companies to prepare and publish a business review as part of their annual accounts and report.
We look at how the 2006 Act has impacted company articles of association and what businesses need to do to ensure they are compliant.
WHAT ARE ARTICLES OF ASSOCIATION?
A company’s articles of association are multi-page documents that outline the rules and restrictions relating to the way a company is governed, operated, and owned.
They include the responsibilities and powers of the directors, and how much influence shareholders have over the board of directors. They also set out how tasks within the organisation are to be carried out, including the process for appointing directors and the handling of financial records.
Although there is no set format for a company’s articles, they must comply with the 2006 Act and certain provisions should be included to guide the regulation of the company.
All limited companies must have articles of association. There are the standard default articles a company can use.
HOW UPDATING ARTICLES OF ASSOCIATION CAN HELP FOLLOWING THE DEATH OF A DIRECTOR
If articles of association are not up to date with the Companies Act 2006, then the death of a sole director or shareholder can be a significant problem. This is because businesses will have no official officers, and the board will have to go to court to gain influence.
The Companies Act 2006 made it simpler for companies to add a provision enabling the board to take control in the event of the death of a sole director or shareholder. Under the Act, the articles of association can state that, on a shareholder’s death, their shares are vested in an executor, who can be registered as a shareholder. Once registered, they can appoint a new director to run the business.
Alternatively, a company that would have no shareholders or directors following a death could add a provision to their articles of association enabling a personal representative of the deceased shareholder to appoint a director. This allows a new director to be appointed without having been previously registered as a shareholder.
Unfortunately, many companies’ articles do not contain either of these helpful provisions, particularly those that still incorporate Table A (the old government-prescribed form of articles), leaving them without a mechanism to appoint a new director. This makes it crucial for companies to update their articles of association to current standards.
OTHER REASONS TO CHANGE THE ARTICLES OF ASSOCIATION
You may want to change articles of association for a variety of additional reasons including:
- To meet internal management requirements
- To increase shareholder protection
- To remove an authorised share capital
- To tailor internal admin arrangements
- To meet changes in legislation
- If your company was incorporated before 2009, you may wish to replace Table A articles (which contain a lot of legal wording and are quite restrictive and complex) with newer model articles
HOW TO CHANGE ARTICLES OF ASSOCIATION
If you want to change certain wording, add or remove specific provisions, or replace your existing articles of association with an entirely new set of bespoke articles, you will need to obtain the approval of shareholders and notify Companies House of the changes.
In order to amend the articles, shareholders or company members must pass a special resolution. At least 75% of the total votes of all the eligible members must agree to the resolution – and it can be passed as a written resolution signed by shareholders, or by casting votes at a general meeting of shareholders.
Within 15 days of being passed, a copy of the new articles and members’ resolution must be filed at Companies House.
For companies incorporated pre-2006 Act, if amending or removing the company’s objects (now deemed part of the articles), the company must also file a notice at Companies House. Any alterations will not take effect until this notice is registered. It is recommended to remove any specific objects clause, to avoid limiting the activities of the company.
An ‘entrenched’ article can only be altered or removed if certain conditions are met – which may include a larger percentage of shareholders agreeing. An entrenched article is one which gives one shareholder more voting power than is usual. If a company’s articles contain entrenched provisions, or if they are removed, you must give specific further notice to Companies House.
IMPORTANCE OF REGULAR REVIEWS
As businesses change and develop, it’s important to review your company’s articles regularly to amend and adapt the articles to protect shareholders and best reflect the current needs of the business.
Articles that are relevant for the particular needs of your company will enable you to manage your company effectively and avoid disputes and invalid decisions.
Legal advice should always be sought to ensure that such changes comply with latest company law.
MSP company secretarial and legal services can help businesses of all types conform to the latest legislation and update company documents, such as articles of association, to best meet the current needs of your business.
Contact MSP to find out more.