articles of association

Under UK law, a company’s articles of association set out the constitutional framework which regulates the management and administration of the company. The Companies Act 2006 requires all companies incorporated after 1 October 2009 to have Articles of Association.

The provisions of the Articles of Association regulate the fundamental internal affairs of the company, as the procedural requirements of board and shareholder meetings, the issue and transfer of shares, payment of dividends and the appointment, removal, powers and duties of directors.

The Articles may also provide for restrictions on the sale of shares, or set out the circumstances in which a minority shareholder could be forced to sell his shares to a potential purchaser of the whole company, where the majority shareholders want to sell.

Model Articles - Pre/Post-October 2009 Companies

Prior to the commencement of the Companies Act 2006, Companies may have chosen to adopt standard articles as prescribed by Table A, the default form of articles for companies incorporated under the Companies Act 1985. Table A Articles were able to be amended if the subscribers to the initial shares or if the shareholders decided to do so at a later date.

The version of Table A associated with the Companies Act 1985 has since been replaced by the Model Articles set out in the Companies (Model Articles) Regulations 2008 (SI 2008/3229), which came into force on 1 October 2009. Model Articles are more modern, in both language and approach, than Table A, however Table A articles remain valid for Companies incorporated before October 2009.

Model Articles are the most common form of articles for companies in the UK. Essentially, they are the precedent set of rules governing the powers of the company viz-a-viz its directors and shareholders. They apply to any company incorporated after 1 October 2009 by default unless the company decides to adopt other articles, or amend them.

There are three types of model articles. The appropriate version of the articles is adopted depending upon the type of company that is being formed. They are:

1. for a private company limited by shares;
2. for a private company limited by guarantee; and
3. for a public company.

Amended and Customised Articles

Model Articles are not suitable for every company. It is possible to either amend Model Articles or adopt entirely customised Articles to suit the needs of a specific organisation. Indeed there are provisions which the shareholders may wish to change at an early stage before significant investment or trading activity, so that the Articles actually reflect the powers which the shareholders and directors would like to have in relation to the company, because companies remain a separate legal entity to its directors and shareholders. The results of this status as a separate legal entity are not always obvious or predictable to those uninitiated to company law.

Companies do have a certain amount of freedom in drafting their articles although the ability to create an entirely bespoke set of rules is limited by the provisions of the Companies Act 2006, which does not always permit derogation from its provisions.

Articles are a public document open to inspection at Companies House, and where a company decides not to adopt Model Articles, it must register the Articles (or simply the amendments) at the time of incorporation of the company.

Once a company has been incorporated, the Articles may subsequently be altered by way of special resolution at a shareholders’ general meeting. In particular, pre-October 2009 companies often wish to adopt Model Articles that are fully compliant with the Companies Act 2006 (unlike Table A).

Shareholders Agreement v Articles of Association

Shareholders will often enter into a contract between themselves called a “shareholders agreement”, which may deal with similar issues to the Articles of Association.

A shareholders agreement is a contract between the shareholders, and any action taken in breach of it may lead to a claim for damages, but will not generally affect the validity of the act. For example, a transfer of shares in breach of a shareholders agreement will usually be a valid transfer regardless of whether the other shareholders have any claim for breach of contract. This is a reflection of public policy that leans towards of the interests of the finding for the validity of acts of a company.

If the company’s Articles restrict a shareholder’s ability to transfer their shares, then the rights of the other shareholders are stronger because a company is not permitted to act outside the provisions of its Articles. Therefore, the same transfer of shares which is not permitted by the company’s articles will often be legally invalid. Frequently, professionally drafted shareholders agreements will provide that the shareholders agreement prevails over the provisions of the Articles, and will require the shareholders to amend the Article to match the obligations imposed under the shareholders agreement.