Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Whichever sector you run your business within and whether you run a private company limited by shares or by guarantee, your articles are the main contract between the directors, the shareholders (or members) of your company and the company itself. The articles of association represent the rules, roles and responsibilities of directors and the internal management of the company.
A company’s articles of association must comply with the Companies Act 2006 and are legally binding on the company, the directors and the shareholders (or members).
The standard model articles of association (the Model Articles) are in most cases a good basis to start from but may need to be modified in several respects to ensure they fit the purpose and/or business strategy of your company.
Here are a few examples:
Membership organisations are often managed via a private company limited by guarantee. They usually have a process for applying, renewing and terminating membership. The company’s articles of association should be amended (or drafted at incorporation) to include those procedures.
In addition, the directors tend to be the main committee members of the organisation, with specific titles, roles and responsibilities and these need to be defined within the company’s articles.
The Model Articles (at article 22) provide for the power to issue different classes of shares via a majority vote of all the shareholders. This might not be appropriate for joint venture companies or companies where investor-type shareholders ought not to have the same voting rights as the founder(s) shareholder(s). You would certainly need to draft bespoke articles to define the different classes of share and the differing rights attached to each class to align with the company’s business strategy and processes.
Share transfer provisions need careful consideration. It is important to bear in mind that any transfer of shares or issue of new shares can affect the rights (positively or detrimentally) of the remaining shareholders. For example, if the company has different classes of share, consider whether on a transfer of shares, they should remain of the original class or change to match those held by the receiving shareholder, thus changing the rights of the latter.
Consider whether to allow ‘permitted transfers’ to family members or compulsory transfers on death, divorce, resignation etc.
The basic principle under the Companies Act 2006 is that a shareholder should be able to protect his/her proportion of the total shares of a company by having the opportunity to subscribe for any new issue of shares. However, this may not be appropriate for your business if you want to bring in new investors who would expect a certain proportion of the total equity of the company. Pre-emption rights can be modified or waived within the company’s articles.
A company’s articles should set out the dividend policy, in particular, who has the power to declare dividends – directors alone or with shareholder approval? You can also set a threshold for when dividends can start being paid out, a sensible strategy for start-ups or businesses in an early growth stage.
A company’s articles can specify how income is spent which is often relevant for a company with a not-for-profit or charitable purpose.
Certain stakeholders require businesses to demonstrate high social and environmental performance and will insist that such businesses amend their company’s articles to legally commit to the B Corp standard.
Hopefully, the above information will encourage you to check that your articles of association are appropriate to the aims and business strategy of your private limited company. Now is as good a time as any to ensure that all directors and shareholders/members have read and understood the company’s articles of association.
Whether you would like articles of association for a new company or would like us to review your Company’s existing articles of association, we can help you to plan, prepare, review and implement your articles of association in a way that helps you to protect and develop your Company.
If you would like more information about articles of association or any aspect of company law or would like to discuss your Company’s articles of association or a potential or existing company law matter, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.
