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You may have heard about your private limited company’s constitution, and are not exactly sure what that entails. For instance, is your constitution interchangeable with the articles of association? This article will explain the legal definition of a company constitution and explain what this definition often means in practice.
What is a Company?
Firstly, it is important to understand what a company is and how it is formed. A company is distinct from a legal person. Companies must be incorporated at the Companies House, where it is given a unique company registration number.
When you are incorporating a new company with the Companies House, you must submit a number of documents. These include a memorandum of association and your company’s articles of association. The memorandum and articles will form your company’s constitution. A ‘company constitution’ is a shorthand to describe the documents that govern the relationship between different stakeholders in your business. These stakeholders include directors, founders, and shareholders. Once it has been set up in this way, your business will then be regulated by your company’s articles of association in conjunction with English company law, which the Companies Act 2006 mostly sets out.
Company’s Constitution: Legal vs Practical Distinction
Many people refer to the company’s articles of association as the company’s constitution and vice versa. Indeed, for some companies, there is practically no distinction between the two. This is insofar that the articles contain the rules governing the relationship between the shareholders, the company, and its directors. Ultimately, these details are the most significant element of a company constitution.
However, there are other elements of a constitution, which may also be important features. The following section examines possible features of a company’s constitution before exploring how each part may influence the company.
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The Legal Definition
Generally speaking, the constitution can be thought of as both proving the company’s existence, the makeup of its share capital, and the rules governing the administration and management of the company.
The law also considers a company’s constitution to represent a unique kind of contract between both:
- the shareholders of the company and the company itself; and
- between and among the shareholders.
From a legal perspective, you may find the constitution of a company in the following places:
- the company’s articles of association;
- its certificate of incorporation;
- its current statement of capital;
- shareholder resolutions affecting the constitution;
- any agreements between the shareholders affecting the constitution; and
- copies of any court orders and legislation altering the company’s constitution.
Some of these elements are universal to all companies, such as its articles of association. On the other hand, not all companies may have each of these in their constitution. For instance, if you do not have any shareholder agreements in place, this will not form part of your company’s constitution.
Articles of Association
As a legal requirement, all companies must adopt a set of articles of association upon incorporation. You can think of a company’s articles as the handbook for how the directors and shareholders should run the company.
Key provisions of a company’s articles include the:
- powers and responsibilities of company directors;
- appointment process for directors;
- rights attached to shares, such as voting rights and rights to dividends;
- rules for holding general meetings; and
- rules for counting votes in shareholder meetings.
Finally, it will also detail any other administrative arrangements in place that are relevant to each company.
The provisions within a company’s articles of association are legally binding on all members of the company (unless specified otherwise) and are treated as a contract between all of the company’s members.
Once a company is ready to go through the incorporation process and draw up its articles of association, it can choose to use either a model constitution or to create its own set of articles.
Restrictions on Amending the Articles
There are certain limitations to how a company can amend its articles. Generally, you can divide limitations between “voluntary provisions” and “mandatory provisions.”
Voluntary provisions are provisions that will apply to the company unless the articles specify otherwise. A common example is restricting the right of a company to borrow more than a specified amount or restrictions on the right to issue more shares.
Conversely, mandatory provisions are those that cannot be excluded by the articles, regardless of if you attempt to include them in the articles. A few examples include any attempt to:
- escape regulatory filing requirements at Companies House;
- exclude the right of shareholders to remove directors; or
- force shareholders to purchase additional shares.
Types of Articles
Additionally, a company’s articles of association can take three forms.
| Unamended Model Articles | Drafted by the government and are effective if there are no other articles registered with the company. |
| Amended Model Articles | In their general form, they are model articles with certain provisions altered to suit the company’s particular circumstances. |
| Bespoke Articles | Articles that are written by a lawyer without reference to the model articles. |
Which Articles Are Best for Me?
Unamended model articles may be suitable for small businesses with few shareholders or directors.
Importantly, it is common for companies to adopt unamended model articles and then amend specific provisions at a later date.
Further, some common terms you may wish to amend include:
- the extent to which directors with the potential for personal interests in certain transactions, such as their service contract, may vote;
- the minimum or maximum number of directors that must serve;
- how directors’ meetings are to be held; and
- restrictions on issuing shares to new shareholders.
Amending the Articles
You can always amend the articles provided the shareholders’ consent — usually by a special majority (i.e. 75% or more of the shareholding votes agree).
In practice, the directors will vote together to propose the amendment to the shareholders. Then, the shareholders will approve or disapprove of the change.
Other Elements of a Company’s Constitution
While the articles of association are the primary source of a company’s constitution, there are other features we will briefly explore.
Certificate of Incorporation
The Companies House Registrar will issue a certificate of incorporation to all new companies as part of the successful registration of the company. It is a document that evidences the company’s existence and right to trade as a company.
Current Statement of Capital
A company’s statement of capital is a snapshot of the company at a certain point in time. It will include the following information:
- the total number of shares issued by the company;
- what the nominal value of all the shares are;
- how much (if any) of the shares are unpaid; and
- information about the rights attached to each class of shares.
You will need to update the statement of capital in certain circumstances, including:
- upon incorporating the company;
- when altering the share capital;
- when cancelling or reducing the shares; and
- as part of the annual confirmation statement.
Shareholder Resolutions
By definition, any shareholder resolution that amends the articles is part of the constitution because it has changed the core element of the constitutional documents.
Shareholder Agreements
Shareholder agreements are part of the constitution. This is because if there is an agreement in place, it will determine the conduct between the shareholders. Again, this is one of the key features of a constitution.
Importantly, in many cases, shareholders do not have obligations to publicly disclose any shareholder agreements, unlike articles, which anyone can inspect through Companies House.
Court Orders and Legislation
Anytime a court order or piece of legislation mandates a company to do or refrain from doing any particular thing, this will form part of the company’s constitution.
Key Takeaways
A company’s constitution refers to the rules that govern the relationship between and among the shareholders and the company. Likewise, it details what powers and responsibilities directors (and company secretary, if there is one) owe the company and how to run the company. A company’s articles of association will contain most of this information, but not all. Therefore, it is important to understand how exactly your company’s constitution is composed.
If you need help understanding how your company’s constitution operates, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The articles of association are typically the most important element of a company’s constitution. Most of the rules on how the company is to be run are set out in the articles.
In addition to a company’s articles of association, you can also find elements of a company’s constitution in its statement of share capital and incorporation certificate. Likewise, any private shareholder agreements between the shareholders will also form a company’s constitution. Finally, any successful resolutions amending the constitution will also form part of the constitution.
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