What Are Articles of Association?

When approaching a corporate lawyer with questions about how the law applies to your company, it is common to hear some variation of the answer: “It depends on your company’s articles of association.” This article will explain the importance of articles of association for your company and the terms most articles contain. It will also discuss how articles can differ between companies and how to look up a company’s articles of association. 

Overview 

All companies must have constitutions so that the three key stakeholders — shareholders, directors, and the company itself — know what each party’s rights and obligations to the others are. The articles of association (often simply called ‘the articles’) will likely specify most of these rights. The articles of association are a company’s most important constitutional document. 

Companies are complex creatures because there are multiple stakeholders whose interests can diverge in various ways. For instance, shareholders are the ultimate owners of a company, and most want some degree of influence over their investment. However, they may not want to make the day-to-day decisions. Nor would it be practical for directors to obtain the consent of shareholders for every decision they make. 

The articles set out the precise balance of power between shareholders and directors. 

Articles are adopted at the point the company is incorporated. However, there are mechanisms for changing them or replacing them with an entirely new set of articles.  

Are Articles of Association Different from the Memorandum of Association?

A company’s memorandum of association is a distinct document with a different purpose from its articles of association. Unlike a company’s articles, the memorandum is not a fundamental constitutional document. 

Instead, a memorandum is used to confirm that individuals wish to form a company and agree to become the company’s first members and usually its initial shareholders. This document must then be delivered to the Companies House so as to register the company, and it must also include the company’s articles of association (alongside a registration document).

Important Terms in the Articles 

Each company’s articles may be worded differently and contain different terms. However, all articles will generally want to address certain essential company matters. 

Authority of Company’s Directors to Act on Behalf of the Company

Companies are not natural persons, and therefore they cannot do tasks like sign contracts and purchase goods and services. They, therefore, need agents to act on their behalf. These agents are called company directors. 

The law gives directors broad powers, but a company may want to restrict these powers. For instance:

• Can any single director enter into any transaction or contract without the consent of the other directors? 
• What powers do the shareholders have to stop directors from taking certain actions? 
• Can directors delegate their powers to other employees? 

Decision-Making by the Directors 

Where all company directors have to weigh in on a decision, such as entering into an expensive transaction, you will want to specify the decision-making process. 

Should a simple majority of directors pass decisions? Will it require unanimous consent? Do some directors have more voting power than others? 

There are also more procedural matters that you may want to consider, such as the process for convening a directors’ meeting in the first place. Likewise, consider the following:

• How much notice do you need to give? 
• How many directors must be present for the meeting to be effective? 
• What is the process for keeping records of meetings? 

Appointing and Removing Directors

You will also need to consider whether your shareholders have exclusive powers to appoint directors. Likewise, whether directors have some license to appoint additional directors or replace ones that have resigned or died.

Additionally, consider who should be able to terminate a director from the company. You also want to consider the circumstances of director termination.

Directors’ Salaries and Remuneration 

Another key term to include in your articles is whether directors have license to pay themselves as they see fit. You might also prefer if your shareholders have a say in their service contract. Alternatively, consider whether you will set out pay in your articles from the get-go.

Restrictions on Transferring Ownership of Company Shares

Suppose you start a company with several business colleagues. You may all decide from the outset that you do not want new shareholders coming on board without the consent of all the other shareholders. 

One of the ways to enact this is to have a term in your articles that restricts the transfer of shares to third parties. The effect would be that if one of the founding shareholders sells his shares to another person, the person cannot become a shareholder. 

Paying Dividends 

Additionally, you may want to create a system where some shareholders have first rights to receive dividends over others. Again, you can set this out in the articles. You can also set what happens if the company does not issue a dividend during a specified period. For example, perhaps some shareholders are entitled to be paid for this period the next time a dividend is declared.

Shareholder Meetings

Conducting shareholder meetings is also important, so you should specify when, where and how your company will hold meetings. You might even decide to nominate a chairperson.

Further, consider which shareholders are entitled to vote. Likewise, how much weight should each share hold? It may be the case that some shareholders have more voting power than others. You should also consider whether a third party vote on behalf of a shareholder.

Forms the Articles Take 

The government has created a template, “Model Articles of Association”, which any business is free to use. For small businesses, these are often adequate. 

You are, of course, free to change certain terms of the model articles. In such a case, the law refers to them as “amended model articles.”

Some businesses may have certain needs or agreements in place that require them to adopt tailor-made articles. The law calls these “bespoke articles”.

Can You Modify the Articles of Association?

Your company can modify its articles of association, which generally happens through a special resolution. If you are a private company, you may be able to amend your articles through a simple written resolution instead. There are restrictions, however, on how your company can change its articles. 

First, you must make any change in the articles of association for the benefit of the company on the whole rather than for the benefit of a certain class of members. For instance, you cannot discriminate against a minority group of shareholders so as to deprive them of their rights, namely, their statutory rights. 

Second, you cannot amend your articles of association so as to preclude further amendments. Although this is a general rule, there are some exceptions – for example, a shareholders agreement could have the effect of preventing certain changes from happening in the future.

Finally, you cannot make amendments that have retrospective effects that are unfair or legal. To demonstrate, you cannot include an amendment that forces members to give you more money because, for example, you have increased their shareholding without their consent.

Finding a Company’s Articles

Every company in the UK must make its articles available to the public for inspection. This is because other stakeholders like creditors and suppliers should be able to understand how the running of the company. 

Key Takeaways 

A company’s articles of association specify the rules that directors and shareholders must follow for essential matters like voting, issuing dividends, and authority to enter into transactions. Your company can choose to adopt model articles, amended model articles, or bespoke articles, depending on your company’s needs. Importantly, every company must make its articles available for the public to read. You can search for these articles on Companies House’s website. 

If you need help drafting your articles of association, 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.

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