In Short
- A company constitution outlines the internal rules and regulations for managing a business, covering roles, powers and decision-making processes.
- It sets the framework for how directors, shareholders and officers interact with each other.
- Having a well-defined constitution helps prevent disputes and ensures compliance with the law.
Tips for Businesses
A well-drafted company constitution is essential for setting clear guidelines on governance and operations. Review it regularly to ensure it aligns with any changes in your business or relevant laws. If you are unsure, seek legal advice to create or update a constitution tailored to your company’s needs.
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. In the UK, companies must be incorporated at Companies House, where they are given a unique company registration number.
When you are incorporating a new company with the Companies House, you must submit a number of documents. When incorporating online, through the government website, you will need to submit your company’s articles of association (and failing this, the ‘model articles’ will apply by default). Once incorporated online, you will receive a Memorandum of Association, a legal document that confirms the shareholders’ agreement to form a company. The memorandum and articles will form your company’s constitution.
A ‘company constitution’ is a shorthand term 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 a company’s articles of association as its constitution, and vice versa. Indeed, for some companies, there is practically no distinction between the two. This is insofar as 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’s constitution.
However, there are other elements of a constitution, which may also be essential features. The following section examines possible features of a company’s constitution before exploring how each part may influence the company.
Continue reading this article below the formThe Legal Definition
Generally speaking, the constitution can be thought of as providing 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 parties:
- the shareholders of the company and the company itself; and
- between and among the shareholders.
From a legal perspective, the constitution of a company may include the following:
- 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 (for example, a shareholders’ agreement); and
- copies of any court orders and legislation altering the company’s constitution.
Some of these elements are universal to all companies, such as their articles of association. On the other hand, not all companies have each of the other items 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 undergo the incorporation process and draft its articles of association, it can choose to use either the model articles or create its own bespoke set of articles.
Restrictions on Amending the Articles
For a company to amend its articles, it must pass a special resolution of its shareholders, which requires shareholders holding at least 75% of the voting share capital to vote in favour of the amendment. There may also be provisions in the company’s shareholders’ agreement that require the consent of particular stakeholders in order for the articles to be amended.
Some provisions in the Companies Act will apply to a company unless its articles specify otherwise. A common example is the statutory pre-emption rights, which require directors to offer any new shares to existing shareholders, unless the articles have disapplied this or included their own pre-emption rights that would apply on an issue of shares.
Conversely, some mandatory provisions in the Companies Act cannot be excluded by the articles, regardless of whether you attempt to include them in the articles. A few examples include any attempt to:
- allow changes to be made to the articles with approval from shareholders holding fewer than 75% of the voting shares;
- remove the right of shareholders to remove directors; or
- declare a dividend without appropriate financial reserves.
Types of Articles
Additionally, a company’s articles of association can take three forms.
| Unamended Model Articles | Drafted by the government, they are effective if no other articles are 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. Or if there are a few changes the company wants to make, amended model articles may be the way to go in the first instance.
It is common for companies to adopt unamended model articles when incorporating the company and then amend specific provisions at a later date or replace them with bespoke articles.
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 resolution at a general meeting of shareholders (with shareholders holding 75% or more of the voting shares who are present at the meeting agreeing) or a special resolution passed in writing (by shareholders holding 75% of all voting shares).
In practice, at a board meeting, the directors will vote together to call a general meeting or circulate a written resolution and propose the amendment to the shareholders. Then, once the notice for the general meeting has been sent and the general meeting is held, or the written resolution has been circulated, the shareholders will approve or disapprove of the change. If the shareholders agree by special resolution, a signed copy of the resolution (along with the new articles of association) should be filed with Companies House within 15 days of the resolution being passed.
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 process. 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 alters a core element of the constitutional documents. This is why it is essential to upload the signed resolution, along with the new articles, to Companies House, ensuring that Companies House accurately reflects the company’s current constitution.
Shareholder Agreements
Shareholder agreements are part of the constitution. This is because, if an agreement is 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. It is also not an obligation to have a shareholders’ agreement in place. However, we highly recommend having one, as it regulates the relationship between shareholders and sets out protections for them.
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.
Court orders can impact a company’s constitution in various ways:
- Rectification of the register: A court may order the correction of errors or omissions in the company’s register of members.
- Validation of actions: Sometimes, a court may validate certain corporate actions that were taken improperly or without authority.
Legislation can also affect a company’s constitution:
- Statutory provisions: Certain provisions of the Companies Act 2006 automatically apply to all companies, regardless of what’s in their articles.
- Regulatory requirements: Specific industries may have additional legal requirements that become part of the company’s constitution.
- Changes in law: When new legislation is passed that affects company operations, it may effectively alter the company’s constitution, even if the articles aren’t formally changed.
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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