Why change your company's articles of association?

What is a Memorandum of Association?

The Memorandum of Association records basic information when a limited company is set up, such as the names of the initial shareholders. People often think of the Memorandum of Association in conjunction with the Articles of Association. In fact, a company's Articles of Association are far more important than the Memorandum of Association, It is no longer a legal requirement to have a Memorandum of Association (since 2009). The Articles of association contain the rules about how the company is run and rights of shareholders. 

What are articles of association?

The Articles of Association bind each shareholder in the company and outline how the company should be run in terms of procedures, types if resolutions needed for formal company approvals,  the powers of the Directors abd potentially many other important issues such as what happens when sharehodlers want to sell or are employee shareholder leavers. The Articles of Association are important, which is why many companies amend or enhance the standard articles.

Reasons to vary or alter your company articles of association

Unless you alter your company articles of association, on incorporation, you will start with standard articles, which are weak in protecting minority shareholders, place few constraints on the powers of directors, make it difficult for minority shareholders to remove directors and are generally unacceptable to future private equity investors and possibly commercial lenders to a company Company law is also quite light on these key issues.

Common reasons to consider varying articles include :-

• Minimising the risk of disputes between shareholders and/or between shareholders and directors.
• Protecting the rights of minority shareholders and the value of their investment.
• Including rules which are likely to be demanded by future investors into the business who may for example want to be issued with pre-emption rights or different classes of shares with enhanced rights..
• Determining in more detail the basis on which important decisions are made and at what level and clarifying and limiting powers of the directors.

Common alterations to standard articles of association

So, many private companies do alter or vary their articles to change rules relating to, amongst other things :-

• Appointment and removal of Directors
• The powers of the Directors and any restrictions
• Company members liability
• How to proceed in events of conflict of interest, meetings, voting and decision making
• Rules about creating new shares, share classes and transfers of shares
• Rules and procedures about selling shares including pre-emption rights 
• Minority shareholder enhanced protections.
• The borrowing ability of the company

Business owners should be aware that the Articles are public information and can be viewed freely. If there are items that it is preferred are kept private, this is often done so by the creation of a Shareholders Agreement working alongside the Articles, in which the governance of the company is outlined but also terms that the company shareholders may wish to keep private from the public.

Process to change model articles of association

• Board Meeting - Directors need to convene a board meeting, providing proper notice. A quorum must be obtained for the board to approve the proposal and present a resolution to shareholders to amend the company’s articles.
• Special Resolution is needed which means 75% approval of shareholders
• Second Board Meeting: If the resolution is passed with at least 75% of votes, directors should convene a second board meeting. During this meeting, additional resolutions to amend the articles should be proposed. If the resolution is passed the amended articles need to sent to Companies House.

Should companies who have a shareholder agreement leave the articles as standard?

There are many different considerations and you can have a shareholder agreement and also amend your articles. A comprehensive shareholder agreement will  generally deal with the same sorts of issues as amendments to the company's articles of association. A shareholder agreement is a private document which is also an advantage. However, a disadvantage of using the shareholder agreement route is the need to get all new shareholders to also sign up to the shareholder agreement, possibly resulting in them trying to negotiate, which is less likely where the company's articles of association have been varied in the past..

Solicitors to advise on or draft company articles

Contact us for more information on how we can assist with ensuring that your company has the right articles of association, whether in terms of drafting bespoke articles of association, varying standard articles or how your company's articles work where you already have a shareholder agreement or are seeking new investors.

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