Is It Time To Update Your Company’s Articles Of Association?

Every private limited company must have articles of association, which take the form of a constitutional document setting out the basic management and administrative structure of the company. Many companies adopt a set of statutory default articles at the time of their incorporation and rarely revise them. Now may be the time to update yours. 

The articles of association regulate essential matters such as the issue and transfer of shares, dividends, board and shareholder meetings, the appointment and powers of directors and the company’s borrowing powers.

 A number of significant changes have been introduced by the Companies Act 2006 including a new set of default articles known as the ‘Model’ articles, which companies incorporated on or after 1 October 2009 may adopt.  If your company was incorporated prior to this date then such default articles will be based on the old ‘Table A’ articles contained in the Companies Act 1985.  Alternatively, your company might have a set of tailored articles which were appropriate at the time of adoption but through the passage of time, or a change in circumstances, may now be unsuitable. 

It can be cost effective to carry out a health check on your company’s articles to see if they require updating.  It is common for articles to be neglected and then when important questions arise in relation to the company’s constitution (for example, whether a director’s appointment can be terminated or whether a member’s shares can be transferred to a third party), it often transpires that the current articles are not appropriate or fail to reflect the intentions of the key shareholders.  This can result in expensive legal fees and leave parties in a position where they are powerless to achieve their desired outcome. 

In giving thought to whether you should carry out a health check on your company’s articles, the following benefits should be considered:

1. To remove any inconsistencies with the current law and avoid the company acting unlawfully. 
   There are a number of instances where provisions in your company’s articles could now, in light of the current law, be challenged and result in a potential claim against the company.  For example, the Model articles were revised as recently as 28 April 2013 to remove the power to terminate a director’s appointment automatically upon the making of a mental health court order because it could be considered discriminatory in terms of the Equality Act 2010.  This is just one of many examples of how specific provisions can become outdated or redundant over time.  
    
2. To cut ‘red tape’ and avoid bureaucracy.  
   It is likely that various changes could be made to your company’s articles which could streamline certain corporate procedures and help your company take advantage of the various deregulatory provisions introduced by the Companies Act 2006.  Some of the key changes include an ability to:
   1. amend the minimum notice period for a shareholders’ meeting from 21 days to 14 days;
   2. remove an obligation for your company to hold AGMs;
   3. remove the requirement to obtain a special resolution to change your company’s name;
   4. remove the statutory right of pre-emption and extend the directors’ authority to allot shares; and
   5. allow board meetings to take place over the phone.
       
3. To ensure your company’s articles reflect its current circumstances. 
   There may be discrepancies between what your company’s articles provide for and how your company is actually conducting itself.  For instance, your company’s articles may contain rights attaching to shares that are no longer in issue.  Alternatively, your company may be falling foul of the provisions in its articles which specify the minimum or maximum number of directors allowed.  On a more practical note, if you have a number of companies within the same group structure, you can simplify the company secretarial duties and provide consistency across the group by ensuring that all of the subsidiary companies have the same form of articles.

If you would like to find out if your company’s articles would benefit from a health check or would like any more information about these matters or any other aspect of corporate law, please contact Arveen Arabshahi or any other member of the corporate team. 

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.