Articles of Association can be long or short form. Until recently, the norm was the latter – 5 or 6 pages setting out key issues and incorporating the statutory ‘Table A’ – a set of standard default Articles. For companies incorporated after October 2009, Table A was replaced by a simplified set of default Articles known as the Model Articles.
The recent trend of company formation agents to use long form Articles, modifying the standard Model Articles to incorporate tailored alterations, means that key issues can often lie buried in a document that may run to more than 30 pages.
So what are the key points to check when reviewing Articles?
1. Transfer of shares
The simplest restriction on share transfers is to allow the Directors to veto any transfer of shares by a member.
The Model Articles have a default provision giving the Directors a veto on share transfers – check that this is included. If instead the Articles include rights of pre-emption on share transfers (i.e. rights of first refusal for existing shareholders) then the procedure laid down in the Articles must be checked carefully.
2. Quorum for shareholders’ meetings
The Articles should be checked to see if the requirement for a quorum (the minimum number of shareholders that must attend a meeting to be able to make decisions) has been amended from the default position – 1 for a single member company and 2 for all others.
Articles must be checked too for what happens if a quorum is not present. The Model Articles state that the meeting is to be adjourned but this is often amended so that a single member can be a quorum, preventing a minority shareholder from frustrating business.
3. Quorum for Directors’ meetings
The Model Articles specify a quorum of 2 as the default position but allow a sole Director to have full authority. This may not be appropriate for an owner-managed company with 2 or more shareholders.
4. Directors’ conflicts of interest in company transactions
With the exception of some ‘permitted causes’, the Model Articles disqualify a Director from voting if they have an interest in business being transacted
This should be checked – it is likely to be preferable to amend this provision so interested Directors have full rights to vote.
5. Situational conflicts
New provisions in the Companies Act 2006 allow the Board to sanction a situational conflict (where a Director for example has interests in a competitor). The statute specifies, however, that conflicted Directors cannot count in the quorum. It is common practice to reduce the quorum for Directors’ meetings down to one in these circumstances and the Articles should be checked to see if this is covered.
6. Restriction on share issues
Before the Companies Act 2006 the Memorandum of Association included a share capital clause: a company wanting to issue more shares than specified in its Memorandum needed to increase its authorised share capital. The 2006 Act has abolished the concept of authorised share capital. Many formation agents now choose to follow this practice indirectly by including in the Articles a cap on the number of shares that can be issued. This should be checked.
If you’d like further information please contact us by phone on 0845 868 0962, or by email: email@example.com. We’ll be very happy to give you help and advice with this and other areas.