Changes to the articles of association have been a hot topic in the legal world recently. As a busy business owner, updates to case law probably pass you by. But this is one that fundamentally affects the day-to-day running of your business, particularly if you’re a sole director.
Articles of Association – what they are and why you need them
Just to make sure we’re all on the same page at the outset, let’s have a quick recap about what we mean by the articles of association (or ‘articles’).
When you register a new company, you’re mandated by law to file articles at Companies House. So you have no choice – if you want your business to be a limited company, you will have to register articles.
They’re important because your articles are the rules that govern how the company is run. They set out how to appoint directors, what their powers are, how to hold and vote at general meetings, and how to distribute profits (among other things).
While you have no choice about whether or not you use articles of association, you can decide what goes into those articles, to reflect how you want to run the business (within the confines of company law). So your options are:
1. Model Articles (unamended)
The Model Articles were drafted with small business owners in mind and they keep regulation to a minimum. If you’re a start-up or small business, the Model Articles may be perfectly adequate for your current purposes. It’s worth noting that if you fail to register articles with Companies House, the Model Articles will apply by default.
2. Amended Model Articles
The Model Articles act as a good starting point for most small businesses, but you may need to make a few tweaks to reflect your own working practices, such as the ability to issue partly paid shares.
3. Bespoke Articles
When Model Articles bear no resemblance to how your business is run, you can draft your own unique rules to govern your business.
When to amend the articles
Given the importance of the articles of association, you have to keep them up to date and in line with your working practices. Let’s have a look at the most common scenarios in which you will need to change your articles.
Scenario #1: Young and growing businesses
For a speedy set-up, some entrepreneurs buy a pre-existing shelf company that is already registered. In that case, you might want to make changes to the articles immediately in order to structure the company in the way that you want to.
Secondly, once you start growing and looking for investment, you’ll need to make a changes to the articles. For example, that would apply to a family run company that’s reached the stage of bringing in external investors.
Scenario #2: Sole Directors with unamended model articles
Sole directors – take note!
This is a crucial issue for you. Recent case law has unearthed a problem for companies with sole directors that operate under the model articles. Even if you have amended Model Articles in place, you may be caught by this anomaly.
The problem is a conflict in the Model Articles. The impact of this conflict is potentially far-reaching and could (in the worst possible case scenario) invalidate the past, present and future decisions of the sole director.
Article 7 of the Model Articles obligates directors to make decisions at a meeting. But it recognises that if there’s only one director, then there’s no need to call a meeting for one person. However, that’s only the case if there are no other clauses in the articles that require the company to have more than one director.
Unfortunately, Article 11(2) of the Model Articles envisages two directors. It says that quorum for a directors’ meeting must never be less than two. That could be read to negate the caveat in Article 7. And while that ambiguity exists, it’s possible that a sole director’s decision-making will be invalid.
The way to regain certainty in the company is to add a bespoke clause into your articles to amend Article 11(2). Or alternatively, you can appoint another director.
This is a complicated and topical issue, so please get in touch if you would like to discuss it further.
Scenario #3: Making constitutional changes to the company
As your company grows and evolves, you’ll start to change the way you do fundamental things within the business. That’s another trigger for making changes to your articles.
Constitutional changes that affect the way you issue shares, or distribute dividends, or appoint directors (for example), are only enforceable if you update your articles to reflect those changes.
How do you amend the articles?
Amending the articles is fairly straightforward. It’s a two-step process:
· Shareholders pass a special resolution, by a majority of 75%
· File a copy of the articles (as amended) with Companies House, together with a copy of the special resolution. You need to do that within 15 days of the change coming into force.
How we can help
If you need amended or bespoke articles for your company, we can draft those for you. Or, if you’re a sole director of a company and you’re feeling a little confused by the recent case law, we’ll help you regain certainty in the way you run your business. Please don’t worry in silence – give us a call and we’ll put the world to right for you.