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The articles of association

Chapter 7


The articles of association


Chapter Contents


7.1      Introduction


7.2      Resolutions or agreements affecting a company’s constitution


7.3      Companies’ objects


7.4      Constitutional documents and members


7.5      Alteration of the articles of association


7.6      Variation of class rights


7.7      Membership contract


Summary


Self-test questions


Further reading



7.1  Introduction


The company has been formed and as noted must have articles prescribing regulations for the company (s 18 CA 2006).


Since the advent of the Companies Act 2006, a company will effectively have a single constitution rather than the two components of memorandum and articles that prevailed before the Companies Act 2006. This will be the articles. As noted in Chapter 5, the new-style memorandum is a document in a prescribed form stating that the subscribers intend to form a company and undertake to become members and to take at least one share each (s 8 CA 2006). The previous chapter considered some of the vital provisions of the constitution and also how a company may change its status.


Since 1856, model articles have been provided for certain types of companies. For example, Companies Act 1985 Table A provides model articles for companies limited by shares. This operates as a ‘default’ set of articles for all such companies. If a company therefore devises its own articles of association, Table A will not apply except to the extent that the table adopted by the company is not comprehensive. The view was taken that Table A, which has been revised several times over the last 150 years but essentially remains a product of the Victorian era in terms of both language and substance, was in need of a rethink. It is essentially drafted in terms of public rather than private companies and successive revisions have tended to include increasingly complex provisions designed to cover every conceivable event or set of circumstances.


The result is that the vast majority of the provisions in Companies Act 1985 Table A are irrelevant to the vast majority of companies. The ‘one size fits all’ approach has a number of problems. The 1985 Act Table A is user unfriendly, poorly laid out and often unintelligible to non-specialists. Most of it concerns matters that are remote from the concerns of smaller companies, and it does not take account of relatively recent changes in the law, e.g. the introduction of single-member companies.


Following the recommendations of the Company Law Review, the government considered that reform of Table A was an important part of updating company law for a modern economy. It proposed in future that there should be:


a radically simplified set of model articles for private companies limited by shares and, for the first time, a full set of model articles for private companies limited by guarantee together with comprehensive, clear and concise guidance for small companies who are using or thinking of using model articles.


To companies set up under the new legislation, the default provisions will apply in relation to the new types of model articles in the same way as they did for Companies Act 1985 Table A. Existing companies will be able to replace their current articles with the new model articles if their members pass a special resolution to do so.


Section 19 of the Companies Act 2006 provides that the Secretary of State may, by regulations, prescribe model articles of association for companies.


Table A Model Articles were superseded by the Companies Act 2006 model articles on 1 October 2009.


7.1.1  The Company’s (Model Articles) Regulations 2008


These regulations made under the Companies Act 2006 prescribe model articles for the three most common types of company: private companies limited by shares; private companies limited by guarantee; and public companies.


All three sets of model articles are available electronically on the Companies House website at www.companieshouse.gov.uk/about/tableA/index.shtml.


7.1.2  Changes in the model articles


Private companies in particular are affected by changes to the model articles.


For example, a private company, whether limited by shares or by guarantee, is no longer required to hold an annual general meeting under the Companies Act 2006. There is, therefore, no provision made for annual general meetings in the model articles on the assumption that most private companies will take advantage of this change in the law.


However, if the members of a private company incorporated under the Companies Act 2006 wish the company to hold annual general meetings, they may wish to include provisions for annual general meetings similar to those in the model articles for public companies.


Similarly, private companies are no longer required to have a company secretary. They may have one if the members so wish. Model articles for private companies are written permissibly but make it clear there is no requirement for a company secretary.


It is likely that most private companies will wish to take advantage of the written resolution procedure (section 16.10.4), and therefore the model articles for private companies do not go as far as those for public companies in setting out detailed rules for general meetings.


Model articles include short permissive articles on indemnity and insurance, giving company directors the power to resolve that the company indemnify directors and/or maintain insurance for directors in accordance with the provisions of the Companies Act 2006 (see section 12.12).


These are just some of the more important changes that have been brought about in the model articles under the Companies Act 2006.


7.1.3  Unlimited companies


There are no model articles provided for unlimited companies and therefore no default provision. The only default provision contained in s 20 of the Companies Act 2006 is for limited companies.


7.1.4  Company checklist


When a company seeks registration it must ensure that, if it does not rely entirely on statutory model articles, its own articles are registered with the Registrar of Companies when it is formed.


Articles must be contained in a single document and divided consecutively in numbered paragraphs.


Where a company changes its articles (by special resolution of its members) an up-to-date copy of the articles must be registered with the Registrar of Companies not later than 15 days after the amendment takes effect.


Companies should also ensure that up-to-date copies of their articles are available for their members on request.


Section 20 applies the default principle to the extent that if a company’s registered articles do not cover every situation, the relevant model articles will fill the gap. Additionally, this section makes it clear that the model articles that are in existence at the time a company is formed will be the articles that apply in default (s 20 CA 2006).


7.2  Resolutions or agreements affecting a company’s constitution


Section 30 of the Companies Act 2006 provides that copies of resolutions or agreements, or written memoranda setting out the terms of such which affect a company’s constitution, must be forwarded to the Registrar within 15 days and recorded by him. Section 29 sets out the resolutions and agreements to which s 30 applies. These are:


(a)  any special resolution;


(b)  any resolution or agreement agreed to by all the members of a company (which otherwise would only have passed as a special resolution);


(c)  any resolution or agreement agreed to by all the members of a class of shareholders (which otherwise would only have passed by resolution with a specified majority);


(d)  any resolution or agreement that binds all members of a class of shareholders though not agreed to by all those members;


(e)  a resolution to give, vary, revoke or renew authority in relation to the allotment of shares by directors (s 551(9) CA 2006);


(f)  a resolution to redenominate share capital or a class of share capital under s 622(8) CA 2006;


(g)  a resolution of the directors of a company in connection with re-registration in consequence of a company acquiring its own shares, under s 664(1) CA 2006;


(h)  a resolution conferring, varying, revoking or renewing authority under s 701(8) CA 2006 (market purchase of a company’s own shares);


(i)   a resolution for voluntary winding up (s 84(1)(a) of the Insolvency Act 1986);


(j)   a resolution of directors of an old public company that the company should be re-registered as a public company (s 2(1) of the Companies Consolidation (Consequential Provisions) Act 1985); and


(k)  a resolution passed by virtue of regulations made under s 790 of the Companies Act 2006 (transfer of title to securities).


Such resolutions and agreements should be embodied in or annexed to the company’s articles.


7.3  Companies’ objects


Section 31 of the Companies Act 2006 provides that, unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.


Where a company amends its articles so as to add, remove or alter a statement of the company’s objects, it must give notice of this to the Registrar (s 31(2)).


The provisions of this section have effect subject to the special position of charities (s 42 CA 2006) (see section 6.15).


7.4  Constitutional documents and members


Section 32 provides that a company must, on request by any member, send him a copy of the up-to-date articles of the company, together with a copy of any resolution or agreement that has been recorded under s 30 as described above.


The provisions of a company’s constitution, when registered, bind the company and its members to the same extent as if they were covenants, signed and sealed on behalf of the company and of each member, to observe those provisions (s 33 CA 2006) (see section 7.7).


7.5  Alteration of the articles of association


Section 21 of the Companies Act 2006 provides that a company may amend its articles by special resolution.


Section 22 of the Act provides that a company’s articles may provide that specified provisions of the articles may be amended or repealed only if conditions are met or procedures are complied with that are more restrictive than those applicable to the case of a simple special resolution, i.e. provisions in a company’s constitution may be entrenched.


If a company’s articles on formation contain entrenchment provisions or are subsequently altered to include entrenchment provisions, the company must give notice to the Registrar (s 23 CA 2006). Similarly, if a company removes provisions for entrenchment, the Registrar must be given notice of that fact (s 24 CA 2006).


With regard to existing companies, s 28 provides that the provisions that immediately before the commencement of this part of the Act (Part III) were contained in a company’s memorandum are to be treated after the commencement of this part of the act as provisions of the company’s articles.


This applies not only to substantive provisions but also to provisions relating to entrenchment.


As has been noted, a company may alter its articles of association by special resolution (s 21 CA 2006). Indeed, any article that seeks to restrict a company’s freedom to alter its articles is invalid (see Allen v Gold Reefs of West Africa [1900] 1 Ch 656), although a separate shareholders’ agreement may validly restrict the alterability of the company’s articles on the part of shareholders. In Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588, four shareholders of a company had agreed not to vote in favour of increasing the company share capital unless all the shareholders and the company agreed in writing. The House of Lords held that the company could not be bound by this agreement. However, the agreement could stand as it was valid amongst the shareholders without the company’s participation. Had the agreement merely involved the company, this would have been void, whether it had been included in the company’s constitution or as part of an external agreement, as it would involve the company fettering its statutory powers.


A company cannot be restricted from altering its articles even if this results in a breach of contract between the company and a third party. In Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701, Shirlaw, the respondent, was a director of the appellant company. Later he also became managing director. This was by means of a separate contract and the appointment was to be for ten years. Later the appellant company merged with other companies.


Alterations were made to the articles with each of the companies within the group. One of these was to the effect that if a person ceased to be a director then he would also lose the office of managing director. Shirlaw was removed as a director under the provision in the articles. The effect of this was that he also ceased to be managing director and he sued on his contract for wrongful dismissal.


At first instance, in the Court of Appeal, Shirlaw was successful.


In the House of Lords, by a majority, it was held that his contract contained an implied term that the article that made him a director would not be altered.


The alteration, therefore, resulted in a breach of contract and the company was liable in damages. The company could not be restrained from altering its articles, however.


There are various considerations for a company to bear in mind in relation to changes of articles. Now the minority remedy in ss 994–996 CA 2006 (remedy for unfairly prejudicial conduct) is likely to be used by a party wishing to challenge a change of the company’s articles.


The power of a company to alter its articles is subject to certain conditions:


(a)  A company cannot alter its articles to contravene the provisions of the Companies Act. Thus, for example, any provision in the articles which would seek to exempt a director from liability for negligence is void by virtue of s 232.


(b)  Any alteration of the articles that conflicts with an order of the court is, of course, void. Thus an order of the court under s 996 relating to the remedy for unfairly prejudicial conduct cannot be overridden by a change of articles.


(c)  If the alteration of articles involves an alteration or abrogation of class rights, then, in addition to the special resolution required under s 21, the company must follow the regime appropriate to variation of class rights set out in ss 629–634. (This will be considered below – see section 7.6.)


(d)  In addition to the statutory restrictions, the power to alter a company’s articles is subject to the principle that any alteration must be bona fide for the benefit of the company as a whole. In Allen v The Gold Reefs of West Africa Ltd (1900), the company’s articles of association gave the company a lien upon all partly paid shares held by a member for any debt owed to the company. The defendant’s company constitution provided that ‘the company would have a first and paramount lien, for all debts, obligations and liabilities of any member … upon all shares (not being fully paid) held by such member’. One Zuccani owned both fully paid and partly paid shares.


An extraordinary general meeting of shareholders was called to pass a special resolution to alter the article in the company’s constitution by omitting the words ‘not being fully paid’. The effect of this would have been to extend the company’s lien to paid-up as well as partly paid shares. Zuccani’s executors (Zuccani having died) sought a declaration that the defendant company had no lien on the fully paid-up shares.


The Court of Appeal concluded that it was open to a company to alter its articles in this way. There was no rule that a company’s articles could not be altered retrospectively.


Much of the case law has centred upon a discussion of how it is to be determined whether an alteration is for the benefit of the company as a whole. In Greenhalgh v Arderne Cinemas Ltd