Does your business need model articles of association or bespoke articles? Here are the common questions we get asked about the different types of articles, as well as which is right for your business.
What are Articles of Association?
Articles of association, also called ‘articles’, create a contract between a company and its shareholders, and are a set of rules for the running of the company.
They are filed with Companies House for limited companies when the company is incorporated.
The model articles of association for private companies limited by shares, are set out in full in Schedule 1 of the Companies Act 2006. These are the default articles that will apply to your company if you do not adopt bespoke articles, or if you only adopt some of them.
What are the benefits of having Articles of Association?
The main benefit of having articles of association is that they help to regulate the internal affairs of the company and set out the rules for how the company should be run.
They also help to resolve any disputes that may arise between shareholders, directors and other members of the company.
It is a legal requirement to have model articles of association in order to be fully formed.
What are included in the Articles of Association?
The articles are divided into numbered paragraphs in a single document. The articles cover the following areas:
- limited liability of shareholders
- directors – number of directors, their powers, and responsibilities and procedures for decision making
- shares and dividends – rights attaching to particular shares, issues and transfers of shares, and payments of dividends
- decision making by shareholders – quorum and voting at general meetings of shareholders and various decision-making options.
Does my company need Articles of Association?
Every company formed in England and Wales needs to have articles to be legally formed.
All companies incorporated on or after 1 October 2009 may adopt the standard ‘Model Articles’ prescribed in the Companies Act 2006.
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What are Model Articles?
Model Articles are available in the following forms:
- private companies limited by shares
- private companies limited by guarantee
- public companies.
Model Articles are widely applied and are suitable to many companies.
However, in some cases businesses will want to tailor their articles to their particular needs and circumstances. This can be done by adopting bespoke articles or by modifying the Model Articles.
Should Model Articles be changed?
If you want to change your articles of association, you must get shareholders’ approval at a general meeting, and then file the new Articles with Companies House.
The Model Articles may be tailored to suit the company. Common reasons for changing the Model Articles include:
- a board meeting of the directors is required to be quorate where there is just one director
- a casting vote by the chairman of a board is not wanted
- conflict provisions which prevent a director from voting if he or she has a conflict of interest needs to be removed
- there is to be more than one class of share
- there is a requirement for pre-emption rights on allotment of shares – pre-emption rights are rights for existing shareholders to protect them against dilution of their shareholdings, by having first refusal on the issue of new shares.
Where are the Articles of Association kept?
All companies are required to have their articles filed at Companies House as public documents.
The company’s articles should also be kept at its registered office.
Articles of Association and Memorandum of Association – what is the difference?
Both the articles and the memorandum of association (memorandum) are essential documents to forming a limited company. The memorandum is a short document setting out few details:
- company name and date of incorporation
- whether the company is limited by shares or guarantee
- names of the subscribers to the memorandum forming the company and, in the case of a company limited by shares, the number of shares taken by each shareholder which is to be a minimum of one share each.
The memorandum cannot be amended or updated during the lifetime of a company.
Shareholders’ Agreement and Articles of Association
A shareholders’ agreement is an agreement between some or all of the company’s shareholders.
The shareholders’ agreement complements the articles to protect shareholders’ interests and to deal with any disputes among shareholders ensuring smooth running of a business.
How are Articles of Association changed?
A company changes its articles by obtaining an agreement of its shareholders by passing a ‘special resolution’.
A special resolution (one requiring agreement of at least 75% of the shareholders) to change a company’s articles can be passed as:
- a written resolution signed by the shareholders
- a special resolution passed at a meeting of the shareholders.
The written resolution is probably the most common way of changing a company’s articles.
Changing articles by way of a written resolution requires:
- shareholders to sign the written resolution to change the articles
- attach a copy of the new or amended articles to the written resolution
- send both documents to Companies House within 15 days of the resolution being signed.
To change articles by special resolution at a meeting of the shareholders requires:
- holding a meeting of the board of directors to arrange calling of a ‘general meeting’ of the shareholders to circulate the proposal to change the articles
- hold the general meeting at which the resolution to change the articles will be passed by a voting majority of at least 75% of shareholders
- the directors then note that a special resolution has been passed and that they have decided to send it with the new articles to Companies House
- a certified copy of the special resolution, along with a copy of the new articles is to be sent to Companies House within 15 days of the general meeting at which it is passed.
Failure to send the changed articles to Companies House within 15 days amounts to an offence committed by the company and its officers, and can be punishable by a fine. However, it does not alter the validity of the articles.
What is the difference between Model Articles and articles of association?
When a company is formed, it may adopt the Model Articles for that type of company as its articles of association. For example, there are separate Model Articles for private companies limited by shares and public companies limited by shares.
The Model Articles are a set of default articles which can be adopted by a company when it is incorporated. The company does not have to adopt the Model Articles and can instead choose to draft its own articles of association.
If a company does not adopt the Model Articles and decides to draft its own articles, these are known as ‘articles of association’ or ‘bespoke articles’.
What are bespoke articles?
Bespoke articles of association are specifically drafted for a company and tailor the rules governing the company to its particular needs.
Bespoke articles can be more expensive to prepare than adopting the Model Articles but may be worth it if the company wants to have greater control over how it is run.
It's a good idea to review each model article if the direction of the company changes. In this case, modified or bespoke articles are a good idea.
Having a bespoke set of articles that align with the company’s shareholder agreement will help mitigate risk in future.
Can you write your own articles of association?
Yes, you can. You are not obliged to adopt the Model Articles and can instead draft your own articles of association, which will be specifically tailored to your company.
Do the Model Articles have pre-emption rights?
The Model Articles for private companies limited by shares do not have pre-emption rights. This means that shareholders can transfer their shares to whomever they choose without first offering them to the other shareholders.
The Model Articles for public companies limited by shares do have pre-emption rights, which means that shareholders must offer their shares to the other shareholders before selling them to a third party.
If you want your company to have pre-emption rights, you will need to include this in your articles of association.
Do Model Articles allow sole directors?
The Model Articles for private companies limited by shares do allow for a company to have a sole director. This means that the company can be run by just one person.
The Model Articles for public companies limited by shares do not allow for a sole director. This means that a public company must have at least two directors.
Are model articles of association right for me?
If the company only has one director then model articles may work well however with more than one director and shareholder, it may be necessary to alter the model articles or create bespoke articles.
You may want to protect the director's interest or restrict the powers of directors.
Modified or bespoke articles can also allow you to appoint alternate directors in the place of absent directors.
You may also make changes for voting purposes where there is a conflict of interest and a director has a casting vote on a proposed decision.For help with model articles of association, get in touch here.