Articles of Association

The articles of association are an important document for any company, setting out the basic internal rules governing how the company operates, as well as the rights and protections of shareholders and the powers and limitations of its directors.

Read on to find out what, as a shareholder, your position is if you leave the standard articles in place and some of the ways your company articles can be adapted to better protect you and plan for future growth.

We are highly experienced in drafting bespoke articles of association and advising on the key changes that can be made to protect your company and minimise the risk of shareholder and director disputes, which can arise more frequently where the articles do not adequately reflect the company's needs.

Please do call or email to discuss how we can assist you.

What are company articles of association?

Every limited company has articles of association. Subject to whether a shareholder agreement is also in place, the articles of association form the primary framework governing how a company operates. They set out the role and powers of the directors, the rights and procedures applicable to shareholders, and the voting thresholds required for shareholders to approve important decisions affecting the company.

Why are a company’s articles important?

Having the right articles of association for your company is important to protect shareholder rights and mitigate the chances of a shareholder dispute.

Articles of Association are especially important because, under English company law, limited companies have considerable freedom to determine their own internal rules, with the articles being the key document through which those rules are established.

When you set up a limited company, if you do not adopt bespoke articles, the company will be governed by what are known as the model articles of association. These cover many of the important day-to-day rules and procedures for running a company, but there can be significant limitations and risks in relying on them without making appropriate amendments.

You can change your articles of association at any time, provided that the necessary shareholder majority is obtained to approve the changes (see below).

Model articles are unlikely to be adequate if :

• you don’t have a comprehensive shareholder agreement in place;
• you are a minority shareholder;
• your company has only one director;
• your company is set up with 50:50 shareholders; or
• you are likely to seek new investment into your business.

Interaction between the Company Articles and a Shareholders' Agreement

Some of the same issues relating to shareholder rights, restrictions on directors' powers and other rules governing how the company must be run are also commonly addressed in a shareholders' agreement. If you already have a very detailed shareholders' agreement in place, you may decide that there is no need to update or amend the standard articles. However, you may also choose to deal with some matters in the shareholders' agreement and others in amended articles.

Some business owners prefer to have a comprehensive shareholders agreement rather than amended articles because, like all company constitution documents, a company’s articles are publicly available documents, whereas a shareholders agreement is private. 

Potential changes to standard Company Articles

Key issues which you should consider when deciding whether the standard articles are appropriate for you, include:

• Power structure and restrictions on directors – directors generally have day-to-day control of the company. Do you want to limit their powers? Without specific changes to the company’s articles, a shareholder's right to remove a director is lengthy and fraught with complexities. It is therefore common to amend the articles to change the process for director removal, particularly in small businesses where there are only a few shareholders and the shareholders are also directors.
• Shares –  What should the rules in the articles say about shareholder leavers, including what happens if a shareholder falls ill, dies, becomes bankrupt or is imprisoned?
• Different classes of shares – do you want to create more than one class or type of shares? All shareholders holding the same class of shares have to be treated equally in relation to dividend, voting and capital rights. This means that, if you only have one class of shares, you cannot pay different rates of dividends. If you want to differentiate between shareholders, you will need to create separate share classes and set out the rights attached to each class in the articles of association. Standard articles of association do not deal with different share classes.  If you ignore the articles of association and pay out different rates of dividends, the shareholders may have claims against the directors and the company.
• Shareholder voting : are there certain issues where the rules in the standard articles could cause problems for your company? For example, removing directors. You can change the process and the majority required for key decisions by amending the articles. See here for more on risks associated with being a minority shareholder.
• Dividends : do the standard articles adequately deal with a company policy that is suitable for your company regarding the declaration of dividends by the directors?
• Rules and procedures for transfer of shares – including compulsory transfers and pre-emption rights. If you use the model articles of association supplied upon incorporation, the existing shareholders of the company will be able to block any issue of shares where the shares have not first been offered to all existing shareholders pro-rata to their shareholdings.  This right is known as the right of pre-emption and is automatic unless disapplied by amending the model articles.
• Good leaver or bad leaver – setting out the circumstances in which an employee or director shareholder will be treated as a good or bad leaver. The classification can determine whether they are required to transfer their shares and what happens to those shares and its valuation upon exit.
• Veto – Powers to veto certain decisions in defined circumstances
• Drag along and tag along– The articles of association can be adapted to include drag-along provisions, whereby all shareholders must sell their shares if the majority want to sell the company. Whereas, tag-along provisions protect minority shareholders by ensuring that they receive the same price on sale of the company as the majority shareholders.

How to change standard company articles?

Unless you have agreed otherwise, at least 75% of shareholders with voting power must favour in favour of the proposed change. This compares with the usual requirement of 100% of shareholders needing to agree to changes to a shareholders' agreement. We can advise you on what should be included in updated articles and what should be dealt with in a shareholders agreement.

How we can help

Get in contact with us if you need legal support on any aspect of company articles 0 including drafting, reviewing, adapting or changing your company articles. We also advise on issues relating to how the articles interact with a shareholders agreement where one is also in place.