Both a memorandum of association and articles of association are required for a company formed in the UK under the Companies Act 2006 and previous Companies Acts. The memorandum of association is the document that sets up the company and the articles of association set out how the company is run, governed and owned. The articles of association will therefore include the responsibilities and powers of the directors and the means by which the members exert control over the board of directors.
In this article we look in detail at the content of these documents. For a practical take, elsewhere we explore what investors will look for in a company’s articles of association and how to change a company’s articles of association. You can also look at the types of enhancements that can be made to the model articles of association.
Memorandum of association
The memorandum confirms that the subscribers wish to form a company under the Companies Act and agree to become members of the company. In the case of a company that is to have a share capital, they undertake to receive at least one share each.
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The memorandum of association must be in a prescribed form and must be authenticated by each subscriber. The memorandum, which includes a statement of compliance, must be delivered to Companies House together with an application for registration of the company and the new company’s articles of association.
Before the Companies Act 2006 came into force a company’s memorandum included provisions which now fall within the articles, including any restrictions on what the company could do. For companies formed before 1 October 2009 these restrictions are now treated as being part of the articles of association and not the memorandum.
Articles of association
The articles of association set out how the company is run, governed and owned. The articles can put restrictions on the company’s powers – which may be useful if shareholders want comfort that the directors will not pursue certain courses of action, at least without shareholder approval. By default, however, the Companies Act 2006 gives a company unlimited powers.
In addition to the articles, which is a public document, the shareholders may enter into a shareholders’ agreement to augment the articles in relation to the running, governance and ownership of the company that they want to keep out of the public domain.
Before the Companies Act 2006 came into force the memorandum of association had to state in an ‘objects clause’ the types of business and transactions that a company could enter into. For companies registered before 1 October 2009 this will still restrict the company’s powers as these limitations are now treated as being part of the articles. Older companies should therefore review their memorandum and articles of association for any changes needed, including the need to remove this objects clause. The removal of this clause is only effective if form CC04 is submitted to Companies House, together with the special resolution approving the amendment.
There are exceptions to the unlimited powers given to companies. Charitable companies must state the charitable objects that the company is restricted to and community interest companies must restrict the company to objects that benefit the community.
There is no prescribed form for the articles although there are certain provisions that need to be included in them. To assist with this there are model articles for the three most common type of company (private company limited by shares, private company limited by guarantee and public limited company) set out in The Companies (Model Articles) Regulations 2008, as amended. The most up to date versions of these are available on Companies House’s website. In addition, for charitable companies the Charity Commission has a set of model articles which can be used and the Community Interest Companies Regulator has a version for community interest companies.
If the model articles are not being adopted then the full articles need to be sent to Companies House when applying to form the company so that Companies House can review them to ensure that they are acceptable. If there is a perceived problem with the articles of association Companies House will refuse to approve the formation of the company until the articles are amended. For charitable companies the articles also need to be sent to the Charity Commission for approval. For community interest companies the articles are forwarded to the regulator by Companies House to be approved. The articles should cover the following:
- Liability of members;
- Directors’ powers and responsibilities;
- Directors’ meetings, voting, delegation to others and conflicts of interest;
- Retaining records of directors’ decisions;
- Appointment and removal of directors;
- Shares, unless a limited by guarantee company;
o issuing shares;
o different share classes;
o share certificates;
o share transfers;
- Dividends and other distributions to members;
- Members’ decision making and attendance at general meetings;
- Means of communication;
- Use of the company seal, if applicable; and
- Directors’ indemnity and insurance.
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The articles can be amended and in another article we explain the process of changing the articles, with free template resolutions for the required special resolution. If a company changes its articles other than to the model articles a copy of the articles should be sent to Companies House within 15 days of the change for review. A copy of the amending resolution must also be send within 15 days of being passed. You do not need to tell Companies House why you are changing the articles of association.
The directors and company secretary (if one is appointed) of a company should have a good working knowledge of the company’s constitutional documents, especially the articles of association. When managing the business of the company, they need to be comfortable that they are acting within the powers conferred by the articles and following and processes or other formalities laid down there.
It’s also sensible for the board to review the articles on a regular basis. As the company and its circumstances change, some existing clauses may no longer be useful or new provisions may be desirable. By reviewing and, where appropriate, updating the articles of association the company can achieve the most appropriate balance between the needs of the directors and shareholders, giving the former the right powers to run the company while protecting the interests of its members.
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