When might you want enhanced articles of association?

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The Articles of Association are the written rules that govern how a company is run, governed and owned.  Every company must have them. In another article we have explained in detail some of the key provisions you would expect to see in the Articles of Association, including requirements around rights of pre-emption.

Usually, the first time most people come across the need for Articles of Association is when a company is incorporated.  This is because it is a Companies House requirement to supply a copy of the Articles of Association as part of the company registration process.  To avoid the enormous filing burden of what would be a very repetitive document Companies House produced a set of Model Articles for private companies limited by shares. (There are also Model Articles for public limited companies and companies limited by guarantee, but we’re not looking at those types of company in this article.)  These Model Articles are, if you like, a default option and are the type used with the majority of all formations.

In addition to being drafted to be of general application to most users, perhaps a reason why many people are happy to use the Model Articles when forming a new company is that they can very easily be changed post formation if required.  We have written separately about how to change the articles of association.

Need enhanced articles of association for your company?

Our professionally drafted articles of association offer various enhancements upon the standard Model Articles, offering tailored support whether you have one, two or three share classes.

You can purchase these enhanced articles online for your new or existing company.

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While the Model Articles fulfil the requirements of most companies there are occasions when they are not sufficient.  For instance:

The above issues impact how the company is run.  An investor may have some particular concerns about how and when he may see a return on their investment and we have written separately about what a prudent investor should check for in the articles of association of any company they invest in.

Here we look at an alternative set of articles to the Model Articles (which we call the Inform Direct Enhanced Articles or ‘IDEA’ for short).  They have been drafted by a top 100 law firm.  We set out below the circumstances when they may be preferred to the Model Articles.  If you think they would suit your situation you can purchase and download a copy and use them either when forming a new company (they’re also offered as part of our company formation wizard) or to replace an existing set of Articles for a company which has already been incorporated.

Alongside various other enhancements, IDEA provide:

  • Power to allot shares as nil, partly or fully paid;
  • Pre-emption rights on allotment of new shares;
  • Pre-emption rights on transfer of shares;
  • Support for one, two or three classes of share as appropriate
  • Directors may appoint alternate directors;
  • Full powers to give notices and hold meetings by electronic means;
  • Director’s power to refuse to register any proposed transfer of shares;

Below is a more detailed explanation of where the Inform Direct enhanced articles differ to the Model Articles.  We believe that, when taken together, the various revisions will generally suit private companies limited by shares better than the Model Articles without amendment. This is particularly true if the company will have two or more shareholders and/or directors. If you unsure whether to adopt the Model Articles or the Inform Direct enhanced articles we would always encourage you to take specific professional advice from an accountant or solicitor that takes account of your personal circumstances.

Inform Direct enhanced articles v Model Articles

The Inform Direct enhanced articles of association are a revision to the Model Articles rather than a wholesale rewriting of them.  Accordingly many of the changes are effected by replacing the relevant section(s) with new wording or in some cases removing it entirely.

Sections removed

The enhanced articles have removed the following sections from the Model Articles

  • 11(2) So a directors’ meetings can be quorate with just one person.
  • 13 So the chairman of a meeting does not get a casting vote.
  • 14 So a conflict of interest does not preclude a director from voting.
  • 19(5) So Directors must account for any remuneration received.
  • 44(4) Removing requirement to take a Poll as soon as one is requested.

Amounts paid and unpaid on shares

The enhanced articles provide that the directors can allot shares which are nil, partly or fully paid.  This contrasts with the Model Articles which requires all shares to be fully paid (save for subscriber shares issued on incorporation which do not need to be fully paid).

Share allotments

If the new company is one that is likely to be seeking additional investment after formation then this area is especially important.  There are broadly three approaches when it comes to allotting new shares:

  • Giving the directors total discretion as to when and to whom they can allot new shares in the company.
  • Giving the directors the ability to allot new shares provided that existing shareholders get the right of first refusal (standard pre-emption) to take up any new shares.
  • Restricting the ability of the directors to allot shares e.g. requiring the written consent of existing shareholders before any new shares can be issued.

Whereas the Model Articles give the directors total discretion when it comes to allotting new shares this can, especially in the absence of a shareholders’ agreement, give rise to potential conflicts of interest.  For this reason alone the Inform Direct enhanced articles contain standard pre-emption provisions.

Share transfers

It is highly likely that at some stage in the life of a company one or more of the shareholders will want or need to transfer some or all other their shares. However, the provisions on share transfers in the Model Articles give the directors the discretion to refuse to register a transfer of shares.  This effective veto on a transfer, albeit one which must be backed up with a valid reason for refusing to accept it, may reduce the attractiveness of the shares to other investors.  Accordingly it is probably better, and certainly fairer on shareholders who are not also directors, that there are simple pre-emption provisions on transfers too.  The Inform Direct enhanced articles provide these.  So, only if the existing shareholders do not want to purchase all the shares being offered can they be sold to a third party.  However, the directors still retain a right of veto on transfer if they do not approve of the proposed transferee.

General Meetings

The Inform Direct enhanced articles provide that meetings are quorate if there is only one member; if there are 2 or more members and a meeting has been properly called it will be quorate with just one member present 30 minutes after the scheduled start time.

Board Meetings

The Inform Direct enhanced articles provide that a quorum is any two directors.  However, if there is only one director in office, the quorum for a board meeting shall be one director.

Alternate Directors

The Inform Direct enhanced articles provide that any director may appoint as an alternate any other director, or any other person approved by the directors.   There is no provision in the Model Articles for alternate directors.

Other Provisions

The enhanced articles provide that the Company is not required to have a secretary, but the directors may choose to appoint any person who is willing to act as the secretary.  The secretary can also be a director.

Multiple share classes

Most companies are formed with a single class of share, which will amply support the needs of the directors and shareholders. However, companies are increasingly choosing either to incorporate with more than one share class or, having already incorporated, to move to having multiple share classes. In this way, the company might split existing Ordinary shares into “A” shares and “B” shares and maybe even “C” shares.

We posit that the Model Articles are insufficient if you are going to have more than one share class. This is because although in clause 22 of the Model Articles there is a section headed ‘Power to issue different classes of share’, it is silent on the names of the new share classes and what rights they have in respect of voting, dividend entitlement and on winding up.

It’s important that the articles cater properly for these scenarios. Different versions of the enhanced articles have been drafted to fully support each option:

If you have very particular requirements then it may be the case that additional work will be required to make these enhanced articles meet the precise circumstances of your situation. If that is the case, we suggest you instruct a law firm to prepare you a bespoke set of articles.

All companies must maintain up to date company records and file documents with Companies House. Inform Direct is the perfect tool to help you easily keep everything up to date.

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