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 explain 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 formations.
The Model Articles were drafted to be of general application to most users. But they can easily be changed post formation if required. For full instructions on how to achieve this please see our article 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.
While the Model Articles fulfil the requirements of most companies, there are occasions when they are not sufficient. For instance:
- They do not cater for the issue of nil or partly paid shares (save on formation).
- They make no proper provision for multiple classes of shares.
- They do not contain provision for alternate directors.
- They include no specific provision for the appointment of a company secretary.
- They leave room for doubt as to whether board meetings are quorate (have enough people present to be considered valid) if there is only one director – see Hashmi v Lorimer-Wing .
The above issues impact how the company is run. An investor may have particular concerns about how and when they 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 when forming a new company (they are also offered as part of our company formation wizard.) Equally, you can use them 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;
- The ability to pay different dividends to different share classes;
- 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 from the Model Articles. We believe that, when taken together, the revisions will generally suit private companies limited by shares better than the unamended Model Articles. This is particularly true if the company will have two or more shareholders and/or directors. If you are 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.
The Enhanced Articles have removed the following sections from the Model Articles:
- 11(2) So 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 require all shares to be fully paid (except subscriber shares issued on incorporation).
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.
It is highly likely that at some stage one or more shareholders will need to transfer some or all of their shares. However, the Model Articles give the directors the discretion to refuse to register a transfer of shares. This effective veto on a transfer must be backed up with a valid reason for refusing to accept it. Nevertheless, it may reduce the attractiveness of the shares to other investors.
Accordingly it is probably 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.
The Inform Direct Enhanced Articles provide that meetings are quorate if there is only one member. If there are two 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.
The Inform Direct Enhanced Articles allow that a quorum is any two directors, but that if there is only one director in office, the quorum for a board meeting shall be one director.
We also offer a set of Model Articles with a single specific amendment to address only the issue of sole directors. You can find it to download in our article on Hashmi v Lorimer-Wing .
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.
The Enhanced Articles provide that the company is not required to have a company 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 is important that the articles cater properly for these scenarios. Different versions of the Enhanced Articles have been drafted to fully support each option. See the box on the right for links to purchase and download.
We have written a guide to setting up a new share class which explains in detail how to do it.
One of the major benefits of multiple share classes is the ability to pay different dividends to different share classes. The Inform Direct Enhanced Articles cater for this and are available in versions for two and three share classes.
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.
Purchase the Inform Direct Enhanced Articles
The Enhanced Articles of Association provide clarity in areas the Model Articles don't cover. Purchase the version that applies to your company.
This article was originally published in 2016. We update our content frequently. The most recent revision to this article was in November 2022.
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.