All limited companies must have articles of association. These set the rules company officers must follow when running their companies
What are articles of association?
Many small and medium sized enterprises, as well as start-up companies, are governed by the model articles of association. Articles of association outline the rules for running, governing and owning the corporation. Including the responsibilities and powers of the directors, and how much influence shareholders have over the board of directors.
For example board resolutions can only be passed either by a shareholder majority vote, or unanimous vote if agreed in writing. They also give the chairperson a casting vote where the directors are split 50/50.
The Articles are a public document and are available for inspection at Companies House.
Do I need to update my company’s articles?
A company’s circumstances can change without them being updated, which can lead to the Articles not be suitable when needed, or reflect the intentions of the key shareholders. Many companies have “standard” Articles which are based on “Table A” or the new model articles of association for private companies, known as the “Model Articles”, made under the Companies Act 2006.
Companies incorporated prior to the Companies Act 2006 have Table A articles contained in the Companies Act 1985, or bespoke articles which would have been drafted based on the 1985 Act. The Table A regulations have now been replaced by the Model Articles.
Despite the final provisions of the Act coming into force on 1 October 2009, many private companies have not updated their Articles to take advantage of the following:-
- The notice period for general meetings is now 14 clear days.
- The consent requirements for holding meetings on short notice have been relaxed.
- Written resolutions can be passed by a simple majority (51%) of those eligible to vote and written special resolutions by a 75% majority.
- Private companies are no longer required to hold annual general meetings.
- The requirement to have an authorised share capital has been abolished. Companies incorporated since 1 October 2009 have no restriction on the number of shares it can issue.
- Private companies are no longer required to appoint a company secretary.
- A company to communicate with its shareholders and others by e-mail or a website.
- Directors are authorised to change the name of the company rather than requiring a special resolution of the shareholders.
How can articles of association be interpreted?
The case of Re Euro Accessories Ltd  EWHC 47 (Ch) involved a claimant who had originally joined the company as an employee and was subsequently given a 24.99% shareholding. A couple of years later the relationship between the shareholders had deteriorated and it was agreed that the claimant would sell his shares to the majority shareholder, but they couldn’t agree a price.
The majority shareholder then used his control over the company to amend its articles of association so that he could force a sale of the claimant’s shares to him “for fair value”. The option was then exercised and the fair value was calculated to be £175,000, when the claimant had wanted around £350,000.
A “minority discount” was applied in calculating the value of the claimant’s shares (to reflect the fact that the claimant only had a minority shareholding, which carried fewer voting rights). The claimant argued that he was not a willing seller in this instance and so a minority discount should not be applied. The High Court held that, in this instance, “fair value” did permit the application of a minority discount. The background to the relationship between the shareholders would not be apparent to anyone reading the information publicly available at Companies House and therefore could not be taken into account in interpreting the articles of association.
How to introduce new employees into ownership of a company
When a company owner wants to introduce an employee into the ownership of a company, they should think carefully about the provisions that apply on that shareholder ceasing to be an employee. Ideally, in this situation, the company should have adopted articles of association setting out a clear and pre-agreed valuation process on a compulsory share transfer, before the claimant became a shareholder. Therefore, the delay and expense of going to court could have been avoided altogether. Although there is a cost associated with putting in place a specific set of new articles (and potentially a shareholders’ agreement), it helps to avoid disputes later on since the difficult conversations are had up front, whilst the parties are on good terms. Therefore the parties agree the position and know where they stand before any relationship turns sour.
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Please get in touch with our commercial lawyers if you require advice generally or help in drafting commercial contracts or terms and conditions.