The articles of association: why are they important and what should be included?

The articles of association – or simply the articles – is a fundamental constitutional document for companies that are incorporated and registered in England and Wales which is required under the Companies Act 2006. The articles establish the core corporate governance rules which regulate the company’s internal affairs, including the appointment and removal of directors, issue and transfer of shares, dividend policy, and the rules governing the decision-making process by directors and shareholders. 

It is important to note that the articles automatically bind the company, its directors, and shareholders, while the shareholders’ agreement will only bind those shareholders that have agreed to become a party to it. This is discussed in more detail below. 

Model Articles of Association

In accordance with its powers under section 19 of the Companies Act 2006, the UK government has published a set of default articles called “Model articles of association for limited companies” (“Model Articles”) which can be found here. The Model Articles cover the most fundamental rules for limited companies and broadly speaking, provide the company and its shareholders with a lot of flexibility. 

It is not necessary to adopt Model Articles as your company’s articles of association. Although, as they are readily available online, most companies adopt the Model Articles at the point of registration to meet the immediate legal requirements of incorporation, then later develop more tailor-made articles to appropriately encompass the governing rules of their specific company.

It is important to note that if you have not registered bespoke articles or if your bespoke articles do not exclude or modify the Model Articles, then the Model Articles automatically apply to your company by virtue of section 20 of the Companies Act 2006. 

Core elements of the Articles

The following key topics are covered in all articles:

• Directors: the procedure for appointment and removal of a director, the powers and responsibilities of directors, as well as any limitations and all aspects of the decision-making process by the board of directors.  
• Shares: allotment and issue of shares, the rights attached to each class of shares (for example any preference rights), pre-emption rights, and the procedure for transfer of shares.  
• Shareholders: dividend policy, voting regimes, reserved matters, and all aspects of the decision-making process by the shareholders.
• Administrative arrangements: communication procedures, record inspections, and director indemnities and insurance. 

How do the articles work alongside the shareholders’ agreements?

Do you need a shareholders’ agreement in addition to your articles? The short answer is yes, you should ideally have both in place to ensure that the rights and remedies of the parties involved are adequately protected. The articles and the shareholders’ agreement are quite similar, and you may find that certain provisions are mirrored in both. Yet, they operate differently. 

Unlike the articles, having a shareholders’ agreement is not a legal requirement and this document does not need to be disclosed to the public. Due to this privacy, certain arrangements which the parties do not want to be disclosed to the public are included in the shareholders’ agreement and not the articles. 

The remedies and enforcement options available following a breach of the shareholders’ agreement differ from a breach of the articles. The articles are subject to the provisions of the Companies Act 2006, whereas the shareholders’ agreements are governed by contract law. Since the general principles of contract law apply to shareholders’ agreements, contractual remedies such as damages and injunctive relief are available in the event of a breach of the shareholders’ agreement. However, the remedy for a breach of the articles is a declaration that the action or decision is void. 

The shareholders’ agreement provides clarity on matters that are not dealt with under the articles. This includes, dispute resolution (English courts, arbitration, mediation), majority or minority shareholder protections, reserved matters, and restrictive covenants. In order to amend the articles, the statutory procedure requires the consent of the shareholders representing at least 75% of the voting rights. However, the minority shareholders could have as much say as the majority shareholders with regards to any variation of the shareholders’ agreement. 

It is therefore sensible to have a shareholders’ agreement which complements the articles and vice versa but care must be taken when drafting to avoid contradiction because both operate to determine and govern the relationship between the shareholders and the company. 

If you’d like to know more about the articles of association or shareholders’ agreements, require assistance drafting a bespoke set or further information about starting a company, we are here to help.

 

Our insights, articles and guides do not, and are not intended to, constitute legal advice or be an exhaustive review of all legal developments. Although every effort is made to ensure that the information provided in this article is accurate as of the publication date, please be aware that this is area of law may be subject to change. Please seek legal advice before applying the information provided to any specific circumstances, transactions or legal issues.