Have you ever heard of the Articles of Association?
Whether you’re a new business owner or you’ve been at the helm of your own organisation for a long time, you’ll benefit from getting up to speed with what’s required to produce watertight Articles of Association for your firm – particularly if there are multiple directors or shareholders involved in your venture.
What are a company’s Articles of Association?
The Articles of Association form the basis of a fundamental legal document that is required for any company incorporated in the UK. This document outlines the internal management structure of a company and governs how the company is run.
Together with the company’s Memorandum of Association, the Articles form the company’s constitution.
Why are they important?
Without clear direction (and even clearer boundaries), companies cannot be run smoothly, efficiently, and to the advantage of everyone involved. The Articles of Association define the roles, powers, and responsibilities of the company’s directors, shareholders, and other key parties. They serve as something of a rulebook, setting out how the company will conduct its operations, including decision-making processes and rights of the shareholders.
The Articles also ensure compliance with the Companies Act 2006, which is the primary legislation governing company law here in the UK.
Articles of Association are put in place to:
- Establish the company’s governance framework
They set the rules on how the company is managed, such as how board meetings are conducted, and the processes for issuing shares.
- Define shareholder rights
They specify the powers of shareholders, including voting rights and procedures for meetings.
- Ensure legal compliance
Articles must comply with UK company law, and certain statutory requirements must be included for the company to be legally registered.
In fact, if you want your business to be incorporated under UK law, submitting the Articles of Association is mandatory. Without them, your organisation cannot operate legally.
The Companies Act 2006 requires that every company limited by shares, whether private or public, adopts Articles of Association when forming the company. Additionally, the Articles are a public document, meaning they can be inspected by any interested parties, ensuring complete transparency if you’re in conversations with investors or looking to sell the firm, buy or merge with another company, or navigate an exit from the director’s board.
If you don’t follow the requirements that are laid out in the Articles, your company could be subjected to legal penalties. But perhaps just as importantly, the Articles can help to reduce disputes or full-blown conflicts between shareholders and directors, because they clearly outline the processes that need to be followed in different scenarios. Having this kind of blueprint readily available ensures you can act quickly if any problems arise, and work towards a faster and more agreeable outcome for everyone involved.
What are the key components of Articles of Association?
The company name and registered office
Basic, but necessary! The company name needs to be outlined, including its legal entity (eg Ltd). You’ll also need to add your official address.
Directors’ powers and responsibilities
The Articles set out the authority of directors, how they are appointed or removed, and their duties in managing the company. This includes decision-making powers and the delegation of authority.
Shareholders’ rights
The Articles define the rights attached to different classes of shares, such as voting rights, dividends, and the process for transferring shares.
Decision-making procedures
The document outlines how decisions are made within the company, such as voting procedures at general meetings and resolutions that require shareholder approval.
Issuance of shares and share capital
They explain how new shares can be issued, the rules for transferring shares, and the company’s obligations in this area.
Dividend distribution
The Articles govern how and when dividends are distributed to shareholders.
General meetings
They detail the procedures for calling and conducting shareholder meetings, including the required notice periods, quorum requirements, and voting methods.
Dispute resolution
The Articles can specify procedures for resolving disputes between shareholders or between shareholders and directors, providing a much-needed mechanism that helps to avoid costly litigation.
Winding up and liquidation
The Articles should describe what would happen if the business needs to be dissolved. This includes approaches for distributing assets and settling any outstanding liabilities.
Company’s objects (if specified)
This isn’t actually required since the introduction of the Companies Act 2006 – but the Articles may be used to define the company’s specific business purpose or “objects” for clarity.
How to create your own Articles of Association
Use or adjust the model Articles
As we touched upon earlier, the simplest way to create Articles of Association is to use the model Articles provided by the government, which are well-suited to most small and medium-sized businesses. If you have more specific requirements, you can modify them to suit specific governance or operational structures. For example, restrictions on share transfers might be added for family-owned businesses, or different rights might be attached to different share classes.
Draft new Articles
Companies with more complex structures or those seeking specific protections can decide to draft up entirely new Articles of Association. You should seek legal advice during this process to ensure that the Articles comply with the law and meet the company’s requirements.
Submit the Articles to Companies House
Whichever way your Articles have been created, they must eventually be submitted to Companies House at the same time your company is incorporated.
Can you amend the Articles of Association at a later date?
Yes – and if there are any changes to your company’s structure, big shifts in terms of your business strategy, or new regulations that need to be considered, you should update your Articles right away and resubmit them to Companies House.
The Articles of Association form the backbone of the company’s governance and management plan. They are there to make sure the company and its decision-makers operate in a transparent and legally compliant manner – and there is clear guidance to follow if and when the business faces significant change or unforeseen challenges.
As outsourced finance directors, we cannot stress enough just how vital it is to consider your Articles of Association as soon as you are thinking about incorporating your company – and, of course, ensure they are updated if your circumstances change. Our FDs can provide more advice on what to include and how to tailor your document, so it covers all eventualities.