An important document that anyone involved in the governance of a registered company needs to be familiar with is the company’s Articles of Association. Sometimes referred to as a ‘Constitution’, Articles of Association are a legally required document for all registered companies.
The Articles are agreed by the shareholders (also known as ‘members’) at the incorporation of the company (although they can be amended) and they essentially form a contract with the officers and directors of the company to whom the shareholders entrust the ongoing management of the company.
The Articles are the rules by which the company is governed and provides clear guidance on the power of the directors and the procedures by which the company is run.
Many companies in England and Wales have adopted Articles of Association which closely reflect the model Articles provided for under company law. For new companies, the model Articles for limited companies and PLCs can be found within the Companies (Model Articles) Regulations 2008 (as amended), whereas older companies, will often follow the standard Articles set out under Table A of the Companies Act 1985 or earlier forms.
However, firms (within the parameters of the law) can be selective in the Articles it chooses to adopt. Some companies may feel that the provisions under the model Articles are irrelevant and need not apply to the firm, alternatively, the members may wish to include additional Articles or substitutions for Articles they wish to exclude.
When the members adopt the Articles, they become legally binding. They are also publicly available documents filed with Companies House and can be accessed online via the Companies House website.
From time to time, however, the shareholders of a company may wish to amend or update the Articles. This may be the case for companies following older sets of model Articles. To do so, the shareholders need to pass a Special Resolution, requiring 75% of the votes cast at a General Meeting or by a Written Resolution approved by 75% of all members. The resolution, once passed, must be filed with Companies House within fifteen days.
It is important that directors have read the company’s Articles of Association as directors can be held personally liable if they breach them. This is particularly concerning if a director acts beyond their powers (ultra vires) and causes the company to incur a loss. In these cases, a director may need to make good the loss out of their own resources, which can potentially be costly.
Therefore, the management procedures and governance of a company need to be in line with the Articles of Association and consistent with the latest company law.