Many, if not most, founders of start-ups and early-stage businesses aren’t that interested in legal nitty-gritty. That’s understandable. Their focus is on attracting customers and growing their brand.
When you launched your business, your lawyer or accountant probably took care of the details and set up a limited company so that you can trade with limited liability, protecting your personal assets against losses. So what more do you need to know about owning a company?
We’d say, a great deal. If you’re new to entrepreneurship and company ownership or have invested in a company as a shareholder, we’d strongly recommend you get on top of the legals and seek expert corporate legal advice, in particular, understanding the rules that dictate how your company is run. These rules are contained in its articles of association or articles for short, and they’re essentially a ‘user manual’ for the company.
The contents of the articles can have a major impact on your ability to attract finance. New investors will be extremely interested in them because their terms can affect the value of their investment and their ability to realise the value of their shares.
Please note, if you’re a sole director company with the model articles for private companies adopted (without amendments), you need to take action now and amend your articles. You need to do this to make sure any decisions you have previously made and will make are valid and not void as a result of the ruling in a recent court case. Find out more about what you need to do in our update for sole directors.
Read on to find out more about the ins-and-outs of articles of association.
Articles are a necessary part of company formation. They represent a contract between the shareholders of a company and the company itself, as a legal entity in its own right. They dictate the way the company is run on a day-to-day basis and are designed to protect the interests of shareholders. Directors are bound by their provisions, despite the fact that they don’t sign them. Their duties as directors mean that they have to abide by them in order to fulfil their obligations to the shareholders, as company owners.
A company’s articles are registered at Companies House, which together with its certificate of incorporation and other fundamental corporate documents form the the company’s ‘constitution’.
The articles deal, among other things, with how directors are appointed and run the company, how shares are issued and change hands, how dividends are paid and how decisions are made by directors and shareholders alike.
Under English law, articles are a prerequisite to forming a company. This is the case whether you’re forming a private company limited by shares or guarantee or a public limited company.
Articles don’t have to be in any particular format, but certain provisions have to be included by law. Companies formed before 1 October 2009 may have adopted the standard articles known as ‘Table A’ articles. These articles were updated by legislation, and companies incorporated after that date may adopt the standard ‘model’ articles. You can find the model articles on the government website.
If you haven’t adapted the model articles to suit your particular needs, you or your advisor will have formed your company based on the standard model articles.
This is quite normal. Most people setting up companies for the first time buy an ‘off-the-shelf’ package – that means the company has been set up beforehand using model articles. These can be adapted once the business grows and its business strategy becomes clearer.
The fact is, you can’t start a company without articles of association.
A company’s articles must be contained in a single document and divided into consecutively numbered paragraphs.
The Articles cover the following key areas:
Our corporate solicitors can provide legal advice on drafting or amending your articles of association and other constitutional documents.
You can find a company’s articles of association at Companies House as these are, by law, public documents open for inspection. As an example, take a look at Tesco PLC’s original Articles and subsequent amendments.
A copy of the company’s articles should also be kept at its registered office.
A company may decide to issue different types of share (for example, ordinary shares and preference shares) and different classes of each type of share, for example A ordinary shares and B ordinary shares, often known as alphabet shares.
The creation of varying types and classes of shares allows a company to allocate different rights to different shareholders which may be necessary to reflect the level of investment in the company or for tax reasons. The rights attaching to these shares should be set out clearly in the articles.
The shareholders’ rights section of the articles generally covers the following:
Any restrictions or conditions on the allotment or issue of shares should be contained in the articles. Companies incorporated under the Companies Act 2006 with only one class of shares automatically have an authority to allot shares provided there is no restriction in the articles. All other companies will need to obtain authority to allot shares which can be done by including a general authorisation in the articles.
Even where the directors have the authority to allot shares, they still have to check whether any pre-emption rights apply before allotment can take place. The Companies Act 2006 states that where shares are issued in exchange for cash, those shares must first be offered to existing shareholders as per their existing apportionment unless, amongst other methods, the articles of association exclude these rights.
Some articles (including the model articles) include a reserve power under which the shareholders may instruct the directors to take, or refrain from taking, a particular action, by passing a special resolution.
Any restrictions on the ability of shareholders to transfer their shares should be found in the articles. Directors cannot refuse to register a transfer of shares unless they are given this power in the articles.
Under the model articles, directors do have the power to refuse to register a transfer but will still need to act in a way they consider would be most likely to promote the success of the company for the benefit of all shareholders.
Some articles may contain a special power allowing shares to be transferred freely to certain categories of people, for example family members or other shareholders of the company.
The shareholders of a company with more than one share will generally take decisions as either written resolutions or at a shareholder general meeting. The articles set out the key rules and processes for a general meeting such as notice requirements, voting and attendance rights, quorum and adjournment.
If you’d like to know more about Articles of Association or would like further information about starting a company contact our team of expert corporate lawyers .
As we’ve seen, there are standard templates of articles of association known as model articles. This makes the process of setting up a company much easier. There are different types of model articles but for a private company with shareholders, the template articles would be the model articles for private companies limited by shares.
The model articles are not compulsory, however, they can be a useful starting point which can be adapted to suit the requirements of your company,. Because the model articles are designed to be a ‘one size fits all’ solution, they may not always be appropriate for your business.
Model articles may not be suitable if:
Even if the model articles are suitable, sometimes company owners choose to remove certain provisions, for example to:
If you don’t want to use the model articles at all, you or your advisor will need to draft bespoke articles which will be tailor-made to fit the needs of your company.
In summary there are three options for a company when adopting articles:
You need both articles and a memorandum of association to form a company. Unlike the articles, the memorandum is pretty brief and it describes:
The memorandum comes in a standard form, and you can get the template from the UK government website. The subscribers need to sign to say that they want to form a company.
Unlike the articles, you can’t amend or update the memorandum during the lifetime of the company. It’s just a ‘snapshot’ of the company at the time it was formed.
While a company has to have articles by law in order to form the company, a shareholders’ agreement isn’t mandatory.
However, shareholders’ agreements are useful to cover important points that aren’t in the articles and you may want to keep private. They can also provide a means of resolving disputes in a pre-agreed way.
Here are some of the main reasons to have a shareholders’ agreement in addition to your articles:
A holding company is generally one whose sole purpose is to own or manage other companies called subsidiaries. A holding company is often called a ‘parent company’.
A company is a subsidiary of another if its parent company holds the majority of voting rights over it or can appoint or remove the majority of the directors.
You wouldn’t normally use the model articles to set up a holding company orsubsidiary but would use tailor-made articles to account for this type of structure.
The term joint venture (JV) is used to describe either a contract, partnership or a company that’s set up by two individual businesses to run a common venture or project.
Often, joint venture partners will choose to set up a company for their JV, so that it can exist in its own right, employ staff, own assets and so on. If this is the case, then the JV company’s articles will lay down the rules that govern the relationship between the shareholding businesses and the company, and between the individual shareholders. Because JV companies can sometimes be complicated, often the parties will use a shareholders’ agreement to supplement the articles.
You wouldn’t normally use model articles to run a JV company but develop a bespoke set to deal with things like disputes, deadlock, different classes of shares and how shares can be transferred.
Companies grow and change, and it might be that once you’ve been in business for a while your articles are no longer suitable.
Provided you have a genuine reason to change the articles, you can normally do this by having the shareholders pass a special resolution – one that’s agreed by at least 75% of them. This can be done either by written resolution or in a shareholder meeting.
If you want to change your articles by written resolution, you need to send a copy of the new articles plus a copy of the written resolution to Companies House within 15 days of the resolution being passed. To change your articles at a shareholders meeting, the directors need to call a general meeting of the shareholders, circulate the proposed special resolution, hold the general meeting and get the required 75% approval. You then send the new articles and copy of the special resolution to Companies House within 15 days of the resolution being passed.
Failure to send the new articles within 15 days constitutes an offence by the company and its directors and can be punishable by a fine. The articles will still be valid, however.
Usually, the Companies House Registrar will send a notice to make the required filing before issuing a fine.
Whatever your articles say, they will still be governed by the law, in particular the Companies Act 2006. Usually the Companies Act therefore overrides any conflicting provisions in the articles, but there are some instances where this isn’t the case.
For companies formed before October 2009 and who have articles based on Table A, certain provisions may be out of date and not compliant with the law. Most companies have changed their articles to reflect this. Let us know if you have concerns around this, and we’d be happy to help.
If you’d like to know more about articles of association, would like help drafting a bespoke set of articles or would like further information about starting a company or putting in place a shareholders’ agreement, contact our team of expert corporate lawyers. Get in touch on 0800 689 1700, email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
About our expert
Having qualified as a solicitor in 2003, Adam has over 20 years' experience in advising businesses on their growth and exit strategies. Adam joined Harper James as a Partner in 2018 and became Head of Corporate in 2022. As of April 2024, Adam’s new role is Chief Legal Officer & Head of Corporate. In this role, he is responsible for the legal services aspects of Harper James and for defining the firm’s strategic vision and objectives to achieve our long-term goals, together with our CEO, Toby Harper, and the other senior leaders.
