The Main Reasons a Company Should Change its Companies House Model Articles

When starting a company, many founders opt to use the model articles of association provided by Companies House. While these default articles are designed to be a generic and quick solution for new companies, they are rarely tailored to the specific needs and long-term goals of a business. In this article, we’ll explore why upgrading these model articles is crucial for effective corporate governance, protection of shareholder interests, and operational efficiency.

What Are Articles of Association?

Articles of association are a critical document that outlines the rules for running a company and govern the relationship between the company, its directors, and its shareholders. They serve as a company’s constitution, establishing procedures for decision-making, rights and responsibilities of directors and shareholders, and the management of the company.

Model articles are the default set of articles provided by Companies House under the Companies Act 2006 when a company is incorporated. While companies may often keep their model articles for years, these are designed to apply broadly to companies but may not provide the flexibility or provisions required for more complex business operations.

Relationship with Shareholders Agreements

While articles of association are a public document filed with Companies House, a shareholders’ agreement is a private contract among the shareholders. Together, they form a company’s constitution. Articles usually cover high-level governance, whereas a shareholders’ agreement often provides more detail on shareholder rights and company management, in particular provisions that a company may wish not to disclose publicly. Although they work in tandem, discrepancies between the two documents can lead to conflicts, making it essential to have customized articles that align with the shareholders’ agreement.

Main Reasons to Change Model Articles

1. Customizing Share Class Rights

One of the most common reasons to amend the model articles is to introduce new share class rights. Model articles only cater to basic share structures, typically with ordinary shares. However, as a company evolves, there may be a need for shares with different rights, such as preference shares or non-voting shares.

Benefits:

• Flexibility in dividend distribution
• Control over voting power
• Special rights in case of company liquidation

NB: When drafting share class rights, it’s important to specify voting rights, dividend entitlements, and rights upon liquidation. Clear definitions prevent future disputes and facilitate smoother investment negotiations.

2. Enhancing Director Powers and Protections

The model articles provide limited scope regarding directors’ powers and decision-making processes. Companies often need to expand or clarify these provisions to empower directors or offer better protections against liabilities.

Changes to Consider:

• Granting directors the power to make certain decisions without shareholder approval
• Strengthening indemnity provisions for directors
• Clarifying quorum requirements for board meetings

3. Addressing Deadlock Situations

Model articles may not adequately address deadlock situations where equal votes among directors or shareholders prevent a decision. Customized articles can incorporate mechanisms such as a casting vote, arbitration clauses, or specific procedures to break a tie.

4. Improving Transfer Provisions for Shares

The model articles provide generic provisions for the transfer of shares, which can be restrictive or unclear in certain business contexts. Companies may want to add pre-emption rights, drag-along, and tag-along clauses to facilitate smoother transitions when shareholders wish to exit.

5. Reducing Administrative Burdens

Model articles allow for improved administrative efficiencies, however depending on their circumstances companies may be able to amend the model articles further to enable increased administration benefits.

Risks of Not Reviewing and Updating Articles

Failing to update the articles can expose a company to significant risks, including:

• Legal Disputes: Ambiguities or outdated provisions can lead to misunderstandings and potential legal challenges.
• Investor Deterrence: Sophisticated investors may be deterred by articles that do not accommodate multiple share classes or other standard investment protections.
• Operational Inefficiency: Rigid or outdated rules can impede swift decision-making, hindering business growth.

Common Issues with Model Articles

Restrictive Share Transfer Clauses

Model articles often lack detailed provisions that suit complex shareholder structures, which can limit how shares are transferred and create complications during buyouts or exits.

Limited Director Protections

The default articles do not typically include comprehensive protections for directors, such as extended indemnity clauses or clarification of director responsibilities, which can lead to liability issues.

Amending vs. Adopting New Articles

Amending Existing Articles: This approach is beneficial if only minor changes are needed, as it can be more cost-effective and less time-consuming.

Adopting New Articles: For substantial changes or when aligning articles with significant shareholder agreements, adopting an entirely new set of articles is often more practical to avoid inconsistencies.

The Process for Changing Articles

1. Drafting the Amendments: Collaborate with legal experts to draft the revised or new articles.
2. Board Approval: Present the proposed changes to the board of directors for approval.
3. Shareholder Approval: Obtain a special resolution, which requires at least 75% of the shareholders’ vote in favour.
4. Filing with Companies House: Submit the revised articles to Companies House within 15 days of approval.

When Do Changes Take Effect?

The changes to a company’s articles of association take effect once they are registered with Companies House or on a later date specified in the resolution.

Understanding Table A

Table A was the standard set of articles used under the Companies Act 1985 before the model articles were introduced by the Companies Act 2006. Companies incorporated before October 1, 2009, may still operate under Table A unless they’ve updated their articles. While similar in purpose, Table A lacks many of the modern provisions found in the current model articles.

The Memorandum of Association

The memorandum of association is a foundational document that historically included key information about the company’s structure and purpose. Under the Companies Act 2006, its role has been simplified, and it no longer holds the same weight in governing the company’s internal operations as the articles of association do. However, it remains a statutory document for company formation.

Invalid or Illegal Amendments to Articles

Certain amendments can be deemed invalid or illegal, particularly if they:

• Violate the Companies Act 2006 or other applicable laws
• Infringe on minority shareholder rights without adequate justification, are discriminatory and / or result in unfair prejudice

Conclusion

Upgrading your company’s model articles of association is a proactive step that ensures smoother operations, investor readiness, and legal compliance. Whether you choose to amend existing articles or adopt a new set, consulting with legal professionals is essential to avoid pitfalls and maximize the strategic benefits of customized articles.

How we can help

If you require help, we offer a no-cost, no-obligation 20-minute introductory call as a starting point and in some cases where appropriate, a fixed fee appointment.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.