COMPANIES: THE ARTICLES OF ASSOCIATION

Under s.17 of the Companies Act 2006, a company’s Articles of Association, known as the company’s ‘Bylaws’ in the USA, is the main document which forms that company’s constitution. The provisions set out in a company’s Articles will therefore govern its internal procedures.

(A) THE PROVISIONS OF THE ARTICLES The Articles represent a binding contract between the company and each of its members. Typical provisions in a set of Articles cover matters such as the appointment of the Board of Directors, the directors’ duties and powers, and the regulation of company meetings. For companies with a share capital they also cover, (i) shareholder responsibilities; (ii) details of the company’s share capital and (iii) the rules regarding the allotment or transfer of shares. Pre-drafted, standard Articles are available for private companies limited by guarantee and for both private and public companies limited by shares. Under the Companies Act 1985 these standard Articles were known as ‘Table A Articles’ and under the 2006 Act they are known as ‘Model Articles’ and are set out and available to adopt in the Schedules to the Companies (Model Articles) Regulations 2008. The subscribers of the company are entitled to draft their own Articles, provided they comply with the provisions of the Companies Act and any other relevant legislation. However drafting bespoke Articles is both time-consuming and costly and the subscribers may lack the expertise to do so.

(B) DIFFERENCES BETWEEN ‘TABLE A’ AND ‘MODEL ARTICLES’ According to the government’s explanatory notes, the model Articles for private companies were drafted to “bring them up to date with the 2006 Act” and also to “avoid unnecessary duplication of provisions of the 2006 Act”. They were “designed with the small, owner-managed companies in mind” and as such were drafted to be “as simple and straightforward as possible”. Given the focus on the needs of smaller companies, the standard provisions do not cover all aspects of the 2006 Act. They assume, for example, that the company will have a fairly simple capital structure and will not have a company secretary, which is no longer a mandatory requirement. Bigger companies may therefore wish to opt for bespoke Articles. The model Articles have also been updated to reflect modern business practices and therefore include provisions which recognise electronic communication as a means for the directors or shareholders to hold meetings, as well as provisions for the passing of written resolutions.

(C) UPDATING AND AMENDING A COMPANY’S ARTICLES Companies incorporated under the 1985 Act will automatically continue to be governed by the Table A Articles unless the members decide to adopt new Articles by passing a special resolution. However, the right to do this is subject to certain statutory and common law limitations which pre-date the Companies Act 2006 and which may prevent any such change from being enforceable. According to Lindley MR, the judge in the precedent case of Allen v Gold Reefs of West Africa Ltd (1900), any alteration must be “exercised subject to those general principles of law which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole”. Therefore, if the majority of members suggest amending the Articles and a resolution is passed which a minority shareholder believes is not in the best interest of the company, he or she can challenge this decision. In addition, the Companies Act 2006 itself protects a minority shareholder from any decision which is unfairly prejudicial to the interest of that shareholder or to the interest of members generally. If a shareholder wishes to commence legal proceedings on the basis that a decision to change the Articles is unfairly prejudicial, then the burden of proof falls on them. Case law in this area demonstrates that it does not automatically follow that because a decision does not benefit the member it will be considered to be unjust.