Articles of Association: What is missing from the Model Articles?

All limited companies must have articles of association. These set the rules company officers must follow when running their companies.

“Model” articles of association are the standard default articles a company can use. They are prescribed by the Companies Act 2006.

The Latest model for companies incorporated on or after 28 April 2013:

• Model articles for private companies limited by shares
• Model articles for private companies limited by guarantee
• model articles for public companies (MS Word Document, 173KB)

The Articles are the Company by-laws setting out its constitution. The Articles are a public document governing the relationship between the Shareholers and the Directors of a Company.

Whilst the Model Articles are sufficient for Companies, this article looks at those provisions that are not included in the Moderl Articles that are worth consideration.

Director Conflicts

Model Article 14 provides that if a proposed decision of the board is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes.

In many small private companies the directors are also shareholders so arguably always a conflict between the two roles. Applying the Model Articles means that directors are not able to vote on simple matters and therefore require shareholder approval, adding extra processes which can take time and create potential risk of challenege as to the validity of decision-making.

A bespoke set of articles can be drafted to give directors the ability to vote if they declare any conflicts at the outset, making the process much more streamlined.

Different Classes of Share

Newly incorporated companies are often incorporated with only one class of share.  Ordinary shares carry the right to a dividend, capital and to vote. The creation of separate classes can allow different rights to attach to the various class of shares and can select whether they attract rights to vote, dividend or capital, or whether they come with weighted voting or a different dividend amount.

Having different classes of shares can allow owners to structure their Company in a way suited to them and also retain control as they expand. It is also possiblee to create deferred shares for employees that last as long as they are engaged by the Company as a way to incentivise employees and attract talent or investors.

Pre-Emption Rights on Allotment and Transfer of Shares

Pre-emption rights are the “right of first refusal”. It follows that on an allotment or transfer of any shares the current shareholders are offered the chance to acquire the same amount of shares, so as not to dilute their own shareholding.

Pre-emption gives management the opportunity to keep control rather than shareholders selling their shares to third parties. However, you should be aware, that it also gives shareholders the opportunity to potentially acquire a bigger stake which could have an impact on the control of the Company in time. Bespoke articles could specify a certain process to follow with respect to alloting and transferring shares.

Alternate Directors and Proxy Votes

Table A is the model articles equivalent set down in the 1985 Companies Act. Table A contained prrovision for appointing an alternate director. It allowed a director to appoint an alternate director for a specified purpose such as appearing and voting at a specified board meeting. The Model Articles however have not retained such right. The ability to appoint an alternate director might be useful if the director in question knows he will be away or not capable of contact during a particular period.

Again, and similarly, with respect to proxy votes, the previous Table A articles provided that such appointment should be received not less than 48 hours before the time appointed for the meeting. Bespoke articles can reintroduce this provision which makes it possible for a director to vote without being present by proxy.

Directors Meeting

Model Article 11(2) states that a quorum for any directors meeting is 2 directors. If a newly incorporated start up is incorporated with Model Articles and has 2 directors then should there be a disagreement and one director does not show up – a quorum will not be present and nothing can be decided. Bespoke articles can change the rules on quorum.

A good set of bespoke articles allows a Company the freedom to make decisions, offer flexible structures to ready a company for outside investment or attracting talent, and protecting the shareholders and directors. It is a crucial document and it is well worth seeking legal advice to adopt an appropriate set of Articles, either upon incorporation or through adopting new articles by way of special resolution of the members.

Source: https://www.gov.uk/guidance/model-articles-of-association-for-limited-companies