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 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.
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.
twitterlinkedininstagramAi Law has acted on a successful claim against Blackpool Borough Council with respect to their government decision taken to ban bus adverts advertising an event held in September 2018 at the Blackpool Winter Garden by charity group Lancashire...
twitterlinkedininstagramINTRODUCTION The concept of limited liability is, as some modern corporate law scholars believe, as important an invention as electricity and the steam engine. This might be too extreme a comparison, nevertheless, the importance of limited...
twitterlinkedininstagramWhy make a will and what to Consider: Essential reasons to avoid your assets being distributed in accordance with the intestacy rules which could mean, for instance, your spouse not inheriting all of your estate to ensure that those you wish to...
twitterlinkedininstagramLooking to the future, this article considers the potential for blockchain technology to revolutionise society and its wider impact on everyday life. When you talk about blockchain, most people think about bitcoin and cryptocurrencies. Whilst...
Click the follow button below or on an icon above to view our other social media profiles.
This information is in no way to be taken as legal advice or tax advice. It is for information purposes only and is in no way to be relied upon. You should always seek the appropriate professional legal advice before attempting to act on any of the information given here.Go back to previous page
Contact Us Here
To find out more or discuss anything that you have read, please contact us below.
+44(0) 151 294 4722
8 WATER STREET LIVERPOOL L2 8TD
Other News and Insights
Ai Law is a trading name of the Ai Law Group, a recognised body law practice, regulated by SRA (SRA No.,: 670155). Registered office: Ai Law, 8 Water Street, Liverpool, L2 8TD, UK. We use the word 'partner' to mean a senior manager or consultant, or a shareholder and in no way is such title used to be held out. Ai Change Management is a connected company and part of the Ai Law Group. Our regulatory body: www.sra.org.uk