Does my company need articles of association?

All limited companies registered in the UK require articles of association. Agreed by members and adopted during the incorporation process, the articles define the rules and regulations for running the company. The members, directors, and company secretary must abide by the articles at all times.

The default ‘model’ articles prescribed by the Companies Act 2006 are suitable for most new and small private firms. Alternatively, you can alter the model version or create completely bespoke articles to suit your company’s specific requirements.

In this post, we explain the importance of the articles of association, what they cover, and when changes to the articles may be necessary.

What are articles of association?

The articles of association are a set of rules governing a company’s management and activities, its internal organisational structure, the way decisions must be made, and the interests of members.

An integral part of a company’s constitution, this document serves as a statutory contract between:

• each of the company’s members in their capacity as members
• the members and officers 
• the company (which exists as a separate legal person) and its members and officers

The officers of a company are the directors and company secretary. They are responsible for running the business on behalf of its members. The members are the shareholders or guarantors who own and have ultimate control over the business, dictating the extent of officers’ powers and influencing the company’s activities.

Articles of association cover a range of important areas, including:

• rights of company members 
• limited liability of members
• duties and powers of directors
• procedures for appointing and removing directors
• how company decisions are made
• procedures for issuing and transferring company shares
• approving and issuing dividends
• procedures for board meetings and general meetings

A company’s articles must be contained within a single document and divided into consecutively numbered paragraphs.  The document may be kept in hard copy or electronic format.

To ensure compliance, all officers and members must be familiar with the articles. Companies should keep a copy at their registered office or a single alternative inspection location (SAIL address).

• Our All-Inclusive Packages - including articles of association
• Company memorandum and articles of association
• The minutes of the first board meeting explained

A company’s articles, along with other key information about the business, are also disclosed on the Companies House register. This public register is free to access online, meaning that any person can view the articles of any company formed in the UK. 

If no PDF copy of the articles is available to view on the register, it means the company is using ‘model’ articles of association.

What are ‘model’ articles of association?

The model articles of association are the standard (default) articles that most companies use.

Although generic and limited in scope, model articles provide a good base, particularly for small companies with only ordinary shares, where there is minimal risk of disputes between shareholders themselves or between the shareholders and directors.

However, model articles may not be appropriate for your company if you wish to:

• issue any share class other than ordinary 
• operate as a sole director company 
• provide pre-emption rights on the allotment of new shares, or prohibit pre-emption rights on share transfers
• apply specific rules or restrictions on share transfers – e.g. compulsory transfers in particular situations, dealing with shares upon the death of a shareholder, or limiting transfers in a family-owned company to only immediate family members 
• issue partly-paid or nil-paid shares 
• limit or expand the decision-making powers of directors 
• allow for the appointment of alternate directors
• make it easier for shareholders to remove directors 
• set different voting thresholds in specified circumstances – e.g. require unanimous approval of directors or shareholders to make certain company decisions
• include an asset-lock provision if the company operates on a not-for-profit basis
• apply particular arrangements for dealing with directors’ conflicts of interest
• remove the right of the chairperson at board meetings or general meetings to make a casting vote in deadlock situations
• set up a joint venture company with another business
• set up a holding company or subsidiary

Unless you make amendments to the default template or create completely bespoke articles, your company will adopt model articles automatically during the incorporation process. 

The Companies Act 2006 prescribes different model articles for private companies limited by shares, private companies limited by guarantee, and public companies limited by shares (PLCs). You can view and download Model articles online.

Understanding the key terms in your company’s articles 

You will likely encounter lots of unknown terminology when you set up a company for the first time. Below are some of the key terms you may be unfamiliar with in the articles of association.  

1. Classes of shares

Companies limited by shares can issue different classes (types) of shares with varied rights or restrictions. Ordinary shares are the most common type of share. This class provides equal voting rights, dividend rights, and capital distribution rights per share.

However, there are times when it may be necessary or beneficial to have other types of shares, such as preference shares, non-voting shares, management shares, or growth shares.

You should consider issuing different share classes if your company has several shareholders and there is a need to reflect their differing levels of investment, seniority, or other contributions to the business.

The rights attached to shares should be set out in your company’s articles of association and a shareholders’ agreement (if you have one).

2. Company resolutions

Company resolutions are formal, legally binding decisions taken by directors or members. Most company decisions beyond day-to-day business matters require a resolution, such as:

• changing the company name
• appointing or removing a director
• amending the articles of association
• changing the share structure of the company – e.g. issuing more shares or creating new share classes
• issuing dividends

Formal decisions of directors are known as board resolutions. Directors can vote on board resolutions at a board meeting or in writing (a ‘written board resolution’).

• A guide to limited company resolutions
• What decisions can directors make without shareholder consent?
• Can board decisions be made remotely?

Decisions taken by members are known as ordinary resolutions or special resolutions. Ordinary resolutions, which are used for most routine decisions, require the agreement of a simple majority (more than 50%) of members. Special resolutions, which are reserved for more important decisions, usually require a higher majority of at least 75% of members’ votes.

3. Dividends 

A dividend is a type of distribution whereby a company issues some or all of its distributable profits to shareholders, typically in the form of cash.

If you hold shares in a company and those shares carry dividend rights, you are entitled to receive dividend payments from the company.

Where profits are available, a company may issue dividends on a regular basis (e.g. monthly or quarterly) or at the end of its financial year.

4. Fully paid up 

The term relates to issued shares in a company. When shares are fully paid up, it means that the shareholder has paid the nominal value of their shares to the company.

5. General meeting

This is any formal meeting of a company’s shareholders or guarantors. In this type of meeting, the members discuss, debate, and vote on important matters affecting the company.

General meetings are optional in private companies. However, if you wish to hold a general meeting, you must follow the rules and procedures set out in the Companies Act 2006 (ss. 301-335).

6. Members’ reserve power

Members’ reserve power refers to the right of shareholders or guarantors to instruct directors to take or avoid a particular action. To do so, the members must pass a special resolution.

However, this power only applies prospectively. The members cannot pass a resolution retrospectively to invalidate any action already taken by the directors.

The model articles include members’ reserve power. If you create bespoke articles, you should consider retaining this clause.

7. Pre-emption rights

Pre-emption rights are the rights of shareholders to have first refusal on the allotment (issue) or new shares or existing shares available for transfer. This means that a company must give its shareholders the right to purchase any shares that become available, relative to their current proportion of shareholdings, before offering them to anyone else.

Under the model articles of association, shareholders have pre-emption rights on the issue of new shares but not on the transfer of existing shares. You need to alter the articles accordingly if you wish to remove or amend pre-emption rights.

8. Share transfers

Share transfers occur when a shareholder sells or gifts some or all of their shares to another person.

Under the model articles, shareholders are free to transfer their shares to anyone. However, the directors have the right to refuse the registration of any transfer, provided that doing so is in the best interests of the company and all shareholders.

If you wish to restrict the transfer of shares in certain situations or impose any other rules or special requirements, you will need to update your company’s articles accordingly.

Can I change my articles of association?

You can change the articles of association of your company at any point. There are three main ways that you can do this:

• amending the wording of existing provisions
• inserting new provisions and/or removing existing provisions
• creating entirely bespoke articles

To change the articles, the members must pass a special resolution at a general meeting or as a written resolution. In order to do so, at least 75% of shareholders’ votes must be cast in favour of the proposed amendments to the company’s articles.

You must notify Companies House within 15 days of making any such changes. You’ll need to provide a copy of the special resolution and the new articles. In certain situations, you’ll also need to complete one of the following:

• a statement of company objects – if your company changes the objects in its articles
• change of constitution by enactment – if the amendments were made due to a change in the law
• change of constitution by order of court or other authority – if the changes to the articles were ordered by the courts or a regulating authority (e.g. the Charity Commission)

You can send the required information digitally using the Upload a document to Companies House service. Alternatively, you can send the documents by post to the Companies House office in Cardiff.

What is the memorandum of association?

Alongside the articles, the memorandum of association is an essential constitutional document required by all UK-registered limited companies.

Created during the company formation process, the memorandum is a snapshot of a company’s membership at the point of incorporation. It lists the names of the initial subscribers (founding shareholders or guarantors) and certifies that each individual agrees to:

• form the company under the Companies Act 2006
• become a member of that company
• take at least one share (if the company is limited by shares companies)

The document also shows the name of the company, the date of incorporation, and whether the company is limited by shares or limited by guarantee.

If you form a company online, Companies House will create the memorandum during the incorporation process. You don’t need to provide it yourself. However, if you choose to register a company by post instead, you’ll need to include a memorandum with your application. The following templates are available from Companies House:

• memorandum of association for companies limited by shares
• memorandum of association for companies limited by guarantee

Upon incorporation, the memorandum becomes a historical document of the company. As such, you can’t change any information on the document, other than the company’s name (where applicable).

Both the memorandum of association and articles of association are publicly available on the Companies House register.

The difference between articles and a shareholders’ agreement

Articles of association are a legal requirement and a matter of public record, while a shareholders’ agreement is an optional private contract between the shareholders of a company.

• Do I need a shareholders’ agreement when I set up a company?

Creating a shareholders’ agreement is worthwhile in any company with two or more shareholders. Designed to supplement the articles, this type of agreement sets out the rights and responsibilities of all members in relation to the company.

A well-drafted shareholders’ agreement provides clarity to all parties, minimises the risk of uncertainty or potential conflicts, and sets out clear mechanisms for dealing with any future disputes that may arise.

Thanks for reading

Together with the memorandum of association, the articles form the constitution of a company. When setting up a company, you must adopt articles during the incorporation process and ensure compliance with its provisions at all times thereafter.

1st Formations provides bespoke articles of association with our company formation packages. These articles are very similar to model articles, although they are slightly more comprehensive regarding best practices and company management.