Model Articles are the default Articles applicable to UK companies. But are they fit for purpose? We look at the limitations and how they can be improved.
All limited companies must have Articles of Association (Articles), which are the rulebook for the company.
The Model Articles are the default Articles applicable to UK companies and they are automatically incorporated into a company’s rulebook to the extent that they are not excluded or modified. When incorporating your company, if you don’t upload bespoke Articles, the Model Articles will apply by default. If using an agent or an accountant to incorporate your company, they will often use Model Articles.
Are the Model Articles fit for your company?
Below I have set out how the Model Articles deal with a few common points and my suggestions for improvement:
Quorum for directors’ meetings
Model Articles: they state that a quorum (minimum amount of directors who have to attend for the meeting to be valid) for a director’s meeting is at least two directors. However, they also say that a company can act with one director.
Implication: the Model Articles are unclear as to what the quorum is for a director’s meeting.
Suggestion: I would suggest a bespoke provision is needed to make it clear how many directors form a quorum for a meeting to be valid.
Director’s casting vote
Model Articles: Model Articles 13 states that if the numbers of votes for and against a proposal are equal, the chairman of the directors has a casting vote.
Implications: your chairman essentially has more power and two votes.
Suggestions: you may wish to disapply this provision.
Appointment of directors
Model Articles: Model Article 17 allows shareholders to appoint directors by ordinary resolution (50% vote).
Implications: you may not be happy with this provision.
Suggestion: you may wish to change this so a certain person, such as a investor or a founder, has to approve any appointments, or a certain percentage of shareholders have to approve, or so that the directors can appoint rather than having to revert to the shareholders.
Removal of directors
Model Articles: the Model Articles fall back on the Companies Act to set out the provisions to remove a director, which requires a shareholders’ resolution to be passed at a meeting and special notice of 28 clear days must be given for the meeting.
Implications: this process can be time consuming, especially at a time when you want to quickly remove a director who is perhaps causing issues.
Suggestion: I suggest an additional removal process is inserted into the Articles to allow for more flexibility, i.e. one that doesn’t require such a long notice period to be given.
Different classes of shares
Model Articles: the Model Articles only deal with one class of ordinary shares.
Implications: often a company can benefit from the creation of separate classes of shares, which may carry different voting and dividend rights.
Suggestion: you may wish to create different classes of shares now or when the need arises i.e. when you want to differentiate between different shareholders or an investor comes on board.
Pre-emption rights on the allotment of shares
Model Articles: under the Model Articles and the Companies Act, if you wanted to allot new shares you would have to offer these to your current shareholders first, in proportion to the shares they hold. This is to provide them with a chance to avoid diluting their own shareholding.
Implications: you may not want your shareholders to have this option, or you may want to give specific shareholders certain rights, i.e. investors.
Suggestion: you can amend this provision within a bespoke set of Articles to either:
- remove this right, i.e. allow directors to allot as they chose;
- provide clarity over the process to allot, i.e. the shares have to be offered to a certain person first for say 10 days before they can be sold to a third party; or,
- that a particular person (such as a parent company or founder) has to consent to the allotment.
Pre-emption rights on the transfer of shares
Model Articles: under the Model Articles there are no pre-emption rights on a transfer and therefore a shareholder can transfer their shares to who they like at whatever price they like.
Implications: you may wish to have more control than this over the transfer of shares.
Suggestion: you may like to introduce restrictions on transfer such as offering to other shareholders first, only transferring at market value, or permitting transfers within family trusts without restrictions.
Compulsory transfer of shares
Model Articles: under the Model Articles, a shareholder is not compelled to transfer shares either to a third party or back to the company.
Implications: you may wish to include provisions to compel a transfer if the shareholder is made bankrupt, does something which breaches the Articles, is no longer an employee of the company, is mentally or physically unable to continue as a shareholder or due to their death.
Suggestions: I suggest drafting bespoke provisions into your Articles to cover this. It can also cover how the shares are valued, i.e. if the shareholder is a good leaver (leaves by mutual consent or due to an event outside their control, such as death or retirement) then perhaps market value can be used. However, if they are a “bad leaver” (leave for any other reason) then nominal or a lower value could be used.
Director’s interest in the transaction being discussed
Model Articles: Sections 177 and 182 of the Companies Act 2006 require a director to declare any interest in a transaction with the Company. Model Articles 14 states that if a director is interested in a proposed decision of the directors, concerning an actual or proposed transaction with the company, that director is not to be counted as participating in the decision-making process for quorum or voting purposes.
Implication: in small private companies, directors are often shareholders as well and they would have to declare an interest. If all the directors, or the sole director, declared an interest and could therefore not vote or form a quorum, a simple decision could not be made. Shareholder approval would be required to proceed. This can be time consuming and involve additional legal paperwork.
Suggestion: I would suggest that the Articles are amended to give directors the ability to vote and form a quorum, as long as they declare their interest.
Model Articles: a director must avoid situations in which they have or can have a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. This duty will not be infringed if authorisation has been given.
The Model Articles state that subject to a few exceptions, the shareholders have to authorise this by an ordinary (50%) resolution or alternatively under the Companies Act the directors can approve a conflict.
Implication: the Model Articles do not address a situation where conflicts may frequently arise such as where a director is a director of a subsidiary and a parent company.
Suggestion: in a corporate group it is common for a subsidiary director to hold office or have interests in a parent/sister company. The Articles can be drafted in a way so that the directors expressly approve this type of interest without the need to seek a separate authorisation each time a conflict situation arises.
The Articles can also include provisions such as directors can hold additional directorships and need not disclose confidential information obtained through those other offices.
Model Articles are unlikely to be fit for purpose and if left in place are likely to have undesired implications on your company. It is best to adopt a bespoke set of Articles to meet your needs.
Other matters which can be covered in bespoke set of Articles include to allow the appointment of alternate directors (to attend in the place of a director who may be absent for a while) and ‘drag and tag’ provisions (if an offer is made to buy the company, all the shareholders will be entitled or compelled to sell their shares to the potential buyer).
You may also wish to consider a Shareholders Agreement. For more information on Shareholders Agreements please see our article here.
If you are concerned that your articles are not fit for purpose for your company, or you are considering incorporating a company and need extra help, please get in touch and our Corporate team would be happy to assist you.