When incorporating a Company, it is normal to focus on the business you will be undertaking and the demands you may have within the industry you are going into. In many cases the constitutional documents of the company are not given a second thought and the standard precedents are adopted. These documents are important as they set out how you run your company and the rules the directors and shareholders must follow.
The key constitutional document of a company is the Articles of Association (Articles). The standard Articles adopted are the Model Articles of Association (Model Articles) and it is not always the better choice for these to be the Articles for your company.
What are Articles?
The Articles of a company set out how a company is to be governed and what the rules are. The Articles stipulate things like how the directors make decisions on the day to day running of the company as well as other decisions that are not referred to in a Shareholders Agreement, hence the importance of the Articles. The Article also set out the minimum number of directors required at a board meeting or the rules and procedures in place for the transfer of shares.
The Articles are a public document and can be accessed through the company’s registry at Companies House. It is therefore usual that a private Shareholder’s Agreement is also in place. It is important that the Articles and the Shareholders’ Agreement work cohesively setting out the relationship between shareholders and the directors of the company.
What are Model Articles?
The Model Articles are the first legal document adopted when incorporating a company. The Model Articles are drafted and can cater for private companies limited by shares, private companies limited by guarantee and public companies. The Model Articles are automatically adopted unless and until a company approves and adopts a different set of bespoke Articles. The Model Articles act as a good starting point and covers the key provisions needed in a company’s Articles; however, difficulties arise as the document is drafted to fit the mould of all companies and therefore may not benefit all companies in the long-term.
The issues with Model Articles
As soon as a company begins to expand and develop, we recommend that a company should consider adopting a new, more specific, set of bespoke Articles. It is likely the need for this will become apparent in the early stages of development as inconsistencies are likely to arise with the Model Articles and how the company is run on a daily basis.
There may be particular circumstances that arise that your company’s Articles do not cater for as the company has adopted Model Articles. For example, the Model Articles specify that at least two directors must be present at a meeting to be able to action any business. If a company has a sole director then this rule does not apply. Also, if a director is unavailable due to illness or other unforeseen circumstances, no business can be conducted, therefore, provision should be made to appoint alternate directors to avoid stalemates like this occurring.
Another important point to consider with Model Articles is that they do not contain all the rules that a company needs to contemplate. This means that if a specific decision or rule is not covered in the Model Articles, the way forward would be left open to the interpretation of the company’s directors.
It is also important to note that once a company has a Shareholders’ Agreement drafted, there are often contradictions between the two documents, and therefore the Articles will need to be amended to allow for decisions to be made quickly and in line with the correct procedure rather than having conflictions in the documents.
How can we help?
As stated previously we recommend adopting a bespoke set of Articles as soon as possible and practical, especially in the event that a Shareholders’ Agreement has been drafted. This will prevent inconsistencies in the running of the company and prevent any issues in the future which will increase the time and legal fees needed to rectify and correct procedures taken.
If you wish to discuss this further and require a set of rules that are unique to your company, please contact our Corporate Commercial team on 01256 320555.