Articles

The Companies Act 2006 (“the Act”) is probably the most significant overhaul of company law for the last 20 years. Although the Act was enacted on 8 November 2006, its implementation has been staggered over the last few years, with all of the Act due to be brought into force in October this year. The implementation process to date has introduced provisions which have already had a significant effect on articles of association and more will follow in the October provisions, which will also include drastic changes to the memorandum of association as we know it.

Each company is, of course, different but the key factors that are likely to affect the memorandum and articles of association include the following:-

* GENERAL MEETINGS

- AGMs - a private company does not need to hold an AGM (unless its articles require one to be held); articles may, therefore, need to be amended if a company does not wish to hold an AGM;

- Retirement of directors by rotation at AGMs - private companies will often exclude such provisions in its articles, although some company’s articles will include such provisions without the company necessarily realising or complying with these provisions! If a company decides to do away with the requirement to hold an AGM, this will affect the retirement by rotation provisions;

- Notice period - an AGM can be convened on 21 days` notice but all other general meetings can be convened on 14 days` notice. However, existing articles may require 21 days notice for a meeting at which a special resolution is proposed - such articles would need to be amended if a company wanted to take advantage of the 14 days notice period;

- Short notice for holding a meeting - a meeting can now be held on less than the required notice period if 90% (previously 95%) of shareholders agree);

- Proxies` rights - the rights of proxies to speak, demand a poll and to vote at meetings has been changed by the Act, as has the time limits for the appointment or termination of a proxy appointment.

* ELECTRONIC AND WEBSITE COMMUNICATION - a company can now send notices etc to members in electronic form or make them available on a website rather than post them to shareholders (subject to certain conditions being satisfied).

* COMPANY SECRETARY - a private company does not need to appoint a secretary (unless its articles require it to have one). Public companies, however, are still required to appoint a company secretary.

A private company whose articles expressly require it to have a secretary will need to amend its articles to remove the requirement before it can take advantage of this change.

Tasks which are usually performed by the company secretary, such as maintaining company registers and filing returns at Companies House, will still need to be performed. So if a company chooses not to have a secretary, directors will, therefore, need to perform these tasks themselves or arrange for someone else to perform them.

* OBJECTS CLAUSE IN THE MEMORANDUM - a company’s memorandum contains the objects clause which sets out the scope of the activities a company is authorised to undertake. The Act significantly reduces the constitutional significance of a company’s memorandum and an objects clause is no longer required for a new company and (subject to any restrictions in articles) companies will have unrestricted objects. However, for existing companies, from 1 October 2009 the objects clause will be deemed to be contained in a company’s articles, and so act as a restriction on what it can do, unless the company removes the objects by special resolution.

* AUTHORISED SHARE CAPITAL - the Act abolishes the concept of authorised share capital. However, provisions in a company’s memorandum or articles which specify the authorised share capital will continue to act as a cap on the number of shares the company can allot until the articles are amended to remove these provisions.

For private companies with only one class of shares, the Act also removes the requirement for shareholder authorisation for directors to allot shares unless the articles require this. However existing companies will need to pass an ordinary resolution to take advantage of this change.

Companies will need to decide whether their circumstances are such that they wish to take advantage of these changes or whether they wish articles to continue to place a cap on the number of shares the directors can allot or to require shareholder approval.

* DUTY OF DIRECTORS TO AVOID CONFLICTS OF INTEREST - the Act puts a director under a new duty to avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests. This requirement is very broad and could apply, for example, if a director becomes a director of another company or a trustee of a company pension scheme.

The Act allows directors to authorise conflicts and potential conflicts in advance to avoid a director being in breach of duty. The articles of a public company must contain a specific provision enabling the directors to authorise conflicts and potential conflicts and so a public company will need to amend its articles to include the necessary provision.

The Act also allows articles to contain other provisions for dealing with conflicts of interest to avoid a breach of duty. Articles can, therefore, usefully be amended to include provisions relating to confidential information, attendance at board meetings and availability of board papers to protect a director from being in breach of duty if a conflict of interest or potential conflict of interest arises.

* DIRECTORS’ INDEMNITIES - the indemnities that can be given to directors by a company have been altered in a number of ways and the articles can be amended to bring them into line with those which are now allowed under the Act.

* SHARE TRANSFERS - articles often give the directors discretion to refuse to register a transfer of shares without giving a reason. The Act now requires reasons to be given for refusing to register a transfer.

* CHANGE OF COMPANY NAME - at the moment a company can only change its name by a special resolution of the shareholders. From October the Act will allow articles to specify a different requirement - for example giving the directors power to change the name or requiring only an ordinary resolution.

* ALTERATION OF SHARE CAPITAL, BUY-BACK OF SHARES ETC - under the current law a company requires specific provisions in its articles to allow it to purchase its own shares, to consolidate or sub-divide its shares and to reduce its share capital as well as shareholder authority to do these things. Articles will usually include such specific provisions. Under the Act a company will now only require shareholder authority to do these things and it will no longer be necessary for articles to contain relevant provisions. Accordingly the relevant provisions can be removed from articles and so simplifying articles.
* ENTRENCHMENT OF PROVISIONS IN ARTICLES - companies will be able to "entrench" provisions of their articles. This means that such provisions can only be changed or removed if conditions are met, or procedures are complied with, which are more restrictive than those required for a special resolution. It is up to a company to specify the relevant conditions or procedures.

Companies can only adopt entrenchment provisions in their articles on formation or subsequently if all shareholders agree. Entrenchment of provisions will not prevent any change of the articles by unanimous agreement of the shareholders.

Entrenchment of provisions is unusual but this change may mean that provisions which would before be contained in a shareholders` agreement will now be included in articles.

At the moment companies usually adopt “Table A” articles subject to amendments to tailor the Table A articles to the company concerned. From October, new model articles will be in force - with different versions for private and public companies, whereas at the moment Table A applies to both private and public companies. The model articles for private companies will be much shorter and easier to understand than Table A and have been designed with the interests of owner-managed businesses in mind.

Come October, existing companies will continue to have the same articles and so if a company wishes to change its articles it will need to decide whether to amend existing articles or whether to adopt the new model articles. The different circumstances of companies will impact on the decision reached. Factors which are likely to be relevant include:-

* The model articles will be unfamiliar to directors and shareholders and companies may find that they do not completely meet their needs and so, as is the case with Table A at present, they may need to be substantially tailored to the company;

* Table A has the advantage of familiarity and so companies may wish to amend their existing articles initially and adopt model articles at a later date once market practice on these develops, although the disadvantage of that is that Table A was designed, and drafted to meet requirements, under the Companies Act 1985, which is no longer in force;

* Whether articles have been updated for changes made by the Act over the past few years - if not it could involve a substantial re-writing of articles and so mean adopting the model articles is a better option

Tom Farrington