Articles of Association and the Companies Act 2006
Posted on by Ceri John
Benefits of updating the Articles of Association to comply with the Companies Act 2006
Other articles of ours highlight our special offer and a brief explanation of what the new articles mean for your company.
In this article however we aim to simply answer some of your questions and outline some of the many arguments in favour of existing companies adopting articles under the new Companies Act 2006.
BIRR Legal Services emphasis the need for company’s to simply adopt the entirely new model articles or adopt new bespoke articles based on the 06 model articles.
The main reason for this is that we are looking to avoid any conflict between the old and new act and for only a fee of £35 + VAT it’s hard to find a reason not to alter your articles.
It is not a legal necessity to change your articles of association and your company will to continue to operate on the constitution set out in your current articles until overridden by any new provisions. However parts of your articles may no longer be applicable if the Companies Act 2006 has specifically overridden them and any reference that is now made in your articles to the Companies Act 1985 is now replaced by the corresponding section in the Companies Act 2006. Knowing which articles are affected and where the law has been replaced and its corresponding section can be a rather unnecessary disruption and is a very simplistic reason to change your articles.
The confusion and implicit doubt that is caused by maintaining your current articles over the new model articles is a core reason to amend them immediately. It is not something you want to do when you’re relying on guidance from your company’s constitution and specific guidance on your legal rights and options.
Below is a list of specific reasons why BIRR Legal Services believes you should change your company’s articles. Adopting the new model articles or allowing BIRR Legal Services to create bespoke articles specific could provide real benefit for your company today.
OBJECTS
Under the Companies Act 2006, the contents of an existing company’s memorandum of association will be treated as a restriction on the business activities of the company. The memorandum can be imported into its articles, but there is some confusion as to how this will look in practice and as a consequence, many companies will propose special resolutions to delete the entire contents of the memorandum and adopt new Articles under the Companies Act 2006.
DIRECTORS
Adoption of new Articles will allow companies to:
- permit directors to sanction conflicts of interest of a director without the need of shareholder approval;
- specify statutory obligations of directors in respect of personal interests in contracts and transactions;
- specify and extend the scope of indemnities to company officers;
- remove references to the retirement of directors by rotation.
MEETINGS
Adoption of new Articles will allow companies to:
- take advantage of some or all of the modernising provisions of the new Act, such as the ability to send and receive notices and/or forms of proxy by email or other electronic means, to hold telephone board meetings, or even meetings by mobile phone text;
- take advantage of the shorter time frames (14 instead of 21 days) for calling meetings at which special resolutions are to be passed, and for lower thresholds for calling meetings at short notice (90% instead of 95%). If they retain Companies Act 1985 Table A type articles, companies are likely to find themselves restricted to longer time frames and higher thresholds;
- remove references to annual general meetings and extraordinary general meetings;
- ensure that any provisions relating to the passing of written resolutions mirror the provisions of Companies Act 2006;
- remove out-dated restrictions on the rights of members based outside the UK to receive notices of meetings;
- inform shareholders of their extended rights to appoint proxies under the new Act.
SHARE CAPITAL
The authorised share capital of an existing company will in future act as a limit on the number of shares that the Directors can issue unless it is removed. This is in conflict with the intention behind the Companies Act 2006 that there should be no limit on the number of shares available unless one is imposed through the articles. This restriction can be lifted by adopting new articles.
If companies want to restrict the subdivision, consolidation, redemption or repurchase of shares, they will have to provide for this expressly in their articles. This is a reversal of the previous position under Companies Act 1985.
SHARE PRE-EMPTION RIGHTS
Many companies, possibly a majority of those registered under older Acts, have articles that contain no rights of pre-emption, either on allotment or transfer of shares. The new Act contains provisions of pre-emption that may be overridden by existing provisions within older articles. The adoption of new articles ensures this important factor is properly covered and detailed within the articles so that the new provisions are clearly understood by shareholders. Where companies have no such provisions already in place, this is a perfect opportunity to introduce this vital feature for the protection of shareholders.
In conclusion the Companies Act 2006 simplifies corporate life in many respects, but will be likely to cause further confusion should a company decide to retain its existing memorandum and articles. The full benefit of this simplification and clarity will only materialise when a company takes action in order to take full advantage of the new Companies Act.
BIRR Legal Services are not the only professional to stress the importance of changing your articles.
Many other professionals have highlighted the benefit but none are offering to do it for as little as £35 + VAT.
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