Memorandum and Articles of Association
Attaining a legal status in the UK (a status which is recognised worldwide) and providing limited liability to shareholders requires a company to be registered at Companies House (a process known as incorporation) in accordance with the Companies Act 2006.
The registration process involves submitting (either electronically or by post) a form IN01 to Companies House with 2 additional documents: the Memorandum of Association and the Articles of Association. The IN01 has the following information:
- The first director(s) of the company.
- The founding shareholder(s) of the company. Shareholders are the owners of the company, and there only needs to be one.
- The company secretary, if any.
- Persons of significant control (PSCs), i.e. anyone with a controlling interest in the company exceeding 25%.
- Statement of the capital and initial shareholdings as well as the details of the number and value of shares being issued and paid for.
- The registered office (official address) of the company.
- SIC (Standard Industrial Classification) codes identifying the nature of the company’s principal business activity.
Attached to the IN01 are the following documents, which are published on the Companies House website:
- The Memorandum of Association: This document establishes the company. It states that the named member(s) (first or founding shareholder(s)) wishes to form a company under the Companies Act 2006 and has agreed to become a member/s of the company and take at least 1 share each. The Memorandum of Association can never be changed once it is placed on the public record.
- 2.The Articles of Association: This document is the constitution of the company and details how the company will be owned and administered on behalf of the shareholders. Every limited company established in the UK has to have Articles.
Articles of Association
The Articles of Association serve as an agreement between each shareholder and between the shareholders and the company. Enclosed within the Articles of Association are the following clauses dealing with administrative matters:
- Directors’ Powers and responsibilities:
- Directors’ authority- making directors responsible for the management of the business.
- Directors’ authority is subject to the power of the shareholders who can, by resolution, direct the directors.
- Directors can delegate their powers to employees and other third parties.
- Generally, directors’ decisions are made collectively.
- Directors’ decisions follow the majority (where there is more than one director).
- There are prescribed procedures for the following:
- Directors’ meetings;
- Calling directors’ meetings;
- Passing resolutions;
- Recording decisions and
- Directors’ Conflicts of interest.
- The authority and procedure for determining directors’ remuneration and expenses
- The company’s share capital including the following:
- Details of the various classes of shares issued by the company, if more than one.
- The rights attached to each class of share issued, including voting and dividend rights.
- The power to issue more shares and the procedures for doing that.
- The procedure for dealing with share transfers.
- Dividends and other distributions including:
- Procedures for declaring dividends;
- Payment of dividends;
- Unclaimed dividends;
- Non-cash distributions and
- Waiver of distributions.
- Decision making by shareholders and organisation of general meetings which usually entail:
- Procedures for calling a general meeting of the company’s shareholders.
- Regulations on the right to attend and vote at general meetings.
- Constitution of a quorum (minimum attendance) at a meeting.
- Procedure for appointing a chairman of a meeting.
- Attendance and speaking regulations at a meeting.
- Procedures for voting at general meetings of shareholders
- Administrative arrangements:
- Dealing with the use of company seals (if they are used).
- Right to inspect the accounts or company’s accounting records.
- Directors’ indemnity and insurance:
- Protecting directors from claims of negligence and other matters.
- Purchase of insurance protecting directors.
Model Articles of Association
A majority of companies are formed using the Model Articles of Association that are set out in the Companies (Model Articles) Regulations 2008. When you use our service, we provide a slightly modified version of the Model Articles of Association set out in the Regulations.
Given that most companies are formed as single-owner companies or with no more than one or two company officers (directors and shareholders) who are often related or friends, very little attention is given to the Articles of Association. The constitution of the company is almost irrelevant to the day-to–day operation of a company. However, when there is more than 1 shareholder, the articles should be given some attention.
Changing the Articles of Association
Articles of Association are legal agreements and as such can be altered. As businesses grow or change, the Articles of Association may need to be changed to accommodate the changing circumstances of the business. Changes are, however, subject to the provisions of the Companies Act 2006.
Changing the Articles of Association requires a special resolution through the agreement of shareholders who have more than 75% of the voting rights. A resolution can either be passed in writing or at a meeting. Written resolutions are the most popular because they eliminate the need for a meeting. A resolution that has been passed at a shareholder’s meeting needs to be documented and certified by the company.
Once a resolution has been passed, the amended Articles of Association needs to be submitted to Companies House along with a copy of the special resolution. Both the documents are then placed on the public record. The directors have to submit the documents to Companies House within 15 days of the date on which the resolution is passed.
Entrenched Articles of Association
Occasionally, a company will include a special clause in its Articles, which makes it more difficult to pass a resolution. Instead of a special resolution requiring 75% majority, a proposed change to the articles is an agreement by all the shareholders, i.e. 100%. Any provision that is more restrictive than requiring 75% majority is referred to as an “entrenched provision” and is identified under the Companies Act 2006, which states the following:
- Provision for entrenchment may only be made
- in the company’s articles on formation, or
- by an amendment of the company's articles agreed to by all the members of the company.
- Provision for entrenchment does not prevent the amendment of the company’s articles
- by agreement of all the members of the company, or
- by order of a court or other authority with the power to alter the company’s articles.
Entrenched Articles of Association are only necessary to protect the interests of the minority of shareholders and certainly not required where there is only 1 shareholder or even 2 or 3 equal shareholders.
There are 2 ways to include entrenched clauses in the Articles of Association:
- Draft the Articles of Association with the entrenched clauses when the company is incorporated and submit them with Form IN01 (either electronically or by post), or
- Obtain the approval of all the shareholders and then submit the amended Articles with form CC01 and a copy of the resolution agreeing with the amendment.
Removing entrenched clauses:
There are 2 ways to amend entrenched clauses in the Articles of Association:
- All the shareholders can approve the amendment
- An application is approved by a court, which orders the amendment to be made to the articles.
Following the court order or the shareholder’s approval, the company will have 15 days to submit the amended articles to Companies House. Forms CC02 and CC03 will also have to be submitted.
Although every limited company has an Articles of Association that can be drafted or amended to accommodate the shareholder’s requirements, shareholders have the option to have a separate shareholder’s agreement.
Shareholder’s agreements are popular for two reasons:
- They are more flexible than the Articles of Association.
- They are private documents and not on display at Companies House.