SPEEDREAD: A quick guide to the purpose and effect of a private limited company’s Memorandum of Association and Articles of Association, and how the Companies Act 2006 affects those of companies registered prior to October 2009 and since (i.e. companies in England and Wales).
The Companies Act 2006 (the “2006 Act”) defines a company’s constitution as its Articles of Association (“Articles”) and any resolutions and agreements that affect a company’s constitution. When incorporating a new private limited company, a Memorandum of Association (“Memorandum”) is required which must take a prescribed form and simply provides that the subscribers:
1. wish to form a company under the 2006 Act,
2. agree to become members of the company, and
3. agree to take at least one share each.
A subscriber may be an incorporated company, an individual or even a minor (provided the Articles allow it). A private company can have a single member who need only subscribe for one share, and that share does not need to be paid for until payment is called for by either the directors or a liquidator (in the case of a winding up). The Memorandum is therefore a simple part of the incorporation process - a snapshot of the company at incorporation and, as such, cannot be amended. All matters relating to the administration and management of the company are dealt with in the Articles. These documents are all available to the public from the Registrar at Companies House.
The Articles now form the main constitutional document of a company, and must be agreed by the shareholders and the directors. They set out the internal affairs of the company, dealing with how the company is to be run, such as: how shares are to be issued and transferred, the conduct of board and shareholder meetings, the powers and duties of directors, how dividends are paid, and borrowing powers. All companies must have Articles but they do not have to include all these things. Model Articles have been prescribed and a company has an option to either adopt the Model Articles, adopt bespoke Articles, or a combination of the two. Under the 2006 Act, a company’s objects (i.e. the provision stating the purpose of the company and its power) are unrestricted unless the Articles make provisions limiting a company’s objects.
The Companies Act 2006 replaced the Companies Act 1985 (“1985 Act”). It was one of the largest pieces of legislation ever enacted under English law and was implemented in stages due to its complexity. The final stage of implementation was 1st October 2009. Since that date, the Memorandum no longer forms part of a company’s constitution. Matters that used to be dealt with by the Memorandum are now included in the Articles. Provisions in the Memorandum of a company which was incorporated under the 1985 Act, such as the objects clause, are now deemed to be incorporated into the company’s Articles. If such a company wishes to amend its constitution, for example to provide for unrestricted objects, it will need to also amend its Articles. Any restriction on a company’s objects needs to be registered with the Registrar at Companies House and the alteration does not take effect until it has been registered. It was possible to entrench provisions in the memorandum under the 1985 Act but new companies may only conditionally entrench provisions in their articles, and notice of such must be given to the Registrar.
The prescribed model articles under the 1985 Act, known as “Table A”, continue to apply to companies incorporated prior to 1st October 2009 but those companies may choose to adopt the new Model Articles in place of Table A at any time. The Model Articles are different from Table A in two key ways:-
1. The director of a company with only one class of share may exercise any power to allot shares. The director(s) do not need the approval of the shareholders, as was previously the case.
2. Pre-emption rights in the 2006 Act apply, unless they are dis-applied or varied under the articles.
The general rule is that the 2006 Act overrides any inconsistent provisions in the company’s articles, subject to a number of exceptions, which are specifically provided for in the 2006 Act.
Additionally, a company formed after 1st October 2009 is no longer required to have an authorised share capital. However, a company incorporated prior to 1st October 2009 will still be subject to any authorised share capital stated in its Memorandum. If that company wishes to allot shares, it should take legal advice as to its situation. A company can either pass a resolution to remove the authorised share capital or adopt new Articles. In adopting new Articles, a company will need to bear in mind the provisions of the Memorandum which are deemed included in the Articles by virtue of the 2006 Act.
Any companies which have not yet updated their Articles to account for the changes from the 2006 Act are not required to change their Articles but it should be something that the directors consider as it can get complicated. A special resolution is required to amend the Articles and must be filed with the Registrar within 15 days after the amendment takes effect, together with a full copy of the amended Articles. Failure to do this is an offence, punishable by a fine, which is committed by the company and every defaulting officer (i.e. directors and secretary).