Model Articles for Private Companies

Articles of Association are a set of rules which forms part of the constitution of the Company. It governs the running of the company. A model set of articles provided by the Companies Act 2006 [1] works as set of rules now for those setting up company. Practically, companies adopt these model articles with slight amendments. These model articles are set out in SI 2008/3229 [2] .

Even if no articles are registered during the time of registration application, the model articles will be applicable to those companies unless and until they are excluded or modified or amended as under Section 20 (1)(a) & (b) of Companies Act 2006 [3] . The Secretary of State, for the following different descriptions of company, has by regulations prescribed [4] different versions of model articles [5] , they are:

(1) private companies limited by shares [6] ;

(2) private companies limited by guarantee [7] ; and

(3) public companies [8] .

Thus, the Companies (Model Articles) Regulations 2008 [SI 2008/3229] [9] will be applicable to a company which registered under the Companies Act 2006 but has not adopted its own articles.

Schedule 1 [10] provides articles in five parts for private companies limited by shares. They are: Part 1: covering the liability of members, Part 2: power and responsibilities of directors, their decision-making powers, their appointment process and their remuneration), Part 3: shares and distributions, Part 4: decision-making by shareholders and Part 5: administrative arrangements. Moreover, Schedule 2 [11] contains the articles for private companies limited by guarantee and it provides four Parts which deals with directors, limitation of liability, administrative arrangements and members in turn.

More specifically, model articles regulates the organisation of meetings (Articles 38-42), voting at the meeting (Article 43-48).Model Articles also provide, with regard to the board of directors, for the allocation of management power to the Board (Article 3-6), director’s appointment (Articles 17-20) and decision making by directors (Articles 7-16). However, the model articles do not states the general removal of directors except in the case of incapacity or resignation (Article 18).

There is no general supervisory power of the shareholder over the directors under Article 70 [12] of Table A. It only reserves only very limited means for intervening in management affairs: a special resolution carried by three quarters of the votes of the members entitled to vote and voting whether in person or by proxy (Section 283 of Companies Act 2006 [13] ).Comparing to Article 70 of Table A, Article 4 [14] of model articles provides reserve power to the shareholders [15] .

So the delegation power under the model articles gives the shareholder the edge than the powers under previous old law.

Table A

The Companies Act 1985 and earlier legislation contains a prescribed format for Articles of Association which is known as Table A. It simply prescribes rules and regulations which will govern running and managing of a company. First of these format of articles was drafted in “The Joint Stock Companies Act, 1856 [16] “. In 1862, the Memorandum was moved into the body of the Act and the Articles became known as “Table A”. ‘This naming convention for the Articles continued through legislation introduced in 1906, 1908, 1929, 1948 (and amendments made in 1967, 1976, 1980, 1981), and July 1985 (and amendments made in August 1985 and 2000) and in 2007’ [17] .

Reference need to be made to Table in considering what governs the management of a company. Only the contemporary and current Table A will be applicable to a company as Table A is altered and updated over the years. Any changes which were made after incorporation of the company will not be applicable to that company.

Table A is now called model of articles under section 19 of Companies Act 2006 [18] . Table A is only a default set of rules, it’s almost universal espousal has meant that it forms the hub of organisational structure of the UK registered company- the Board of Directors and the general meeting and allocates the powers of each one.

Similarities and Differences between Table A and the model articles

As the model articles are not applicable automatically and it requires a special resolution to adopt, Table A should continue to be seen for many years. It is also worth mentioning that the model articles do not apply by default on a re-registration.

It was a common legal practice that company prepares its articles stating primarily that Table A will be applicable unless it is excluded or modified. In relation to the model articles for private company, it is has the same procedure subject to specific modifications.

For adding good point to new model articles for private companies, the model articles are designed as more simple and handy. Table A articles were drafted in a multifaceted and unwieldy manner whereas the model articles seems up to date and concise. Moreover, model articles avoided repeating statutory provisions.

Most of the Articles in Table A and Model Articles for private companies are similar, however there are some differences:

The model articles emphasise on simplification of the company management thus it is more likely that these articles are more suitable for small owner-managed business. Model articles contains no restrictions as to company’s objects, no requirements for holding annual general meeting (AGM) or other general meetings, all shares are assumed to be fully paid up and directors are not required to retire or appoint any alternate director (Contrary to Article 65-69 & 73-80). The model articles do not provide the types of restrictions on share transfers commonly found in the articles of joint venture or investment companies.

Model articles are mode contemporary where directors are free to take technological advantages. Any board meeting can be held through using telephones, internet or even using video conference technologies. On the other hand Table A contains no such provision which inserts doubt as to the validity of resolution which was passed in the above ways.

Table A requires a standard written resolution signed by all directors in case of any decision making by directors. However, model articles broaden this area by adding emails and text message as sufficient enough to confirm a decision. Model Articles provide extensive power to directors for delegating to non-directors and the directors may also delegate any sub-delegation thereafter (Article 5 of the Model Articles).

Under Article 19 of the Model Articles, the board will determine the remuneration of a director, whereas under Table A remuneration payable to director had to be approved by ordinary resolution of the members.

Operation of English companies

It is advisable to adopt model articles as this is advantageous for small companies. The reasons behind this are: Firstly, economy of printing, secondly, all the provisions of model articles are legal beyond any shadow of doubt (per Kay L.J. in Lock v Queensland Investment and Land Mortgage Co [1896] 1 Ch. 397 at 406407). Only if the articles specifically set out are inconsistent with the regulations incorporated from model articles will the former override the latter (Stothers v William Steward (Holdings) Ltd [1994] 2 B.C.L.C. 266 at 273 (CA)).

Though Model articles are clear and detailed, their adoptions by the company do not provide a comprehensive regulation of the internal affairs of the company. Certainly, it raises some lacuna which it failed to address like the Table A articles. The obvious question then arises how these lacunae can be filled. Here two cases have to be distinguished.

Firstly, if the company expressly excluded the application of model articles and stayed with Table A articles, only general law can fill the lacuna created by it in absence of model articles. On the other hand if the company partially adopted those articles, the lacuna will be filled by reference to the relevant Model Articles.

Procedure to change the existing articles

However, Model Articles don’t contain any regulations for unlimited company. Except this, Model Articles set out regulations in detail and simpler way which is very helpful for private companies.

A private company has the power to alter or change its articles subject to certain restrictions and conditions. However, in altering the articles the company must make ensure that company’s needs are compatible with administrative and managerial regulations. A company may be restricted in altering its articles from Table A to model articles:

i. by entrenchment of a particular provision in the articles;

ii. by the legislation prohibiting or setting out special rules for the proposed changes, e.g.: –change can not be made to rights attaching to a class of shares without following the proper procedure under statute;

iii. the company may be subject to a court order prohibiting it from making the change following an application for relief from unfair prejudice (s 996 of Companies Ac 2006); or

iv. it can be challenged if the changes are unfairly prejudicial to minority shareholders. Objections on this ground are not far from fetching considering the increase in the case laws under Section 994 of Companies Act 2006 [19] .

Though the company’s decision whether particular change is for its benefit, the court will overrule company’s decision if it is evidently unreasonable (Shuttleworth v Cox Bros & Co (Maidenhead) Ltd) [20] . If none of the above restrictions applies, the articles can be changed by special resolution as per Section 21 of Companies Act 2006 [21] .It states that:

“(1) A company may amend its articles by special resolution… ”

However, this special resolution can be done through voting by three-quarters of the members to amend the articles as section 283 of the Companies Act 2006 provides:

“A special resolution of the members (or of a class of members) of a company means a resolution passed by a majority of not less than 75%.”

Thereafter, it must be filed at Companies House within 15 days of being passed (Sections 29 [22] , 30 Companies Act 2006 [23] ). A notice will be published by the register in the Gazette (Section 1077 of Companies Act 2006 [24] ). As per Section 26 of Companies Act 2006 [25] , the company must also file the amended copy of the articles within 15 days of the amendment taking effect. The copy of special resolution and the copy of amended articles must be filed together.

If the company fails to comply with this requirement, it will constitute a criminal offence and will be held liable for. Companies House can serve notice on the company requiring it to rectify the breach within 28 days. Any additional failure by the company will make the company liable to an automatic penalty of £200 levied by Companies House as per section 27 of Companies Act 2006 [26] . After registering the amendment, the company must issue a up to date copy of articles. It is evident that the procedure is a hectic one, which will only increase the reluctance in changing the articles by the private companies.

Section 994

It should be borne in mind though there is Companies Act 2006 and the Companies (Model Articles) Regulations 2008 [27] , much of the common law relating to general matters regarding the articles of association will still be applicable, and will be considered where it is necessary. Similarly common law principles are also applicable where the company in question has drafted its own articles or partially adopted Table A articles or fully adopted the Table A articles.

One of the opportunities of such common law can be found in from case laws under Section 994 of Companies Act 2006 [28] , previously known as Section 459 of Companies Act 1985 [29] . As Section 994 of Companies Act 2006 [30] states that:

“A member of a company may apply to the court by petition for an order under this Part on the ground –

(a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

Section 994 of Companies Act 2006 which only reiterates Section 459 of Companies Act 1985 [31] .It is notable that the Consultation Paper November 2000 ‘Completing he Structure’, states that section 459 of Companies Act 1985 should be retained in its present form and subject to the focus laid down in House of Lords’ decision in O’Neill v Phillips [32] .

What are the recent case laws that diminished the importance of the model articles?

Despite of having model articles, it will do little good or difference to the way company operates. As it is already mentioned above that why the model articles will have little change to the Table A and now it is the case laws under Section 994 which diminishes the value of these model articles. Model Articles can not still protect the interest of the minority shareholders, and the growing number in Section 994 cases proves that this area still faces the wrath of Foss v Harbottle [33] . Though the right was codified in to statute but still it is governed by the common law and judges still interpret any provisions of Companies Act 2006 in the context of previously decided cases.

One of such important case is Re Guidezone Ltd [2000] BCLC 321 [34] , where the rules or terms of the arrangements between the parties are being used in manner equity would regard as unconscionable or contrary to good faith [35] . Mere loss of trust and confidence alone may not be enough to afford a remedy under s 459 and a mere desire to exit the company at will, will not.” The example of the case illustrates and implies one single thing and that is before Model Articles, Table A was there, and articles of association could do much difference to the minority protection or shareholder’s protection. It is rather an issue which depends on case to case and it is purely objective in nature.

There are growing numbers of cases involving alternation of articles and which raised the issue of section 994 of Companies Act 2006. In spite of having model articles or Table A Articles, shareholder may bring an action if there is a mismanagement of the business affairs of a company which in principle amount to unfairly prejudicial conduct of those affairs for the sake of section 994.However, it is required that the mismanagement is serious and the Court will not consider whether the decision was taken on reasonable grounds as per model articles or Table A articles. As long as the conduct of the affairs of the company is in an unfairly prejudicial manner, the shareholder can bring an action under Section 994 of Companies Act 2006, Oak Investment Partners XII Ltd Partnership v Boughtwood [36] . So incorporating or adopting model articles in place of Table A will do little difference in protecting or reducing petition by the shareholder under Section 994 of Companies Act 2006.

There was another case of Folkes Group plc v Alexander and another [37] where effect of alteration of articles was considered broadly. Folkes Group plc is a quoted company whose authorised capital was £4 million. It was divided into 5p shares, of which 13,110,000 are voting shares and 66,890,000 are non-voting shares. At the annual general meeting of the company held on 20 May 1999, various amendments to the 1985 articles were adopted. Two of them were to art 7. A question has arisen as to their true effect. At the AGM, the members were invited to vote on a special resolution proposing several amendments to the 1985 articles. In the article there was a reference to “the Folkes Family Company” which immediately suggests that “something must have gone wrong with the language”. The use of the definite article points to a particular company already in existence. If so, then it would be more natural to refer to it by name.

However, the definition in article 7(1)(h) shows that “Folkes Family Company” is capable of referring to one or more companies satisfying the criteria mentioned there. It also produces an immediate tension with the earlier use of the definite article. Moreover, at the time of the amendments, no such company existed. At the end the Court approved those amendments. The effect was that art 7(1)(a) to (d) inclusive, (f) and (g), remained as before. Judge modified the controversial art 7(1)(h) and further amended Article 7(1)(e).

This case emphasise on the point that articles of association can change the whole format of the company and can even create fictitious company as articles of association is the constitution of the Company. It is of the utmost truth that model articles bring positive and welcoming changes but it falls back due to its cost and procedure complexity in implementation. The companies with Table A articles will not prefer to adopt model articles as except few articles these two seemingly alike. Moreover procedure for changing is a lengthy and onerous one.

Argument for adopting Model Articles:

The companies are not obliged to adopt the new Model Articles. But some commentators and academician, practitioners suggest adopting these Model Articles. Table A may become inconsistent with the company law and contemporary practice due to the reason that it will no longer be updated. The last Table A was issued is prior to October 2007. Table A fails to take advantage of ‘deregulation opportunities’ [38] under the new Companies Act 2006. Moreover, the model articles are more user-friendly and in clear language. Contrary to Table A, model Articles allow electronic form of communication for example it permits telephone board meetings. Besides the companies would have to adopt any future form of Articles, so those who already adopted model articles would be easier for them to adopt it. As there is possibility of modification in the model articles, it may allow alternate directors in near future.

Further, Companies Act 2006 allows a great opportunity to update a company’s constitution as it abolished the concept of authorised share capital, ability to dispense with an object. It will be easier to adopt the new changes brought by the Companies Act 2006 once Companies adopt the Model Articles. Changes like: memorandum of association is simplified and it cannot be amended further once it is incorporated, substantive provisions must be set out in articles the, private company can be formed with a single member, a statement of capital and initial shareholding must be filed with the registration application; can only adopted if there is model articles instead of Table A articles.

End Talks:

In conclusion it can be stated that though Table A is quite similar to Model Articles, it is not the same. The new Model Articles has simpler, contemporary articles which are more compatible to Companies Act 2006 than Table A. It may involve the time, trouble and expense of changing their existing articles and there may be more case laws under section 994 but it will be quite ineffective considering Table A will have no more update and at certain stage it will be inconsistent with the Companies Act 2006.