The Companies Act 2006 requires newly formed companies to have a memorandum of association and articles of association. The memorandum of association sets up the company while the articles of association set out how the company is run, governed, and owned. The articles of association define the responsibilities and powers of the directors and describe how the members (e.g., shareholders) exert control over the board of directors. The articles are a public document and may be complemented by a shareholders’ agreement, typically confidential, which specifies the running, governance, and ownership of the company. Model articles of association are available on the Companies House’s and Charity Commission’s websites.
Key elements of articles of association
Articles of association cover the following:
- Purpose of the organisation;
- Liability of members;
- Directors’ powers and duties;
- Directors’ meetings, voting, delegation to others;
- Conflicts of interest;
- Retaining records of directors’ decisions;
- Appointment and termination of directors;
- Shares, unless a limited by guarantee company;
- Borrowing powers;
- Dividends and other distributions to members;
- Members’ decision making and attendance at general meetings;
- Means of communication;
- Directors’ fees, indemnity, and insurance.
Amending, adapting, and modernising articles of association
It is best practice to review the articles on a regular basis to ensure that clauses remain appropriate and fit-for-purpose. Changes require a special resolution to be passed i.e., 75% of shareholders must approve the change. This is done either by a written resolution or by casting votes at a general meeting.
Anecdotally, NEDonBoard is regularly asked for support by its members for advice on problematic situations such as the removal of directors. We have noted that:
- Board members are often not familiar with the articles of association.
- Articles of association are not reviewed regularly. This means that articles are no longer fit-for-purpose.
- Problematic situations cannot be solved easily because articles are restrictive.
“It is good practice to review articles of association periodically to ensure that they remain fit-for-purpose and allow the resolution of problematic situations, such as the appointment or removal of directors”.
The Better Business Act, B Corp, and articles of association
NEDonBoard is a signatory to the Better Business Act, a coalition supported by B Lab UK, whose objective is to amend section 172 of the Companies Act to ensure that organisations align the interests of their shareholders with those of wider society and the environment. A corporate purpose that balances profit, people and planet may be included in the articles of association.
In fact, companies going through the B Corp certification must amend their articles of association to include a specific B Corp legal requirement wording, in which they commit to be a force for good.
Related posts: The Better Business Act and your ESG director responsibilities
Written by Elise Perraud, NEDonBoard COO
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