A UK Company’s Constitution

The constitution of a business, generally speaking, can be defined as the documents that govern how the business is run.

It typically also includes the documents which confirm the business’ formation; its name; and who the initial owners / members are.

For companies, the constitution typically includes the following:

Certificate of incorporation
Certificate of change of name
Memorandum of association
Articles of association
Shareholders’ agreement
Any resolution or court order which affects the articles of association.

For partnerships it would include a partnership deed and for trusts, a trust deed.

The key constitutional documents for companies are the articles of association, memorandum of association and the shareholders’ agreement. A high-level review of these documents is provided below.

A good set of constitutional documents for a company should provide for a sensible and efficient running of the company by its directors, as well as adequate protection of the interests of its shareholders/members.

The Articles of Association

The articles of association is a legally required public document that governs how the company runs in significant detail. It includes, for example:

Directors’ powers (e.g. to delegate decision making to other persons or committees).
How the board makes decisions.
How directors are appointed.
How shares can be transferred.
How dividends are paid.
How decisions are made at shareholder (‘general’) meetings.

The articles of association constitute a binding contract between the company and its shareholders and the shareholders themselves.

When forming a company, the person forming the company is given the option of selecting the ‘model articles’, a standard set of articles of association prescribed by legislation as a ‘one size fits all’ solution. It is tailored for the most common types of company which are:

Private company limited by shares.
Private company limited by guarantee.
Public limited company.

In addition, the Charity Commission has a set of model articles for charitable companies and the Office of the Regulator of Community Interest Companies has model articles for community interest companies.

Most companies choose to adopt the model articles, however it is not necessarily the most suitable option. For example, the model articles state that the directors may refuse to register the transfer of a share, but shareholders may not want this veto to be available and may want shares of an outgoing shareholder to be offered to the other shareholders first.

Companies can choose to use a set of amended model articles or an entirely bespoke set (albeit they must be in a single document with consecutively numbered paragraphs and must not be contrary to the law). In both cases they must be sent to Companies House when incorporating the company so that they can be reviewed to ensure that they are acceptable. In the case of amended model articles, only the amended provisions need to be sent to Companies House. For charitable companies, the articles also need to be sent to the Charity Commission for approval. For community interest companies the articles are forwarded for approval to the Office of the Regulator of Community Interest Companies by Companies House.

Generally speaking, amendments to the articles of association require a ‘special resolution’ (i.e. 75% + of shareholders must vote in favour of the amendment). However, companies can choose to ‘entrench’ certain provision in their articles of association in accordance with s22(1) Companies Act 2006 (‘CA 2006’), meaning that further conditions can be imposed in order for the entrenched provision to be amended.

If a company amends its articles of association (other than where the amendment is such that the articles are becoming the model articles), the company must send to Companies House:

A copy of the articles of association for review (within 15 days of the change).
A copy of the special resolution (within 15 days of it being passed).

S24 CA 2006 requires companies to file a statement of compliance whenever it amends its articles (Form CC03). The statement of compliance certifies that the amendment has been made in accordance with the company’s articles.

A notice must be given to Companies House when an entrenched provision appears in a company’s articles upon incorporation (s23 CA 2006). Form IN01 (Application to Register a Company) contains a box for this purpose.

Companies House must also be informed when an entrenchment provision is added after incorporation (s23 CA 2006) using form CC01, or removed after incorporation (s23 CA 2006) using form CC02.

The Memorandum of Association

The memorandum of association is a legally required public document under s9(1) CA 2006. For companies incorporated after the enactment of the CA 2006 on 1 October 2009, it simply describes the initial shareholders of the company (the ‘subscribers’).

It previously had a broader role and was required to include, for example, reference to the company’s ‘objects’ (i.e. the type of business that the company could transact). If a company acts outside of its objects the actions are said to be ultra vires (outside of the company’s powers) and the act is potentially voidable by any of the shareholders and exposes the directors to disqualification. Even though the act being voided could result in loss to third parties, this is considered justified as the memorandum of association is a public document and therefore third parties could assess the risk. Given the risk of the company’s acts being inadvertently voided, objects clauses were often drafted in a long and unwieldy fashion to cover all potential acts of the company.

If a company has a memorandum of association which includes an objects clause, this is deemed to form part of the articles of association, but the objects clause can be removed by filing form CC04, along with a special resolution approving the amendment. Doing this can both neaten the company’s constitution and reduce the risk of acts of the company being inadvertently ultra vires.

The Shareholders’ Agreement

The shareholders’ agreement is a non-legally required private contract between the shareholders of the company and often the company itself.

Whilst the content of a shareholders’ agreement could generally be dealt with in the articles of association, a shareholders’ agreement has the advantage of being private.

In practice, the majority of shareholder related matters, and general matters that the company wants to keep private, are dealt with in the shareholders’ agreement.

Shareholders’ agreements will usually include:

What decisions require shareholder approval.
The arrangement for transfers of shares.
The rights to dividends.

The articles of association and shareholders’ agreement should not contradict each other but if they do, and the articles of association and shareholders’ agreement are silent on which document takes precedence, the articles of association will take precedence. For this reason, the shareholders’ agreement will often have a supremacy clause to ensure that it overrides the articles of association in the event of conflict.

As it is important that new shareholders are party to the shareholders’ agreement, most shareholders’ agreements make it a condition that new shareholders must sign a “deed of adherence” which makes them a party to the shareholders’ agreement.

General

It is important that a company’s company secretary (or the person carrying out the functions of a company secretary) has a good understanding of the company’s constitution so that they can ensure that the directors and the company are acting within the rules prescribed therein. Acting within these rules ensures that decisions are made in accordance with good practice and avoids arguments down the line by the company, its shareholders, or its directors, that decisions were made improperly.
It is good practice for the company secretary (or the person carrying out the functions of a company secretary) and the board to review the company’s constitution on a regular basis as businesses change and the constitution may no longer be fit for purpose.
S32 CA 2006 provides that a shareholder/member can require the company to supply them with a copy of any of the following constitutional documents:
- The articles of association.
- Any resolution or court order which affects the articles of association.
- The certificate of incorporation.
- The statement of capital (or guarantee).