Articles of association Archives - MLP Law

Articles of Association and Shareholders’ Agreements: What are they and do I need them?

Articles of Association

What are they: It’s a “public” rule book setting out how the Company is run and governed by its directors and shareholders. It defines how the Company should operate and provides specific provisions to deal with (not limited to):

  • Powers and duties of the directors and shareholders;
  • Appointing and removing of directors;
  • Voting and decision making of directors and shareholders;
  • Share classes and rights attaching to shares; and
  • Transferring of shares.

Do I need them: Yes, it is a legal requirement if your Company is a limited company. The standard “model articles” can be used in default, although these are usually updated and amended to ensure the articles reflect the business’s current circumstances.

 

Shareholders’ Agreement

What is it: It’s a “private” agreement regulating the relationship between the shareholders of a Company and the Company itself. This agreement can cover matters already outlined in the articles, but would also include matters such as:

  • Providing clarity as to what happens to a shareholder’s shares should there be a dispute between the shareholders, a serious illness or death of a shareholder;
  • Detailing share transfer provisions and specific policies about when and how this can be done, together with tag along/drag along provisions and good leaver/bad leaver provisions;
  • Setting out how key decisions will be made and whether the management of the Company must obtain shareholder approval for certain key decisions;
  • Protecting minority shareholders (and majority shareholders) in certain events i.e when an offer is made for the sale of the business and including any veto rights; and
  • Helping to attract investment into the Company – an investor may look favorably knowing the clarity that a shareholders’ agreement brings.

Do I need them: Although not a legal requirement, it makes good business sense to put one in place. A lack of certainly by not having one can often lead to costly and lengthy disputes amongst shareholders.

To seek advice, please contact our Corporate Team via corporate@mlplaw.co.uk

All the sole directors – now put your hands up!

How articles of association can affect the decision-making of companies with a sole director.

Historic position

The ‘Model Articles’, the standard default articles of association used by UK companies, set out the basic rules under which a company should operate. However, there has always been a lack of clarity with regards to how the Model Articles work for companies with a sole director.  This is because of certain provisions seemingly counteracting each other.

Since the introduction of the Model Articles under the Companies Act 2006, in practice the assumption was always that the provision requiring a company to have more than one director (Model Article 11(2)) would be disapplied for companies with only one director.

A change in position?

However, recent case law has called the above interpretation into question, with the courts ruling in Re Fore Fitness Investments Holdings Ltd [2022] that Model Article 11(2) did in fact still apply to sole director companies with Model Articles, so any decision made by the sole director was not quorate and was therefore invalid. This judgement went against the historically accepted interpretation, so caused significant concern amongst company lawyers.

However, in Re Active Wear [2022], the court held that the articles should be interpreted in the same way any other contract would be. As such, under this interpretation, Model Article 11(2) would not apply to sole director companies with Model Articles, so their director decisions would indeed be valid. This fit with the general consensus of the legal profession prior to Re Fore Fitness bringing this understanding into question.

Current situation

Although Re Active Wear offers some peace of mind to sole director companies with Model Articles, there is still enough uncertainty and room for challenge to encourage sole directors of such companies to adopt bespoke articles to better fit their set-up. In light of this, if you are a sole director of a company that uses Model Articles, we recommend you update these to tailor them to your particular situation.

This update can be a great opportunity to consider what other bespoke provisions can be changed or included to better serve your company.

If you have any queries about the effectiveness of your current articles of association and/or want to discover how to update them to help your company, please contact our Corporate Team at corporate@mlplaw.co.uk.