The articles of association are a critical foundation for any company. They define the rules governing how the company operates and outline the relationship between the shareholders and directors. While many companies adopt the model articles of association (Model Articles) provided under the Companies Act 2006 (Act), these may not always suit a company’s specific needs, particularly as it grows or evolves.
Here are some key considerations for tailoring your articles of association to align with your company’s unique requirements:
1. Quorum for directors’ meetings
The Model Articles require a minimum of two directors to form a quorum for meetings. While this may be appropriate for some board structures, this doesn’t work for companies with a sole director. On the other hand, companies
with a large number of directors may encounter situations where decisions could be passed by a minority under the default rules. Tailoring these quorum rules will ensure efficient decision making.
2. Appointment and removal of directors
Under the Model Articles, directors can be appointed either by ordinary resolution (requiring more than 50% shareholder approval) or by a decision of the existing board. However, some companies may prefer to adopt stricter thresholds, such as requiring director appointments to be made by way of a special resolution (requiring 75% or more shareholder approval), to ensure a higher level of consensus.
Additionally, the Model Articles do not provide straightforward mechanisms for removing directors who underperform. By customising director appointment and removal provisions companies can ensure smoother management transitions when necessary.
3. Decide on use of a casting vote
The Model Articles grant the chairman a casting vote in the event of a tie. For small companies with only a few directors, this could lead to unintended consequences. Assess whether this provision aligns with your company’s governance style.
4. Conflicts of interest
While the Model Articles address conflicts of interest, they assume a separation between shareholders and directors. In smaller companies, where shareholders and directors are often the same individuals, these provisions may be less relevant and even counterproductive. Consider tailoring these provisions to reflect your company’s dynamics.
5. Directors’ interests
Under the Act, directors must disclose any interests in transactions involving the company. The Model Articles prevent directors with such interests from participating in decisions for quorum or voting purposes. In small companies, where directors are also shareholders, this can create challenges if all directors (or a sole director) declare an interest as shareholder approval would be required to proceed, causing an additional administrative hurdle that some companies do not want.
6. Share issues and employee incentives
The Model Articles require that all shares issued be fully paid upfront (except for those issued on incorporation). However, many companies use partially paid or deferred shares as part of employee incentive schemes. If your company plans to adopt such arrangements, this article will need adjustment to align with your objectives.
7. Multiple share classes
By default, the Model Articles only cater to ordinary shares. In reality, many companies issue multiple share classes with varying rights, (such as voting rights or dividend entitlements) to different shareholders. Customising your articles allows for the flexibility to structure shares to suit your goals, and contemplates growth.
8. Pre-emptive rights
Under the Act, section 561 provides statutory pre-emptive rights on the allotment of new shares, and these rights automatically apply under the Model Articles, giving existing shareholders the right to purchase shares in proportion to their shareholding before they are offered to anyone else. However, the Model Articles do not impose pre-emptive rights on the transfer of shares, so shareholders are free to transfer their shares to any third party without offering them to existing shareholders first. If maintaining control over share ownership is a priority, it may be in your company’s best interests to amend this.
The benefits of a tailored approach
Adopting the Model Articles can be a convenient starting point for new companies. However, revisiting and tailoring these rules as your company grows ensures that your governance structure aligns with your strategy and operations.
By proactively addressing these areas, your company can foster smoother decision-making, reduce risk and support long term success.
If you’d like to explore how tailored articles of association could benefit your company, schedule a complimentary discovery call with the team today
Our team of expert corporate lawyers can help you create a tailored set of articles that ensures your company’s long-term success.
About Lucy Clarke:
Lucy Clarke is a Corporate Solicitor admitted in New Zealand. Her experience includes advising on a range of M&A transactions, corporate restructuring, share/asset sales, capital raises, commercial contracts and general corporate/commercial matters. Prior to joining Sumer Law, Lucy worked in the corporate team at Burton Partners, a boutique law firm in New Zealand.
Contact email:
lucy.clarke@sumer.co.uk
About Mahitha Kumar:
Mahitha Kumar is a corporate and commercial lawyer admitted in New Zealand, as well as a chartered accountant with Chartered Accountants Australia and New Zealand. Her previous experience involves working at a top 10 New Zealand law firm, and in the transaction team at Deloitte, giving her rich experience in corporate structuring, M&A, fundraising, equity documentation and general commercial drafting and advisory.
Contact email:
mahitha.kumar@sumer.co.uk
