Part 7 Model articles of association
June 2011
The model articles of association (model articles) (see paragraph 75.57) are designed to ensure that the company runs smoothly. The model articles set out how the company should operate. The Companies (Model Articles) Regulations 2008 provide model articles for a number of different types of companies. The model articles for a private company are considered firstly in this part. This is only a brief description of what general areas the model articles cover. To view the detailed model articles for a specific type of company click on the link above and open the appropriate schedule to the regulations.
75.62 Appointment and termination of directors
The model articles explain how the directors are appointed. They set out how the directors’ remuneration is to be decided and what expenses may be paid. The articles will also describe the circumstances under which a director’s appointment may be terminated, for example, resignation, bankruptcy or by the provisions of the Companies Act 2006, i.e. by ordinary resolution at a meeting of the company [Note 1].
The model articles set out the powers and responsibilities of the directors and state that “the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company”. The directors may delegate these powers to another person or a committee.
The model articles provide rules as to how decisions within the company are taken by directors. The general rule is that decisions are either by majority or unanimous vote. For companies with only one director the articles allow him/her to take decisions without regard to any of the other provisions covering decision-making. Private companies are allowed to make unanimous decisions if each director indicates his/her consent in writing. In all other instances a meeting will need to have taken place. The model articles provide rules for calling meetings, together with the quorum necessary for a decision to be made. The model articles include provisions for dealing with potential conflicts of interest. The length of time a company should keep a record of decisions is also included. The model articles specify a period of 10 years from the date of the decision.
According to the model articles all shares are to be fully paid up and any payment (in addition to the face value of the share), called a premium, must be paid to the company. If a company wanted more flexibility it would need to replace this provision with one authorising the issue of nil-paid (see paragraph 75.76) and/or unpaid shares (see paragraph 75.75). Further provisions would be required to deal with how nil-paid and unpaid shares are to be treated. The company has the power to issue different classes of share, e.g. ordinary shares, preference shares, cumulative preference shares, etc (for more details see Part 12). The company must issue, free of charge, a certificate for each share. However, the company may charge for any replacement. The transfer of shares can take place in a manner approved by the directors. The directors have the powers to refuse to register a transfer.
The model articles allow the company to declare a dividend by ordinary resolution, and prescribe how it is to be paid to shareholders and how to deal with any unpaid dividends. The company may pass an ordinary resolution allowing it to pay all or part of the dividend by the transfer of non-cash assets of equivalent value, including, without limitation shares or other securities in any company.
75.67 Capitalisation of profits
The model articles allow a company, by ordinary resolution, to retain (capitalise) any profits which are not required for paying a preferential dividend and are not earmarked for the company’s share premium account or capital redemption reserve. The capitalised sums can be used to issue fully paid shares or a new debenture to persons entitled to a dividend.
75.68 Decision-making by shareholders
The model articles provide rules for the conduct of general meetings of the shareholders. They state who may attend and speak at the meeting, who the chairman of the meeting will be and who may vote.
The use of the company’s seal can be seen as evidence that a contract or agreement has been entered into by the company. There is no legal requirement in the United Kingdom for a company seal to be used. However for some contracts outside the United Kingdom the use of the company seal may be required. The model articles state that the company seal can only be used on the authority of the directors and the document signed by an authorised person and one witness, who verifies the signature. An authorised person is a director, the company secretary or any other person authorised by the directors to sign under the company seal.
The final section of the model articles deals with the service of documents to and from the company, the provision for employees if the business ceases, restrictions on the right to inspect the accounts and other records, director’s indemnity for negligence, breach of duty or breach of trust and insurance for the benefit of any director.
The Companies (Model Articles) Regulations 2008 also provide model articles for public companies. Many of the individual clauses are the same or similar to those for private companies. There are some substantial differences which are described in the following paragraphs 75.72 to 75.76.
75.72 Retirement of directors by rotation
The model articles provides rules as to when the first directors must retire from, and, if applicable, be reappointed to, the board. The model articles also provides rules as to when future directors have to retire and offer themselves for re-election.
The model articles provide for the appointment and removal of alternate directors. An individual may be appointed as an alternate director and attend meetings on behalf of another director with same rights as that director. The model articles also specify that an alternative director cannot receive any remuneration, other than from the director he/she is standing in for.
The model articles add rules on how to conduct a poll of shareholders when voting on a resolution. They also state that votes will not be permitted regarding shares on which money is still outstanding.
A major difference between private and public companies is how shares are treated. In a private company the model articles state that shares are to be fully paid up, see paragraph 75.65, although there is no legal reason why a private company cannot adopt articles of association that allow it to have unpaid shares. In a public company, shares do not have to be fully paid. A public company may ask for payments in respect of shares to be paid on certain future dates. When a payment is due or requested this is referred to as a “call”. The model articles provide rules for dealing with calls, partially paid and unpaid shares.
Nil -paid, shares may be issued and carry an entitlement to purchase them at a later date at a set price. In a public company nil-paid shares can be traded.
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