Articles of Association

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Articles of Association

The importance of getting them right

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Articles of Association | Reducing Legal Risk

Articles of Association

The importance of getting them right Articles of Association (“Articles�) are rarely considered as the contract between a company and its shareholder(s) or the basic manual for the operation of that company, but this is exactly what they are.

John McDermott Solicitor john.mcdermott@laytons.com +44 (0)161 214 1600

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Articles of Association | Reducing Legal Risk

Once a client realises the importance of this document a Corporate lawyer is sometimes asked about the consequences of a company incorrectly filing the wrong set of Articles at Companies House. The error often occurs due to an administrative error (the resolution is incorrectly completed or the wrong draft of the articles is filed). In such circumstances is the company bound by those Articles? Luckily for concerned business owners, the answer is “no” (as held in 2016’s High Court case in Gunewardena v Conran Holdings Ltd, which served up a useful summary on the position regarding the effect of an incorrect filing). The mere filing of a set of Articles does not make them “sacrosanct”. The correct interpretation is to look at the intention of the directors and shareholders, and which set of Articles they believed to have applied to the company.

Consider what you need from your articles Make sure your Articles truly reflect what you need for your business – there is a temptation to simply adopt and leave in place the standard model articles of association (“Model Articles”) due to deemed cost savings. However, this can be a false economy as your business grows and its share structure develops, rendering the Model Articles unsuitable.

Furthermore, the quorum and conflict of interest provisions within the Model Articles can be restrictive and unwieldy, potentially leaving shareholder-directors hamstrung when making certain decisions.

Take legal advice Take legal advice before amending your Articles. It can be tempting to think that they can be amended in-house in order to save on legal fees; however, more often than not this will be a false economy. Even a seemingly minor amendment could impact on the rights of certain shareholders. In the event of a share sale or shareholder dispute this could lead to, at best, costly and protracted negotiations in getting the correct the correct copy in place. Similarly, if you have an EMI share option scheme in place, altering the Articles could

Whilst this provides some comfort to business owners that

amount to a “disqualifying event” for tax purposes, resulting

they will not be bound by unsuitable provisions which they

in the loss of the preferential tax treatment of the option

never intended to apply to their business, the importance

shares. The likely outcome of this is a number of disgruntled

of getting it right first time (or at least rectifying a mistake

employee option holders whom you will need to indemnify in

quickly) when filing documents at Companies House cannot

respect of their resulting tax liabilities.

be overstated. Unpicking errors in Articles can prove to be a costly and time-consuming affair, and in some cases cause issues if litigation arises.

So, what can a business owners do to ensure that their Articles and other key documents are suitable and correct?

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Articles of Association | Reducing Legal Risk

Document your decisions Once a final set of Articles have been agreed, you will need to hold a board meeting in order to adopt them; at the meeting a special resolution (i.e., a resolution which is approved by the owners of 75% or more of the company’s voting rights) will need to be passed. Detailed minutes should be taken and recorded in the company’s records. These minutes should include a summary note of key provisions and requirements of the Articles. This reduces confusion at a later date if questions are raised about which set of Articles should apply. A copy of the Articles must be available for inspection and review at the meeting itself, and circulated to the company’s shareholders along with the written resolution. It is a sensible administrative step to have a director initial the front page of the Articles when agreed so that there can be no doubt over which set has been adopted.

Review your company documentation We recommend reviewing your constitutional and key shareholder documents, including the Articles and shareholders’ agreement, every 2-3 years to keep pace with changes in the law and the development of your business.

As your business evolves it can be easy to ignore these, but you may find on inspection that they are no longer fit for purpose. A review and refresher if needed will ensure that your documents still reflect the needs of your business, and avoid any ambiguity in the event of a dispute.

Furthermore, should you wish to sell your business at any point, an up to date and genuinely fit for purpose suite of constitutional and shareholder documents can ensure that the sale process runs more smoothly, avoiding the need for any remedial work and associated legal costs in order to get your company’s internal affairs in a suitable state for the buyer.

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Articles of Association | Reducing Legal Risk

Corporate We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market.

Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.

Our Team Michael Barrington

Kathryn Beasley

Ben Crichton

Solicitor michael.barrington@laytons.com +44 (0)20 7842 8000

Solicitor kathryn.beasley@laytons.com +44 (0)20 7842 8000

Solicitor ben.crichton@laytons.com +44 (0)20 7842 8000

Patrick Curtis

Martin Donoghue

John Gavan

Partner patrick.curtis@laytons.com +44 (0)161 214 1600

Partner martin.donoghue@laytons.com +44 (0)20 7842 8000

Partner john.gavan@laytons.com +44 (0)161 214 1600

Dimitri Iesini

Barney Leaf

Rupert Lescher

Partner dimitri.iesini@laytons.com +44 (0)20 7842 8000

Partner barney.leaf@laytons.com +44 (0)20 7842 8000

Consultant rupert.lescher@laytons.com +44 (0)20 7842 8000

John McDermott

Daniel Oldfield

David Sefton

Solicitor john.mcdermott@laytons.com +44 (0)161 214 1600

Partner daniel.oldfield@laytons.com +44 (0)20 7842 8000

Consultant david.sefton@laytons.com +44 (0)161 214 1600

Christopher Sherliker

Jonathan Silverman

Cameron Sunter

Partner christopher.sherliker@laytons.com +44 (0)20 7842 8000

Consultant jonathan.silverman@laytons.com +44 (0)20 7842 8000

Partner cameron.sunter@laytons.com +44 (0)20 7842 8000

Daniel Walter

Liza Zucconi

Solicitor daniel.walter@laytons.com +44 (0)20 7842 8000

Partner liza.zucconi@laytons.com +44 (0)20 7842 8000

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This information is offered on the basis that it is a general guide only and not a substitute for legal advice.

We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.

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