Every UK company has its own ‘articles of association’ – the rules which govern the company’s internal administration. The company’s members can agree to change the articles but when will those changes take effect? Corporate Partner Sophie Brookes explains the process.
The nature of articles
A company’s articles are a contract between the company and its members, and also between the members themselves. They set out various matters relating to the on-going operation and administration of the company, typically dealing with things such as:
- Rights attaching to shares, including dividends, capital and voting rights
- Transfer of shares
- Shareholders’ meetings
- Directors’ meetings
- Appointment and removal of directors
Changes to articles
There are various reasons why a company might want to change its articles: it might be issuing a new class of shares so the rights attaching to those shares need to be set out in the articles; perhaps a new shareholder is to have the right to appoint a director which should be reflected in the articles; or the company might want to update its articles generally to ensure they are consistent with new law (for example, as provisions of the Companies Act 2006 were implemented).
Amendments to articles will generally require the consent of at least 75% of the members by special resolution. Once the articles have been amended, a copy of the new version must be filed at Companies House within 15 days. But when does the change take effect: is it when the resolution is passed? Or not until the articles are filed? According to a recent case it’s the date of the resolution that’s key. Once the members have resolved on an amendment by special resolution, the amended articles become the new contract and the new articles take effect. Their status as articles does not depend on registration. Failure to comply with the registration requirement means that both the company and its officers in default are guilty of a criminal offence and liable to a fine. But that failure does not affect the status of the articles resolved upon by the members.
An exception to the rule
As with many legal matters, however, there is an exception to the rule….
A company’s articles might include its ‘objects’, the purposes for which the company was formed, which operate as a limit on the directors’ authority: if something is outside the company’s objects, the directors’ may face an action for breach of duty or breach of the articles, and the relevant transaction may be voidable. Companies are now deemed to have unlimited objects unless they choose to include specific objects in their articles. Whilst some may choose to do this, others have it forced on them: for a company incorporated before 1 October 2009 the objects in its memorandum of association on that date are deemed imported into its articles.
A change to the objects in a company’s articles still requires a special resolution of the members but in this case the change only takes effect when the relevant form (a CC04) is filed at Companies House.
A mixture of changes?
What if the company is making various changes to its articles at the same time, perhaps adopting a completely new set of articles which alter the objects as well as making other changes? It seems that it is only the change to the objects that will be delayed until the form CC04 is filed at Companies House and other changes will take effect on the resolution being passed.
If this is not the members’ intention, the resolution changing the articles or adopting new articles could be made conditional on the form CC04 being filed. This should ensure that all the changes to the articles take effect at the same time.