Constitution

Time for a company to modernise its articles?

The constitution of a company incorporated after 1 October 2009 is likely to look very different to that of a company incorporated before that date. To the extent that they are not excluded, modified or replaced, new model articles apply as the default constitution to new companies instead of the now quite out-dated "Table A". These articles provide for far more flexibility for companies (for example, in decision-making by directors), embrace more modern communication styles, are written to be compliant with the new law and are in easy to understand plain English. The company's memorandum of association is no longer part of its constitution. Most of the matters previously dealt with in the memorandum will either now appear in the articles or no longer be required.

The question for existing companies is whether or not they should do anything to update their constitutions to bring them into line with the new act. The answer is likely to depend on a number of factors, but there will be advantages to you in discussing the best approach with us. For more information on the free consultation that we are offering please see About Change Review. In some cases it will be appropriate to make some small basic changes and, in others, adopting new articles modelled on those of new companies would be far more advantageous than doing nothing at all.

Advantages of amending your articles may (depending on the circumstances) include the following:

• To minimise exposure of the directors arising from increased regulation - For example, certain protections can be included for directors relating to the new statutory duty on directors to avoid a conflict of interest. Without such provisions a director may either not be able to have his positions of potential conflict authorised so easily or may find it difficult to manage his conflicts without breaching other duties he owes either to the company or third parties - see Managing competing business interests.
• To take advantage of new flexibility - For example:
  • Directors may be given the power in the articles to change the company name (without passing a shareholder resolution).
  • Lengthy objects clauses which limit the company's capacity and the powers of directors may be removed, again, protecting the directors from potential liability (such objects clauses are deemed to be part of the articles now and no longer in the company's memorandum).
  • Directors' indemnity provisions could be reviewed to take advantage of new flexibility under the law.
  • The articles could allow shareholder meetings (other than AGMs) to be convened on 14 clear days' notice in all cases rather than on the 21 clear days required for some meetings in the old Table A.
  • Flexibility in the act allowing electronic communications with shareholders could be enabled, saving the company costs, particularly where it has a large number of shareholders e.g. allowing larger documents such as accounts to be made available to shareholders on a website.
  • If a private company has express articles requiring an AGM, they could be removed, relieving the company from the obligation to hold an AGM.
  • The shareholder authorisations associated with issuing shares could be reduced - see further modernisation of share capital requirements.
• To allow directors' decisions to be taken using more modern methods - Many companies are likely (for now) to still require regular board meetings to be held in line with good management practice. However, it may be appropriate in some cases to allow board decisions to be taken by majority (rather than unanimity) by way of a directors' written resolution. It is also possible to write more informal decision-making into the articles in line with that allowed in the new model articles for private companies, so that directors' decisions can be taken orally if all directors agree. However, this does carry evidential risk and will not be appropriate in all cases.
• To ensure the articles comply with new law - Existing companies' articles are likely to be misleading. Many provisions of the new legislation override provisions of articles written before the new law came into effect and should not, for example, be relied on for the correct procedure for convening a shareholder meeting or passing a shareholder resolution in writing. Shareholder protections may also have been drafted assuming meetings had to be held. These may not protect you as fully as they previously did now that decisions can be taken using the new statutory procedure to allow shareholders' resolutions to be passed in writing by majority.

The Change Review is offered at the discretion of Mishcon de Reya and we reserve the right not to conduct the review in any particular case.