This is the fourth in our series of short articles in which we try to shed light on some of the more confusing areas of the Companies Act 2006 (the "Act"). It looks at private companies' memoranda and articles of association, and highlights a number of practical points which we have come across during the Act's implementation process and subsequently.
The points fall into three categories:
- underlying issues - covering matters such as the incorporation of Table A by reference and the use of an objects clause now that the Act provides the option of having unrestricted objects
- directors - covering conflicts of interest and the removal of directors
- written resolutions.
- incorporation of Table A by reference - a question which comes up from time to time is whether the articles of a company formed under the Companies Act 1985 can continue to incorporate parts of Table A by reference. The answer, set out in government guidance, is that they can
- limitation of liability - under section 28 of the Companies Act 2006, most of the key provisions in the memorandum of a company formed before 1 October 2009 are now automatically deemed to form part of its articles. A company which wants to take advantage of the Act's relaxation of the law in relation to objects and authorised share capital may opt to pass a single resolution deleting from its articles all the provisions which were imported into them by section 28. This approach is entirely acceptable, but since it has the effect of removing the statement (formerly in the memorandum) that the shareholders' liability is limited, the company must remember to insert a fresh limited liability provision into its articles
- objects clause - the objects clause is not entirely a thing of the past. Some companies may want to restrict their objects in order to qualify for particular sources of funding, while others may want their principal aims set out in black and white for their members to see. Where the objects really need to be restricted, the articles should spell the restrictions out clearly and succinctly. Where the intention is merely to set out a mission statement, it will often be sufficient for the articles to state the company's aims with the caveat that its objects remain unrestricted. As a general rule, the flexibility afforded by having unrestricted objects should not be sacrificed without good reason
- form of memorandum - although the memorandum is now a very simple document, it must adhere strictly to the form prescribed in regulations under the Act. Any deviation at all from the prescribed form may result in the document being rejected by Companies House. The omission of the prescribed heading "Company having a share capital", for example, may result in rejection, as may the inclusion of details of the numbers of shares taken by each subscriber (the regulations simply require that each subscriber agrees to take at least one share)
- conflicts of interest - a question upon which we did not touch when we discussed directors' duties in the August 2010 issue of the Corporate Newsletter is what role the articles play in relation to the conflicts duties, in particular section 175 (duty to avoid conflicts) and sections 177/182 (duty to declare interests in transactions with the company). A detailed discussion is beyond the scope of this article, but the point to note is that the articles should normally include wording dealing expressly with both of these duties:
- in relation to section 175, the articles should specify either that the board has the power to authorise conflicts, or that it does not. If it has the power, the articles should set out rules governing its exercise of the power. For example, should the board be able to prevent a director whose conflict has been authorised from voting on matters to which the conflict is relevant?
Although companies may also want to take advantage of section 180(4)(a) of the Act, the effect of which is that the articles can permit directors to enter into situations of conflict which would otherwise breach section 175, the scope of this provision is open to debate and it should be used with care
- in relation to sections 177/182, the articles should address the position of a director who has declared an interest. In particular, is he permitted to vote in relation to the transaction in question?
- appointment/removal of directors - the Act does not concern itself with the appointment of directors, and sets out an unwieldy procedure for removing directors (section 168). As a minimum, therefore, a company's articles should specify how a director is to be appointed. The model articles for private companies under the Companies Act 2006 (the "Model Articles") permit appointment by means of an ordinary resolution or a decision of the directors, and these options will often be supplemented with a provision for the majority shareholder to appoint a director by giving the company written notice. In relation to the removal of directors, the section 168 procedure can often seem cumbersome because it not only requires the resolution to be taken at a general meeting, but also requires special notice of the resolution to be given. Group companies, in particular, should consider including in their articles an alternative option of removing a director by written notice from the majority shareholder
- written resolutions of directors - most companies will provide in their articles for the directors to take decisions by means of a written resolution, as an alternative to holding a board meeting. Regulation 93 of Table A under the Companies Act 1985, for example, states that "A resolution in writing signed by all the directors entitled to receive notice of a meeting of directors ... shall be as valid and effectual as if it had been passed at a meeting of directors". Wording along these lines will often work perfectly well, but it is worth noting that it prevents the directors from using a written resolution where one or more of their number is ineligible to vote as a result of a conflict of interest. In order to avoid a situation where the board is forced to hold a meeting because the written resolution option is not available, the wording of the provision in the articles can be adjusted so that a written resolution has to be signed by all "eligible directors", where an eligible director is a director who would have been entitled to vote at a board meeting. This is the approach adopted in the Model Articles
- written resolutions of shareholders - as we noted in the last issue of the Corporate Newsletter, shareholders' written resolutions must now be passed in accordance with Chapter 2 of Part 13 of the Act. In other words, a written resolution which purports to be passed under a non-statutory procedure in the company's articles is not valid. In order to avoid confusion, companies should remove from their articles any provision purporting to establish such a procedure.