On 1 October 2009 the Companies Act 2006 (CA 2006) will finally be fully in force.
As this date approaches, it may be time to take stock and consider whether changes need to be made to the articles of association of existing private companies. Whilst there has been considerable debate as to the scope of any changes to articles for public companies (particularly in light of the staged implementation of the CA 2006), the question as to when and how private companies should change their articles has received less attention.
This briefing examines what changes could be made to the articles of association of a private company in light of the CA 2006, and why those changes are worthwhile.
What benefit is there in changing the articles?
The mere fact that the CA 2006 is now in force does not mean that there is an overwhelming reason to change a company’s existing articles of association. However, it does mean that the company will be missing out on a number of useful simplifications that have been made to company law by the CA 2006. As a corollary to this, a change to the articles also means that there is less risk of falling foul of technical irregularities resulting from the staged implementation of the CA 2006.
Some specific benefits of changing the articles of association are that a company would be able to:
- take advantage of the abolition of the ultra vires rule;
- take advantage of the removal of the concept of authorised share capital;
- remove any unwanted (and/or forgotten) provisions in the memorandum of association which, as of 1 October 2009, will be deemed to be incorporated in the articles of association;
- allow the directors to allot shares without prior shareholder approval;
- allow the company to change its name by way of a board resolution (as an alternative to a special resolution);
- remove any unwanted (and/or forgotten) restrictions on the issue of redeemable shares, the reduction of share capital and/or the purchase of own shares;
- remove any requirement for a company secretary; and
- more generally, put in place articles of association based on the new “model articles” (rather than Table A), which will increasingly become the standard “template” for articles of association.
- At the same time, although not strictly related to a change to the articles, for those companies incorporated before 1 October 2008, an ordinary resolution could also be passed at the same time as the resolution to adopt new articles in order to take full advantage of the ability of boards to authorise certain conflicts of interest which directors may have.
- These benefits are explained in turn below. For the purposes of this briefing, it has been assumed that new articles will be adopted (much the simpler option) rather than simply seeking to amend articles piece-meal to take advantage of the new changes. It also assumes that the companies in question were incorporated prior to 1 October 2009 (or 1 October 2008 in respect of conflicts of interest).
The benefits explained
Abolition of ultra vires rule
One of the deregulatory measures being introduced on 1 October 2009 is that a company may have unrestricted objects. However, any existing objects clauses contained in the memorandum of association of an existing company will be deemed to form part of the articles of association.
Accordingly, in order to take advantage of this deregulatory measure, a company will need to amend its articles to remove the existing objects clauses (deemed from 1 October 2009 to form part of the articles). A practical benefit of removing the objects clauses is that it avoids the need for a bank or other lender to check the company’s objects clauses to ensure that any lending or security is not ultra vires. Indeed, in future we may see lenders requiring that objects clauses are removed to avoid this possibility.
Removal of concept of authorised share capital
Another deregulatory measure in place from 1 October 2009 is the removal of the concept of an authorised share capital.
However, for existing companies the concept will remain since it is likely that they will have a statement in their memorandum (or perhaps their articles) as to authorised share capital which will be treated as an ongoing, post 1 October 2009 restriction.
Accordingly, in order to take advantage of this deregulatory measure, a company will need to amend its articles to remove any reference in the articles or the memorandum (which will be deemed to form part of the articles) to authorised share capital.
Removing legacy provisions of the memorandum of association
As referred to above, from 1 October 2009 provisions currently in the memorandum of association of a company which would not appear in the new short-form, post 1 October 2009 memorandum of a newly incorporated company will be deemed to form part of its articles.
Apart from preventing a company from taking advantage of the abolition of the ultra vires rule and the removal of the concept of authorised share capital (as referred to above), it is potentially confusing to have legacy provisions from the memorandum of association deemed to form part of the articles of association, and so an amendment to the articles to remove these provisions is a helpful house-keeping exercise.
Allotment of further shares by the board
From 1 October 2009 the directors of private companies with only one class of share will be able to allot shares of the same class without the need to obtain prior shareholder approval for such allotment (unless the company’s articles restrict them from so doing).
However, for an existing private company to take advantage of this provision, members must pass an ordinary resolution. Furthermore, existing articles of association may contain specific restrictions on the ability of the board to allot further shares without shareholder approval. To deal with this, the requisite ordinary resolution could be passed at the same time as the special resolution adopting new articles, meaning that such a restriction on allotments are thereby removed.
Whether a company wishes to take advantage of this particular piece of deregulation depends upon the company in question. However, for private companies which are wholly-owned subsidiaries this would appear to be a sensible and helpful simplification.
It should also be remembered that even if the board does have authority to allot further shares, any pre-emption provisions (either statutory or under the articles) will still need to be complied with.
Change of name by directors
From 1 October 2009 a company will be able to change its name either by special resolution or by other means provided in its articles (e.g. by way of a board resolution).
Whether a company wishes to take advantage of this particular piece of deregulation depends upon the company in question. However, for private companies which are wholly-owned subsidiaries this would again appear to be a sensible and helpful simplification.
Removal of certain restrictions involving share capital
From 1 October 2009 the default position will be that a private company can issue redeemable shares, effect a reduction of capital and purchase its own shares, in each case unless the articles otherwise provide.
The adoption of new articles of association (without any such restrictions) means that a company will not, inadvertently, fall foul of any such restriction.
Removal for the requirement of a company secretary
The requirement for a private company to have a secretary was abolished on 6 April 2008, save where the articles of association continue to impose such a requirement.
Accordingly, if the existing articles expressly require the appointment of a secretary, then they would need to be amended before the company can dispense with a secretary.
In some cases it may be beneficial to retain a secretary, for example where the secretary is not also a director and where it is useful to have an additional “office-holder”. However, any change to the articles to remove the requirement for a secretary does not prohibit the appointment of a secretary, it merely provides flexibility as to whether to have a secretary or not.
Articles based on the new “model articles”
From 1 October 2009 “model articles” become the default articles of association of a company in place of Table A. These are set out in the Companies (Model Articles) Regulations 2008. There are separate forms of model articles for private companies and for public companies, although either set of model articles could be adopted as the template articles by a private company, with whatever amendments are thought relevant or appropriate.
Two advantages of adopting new articles with the “model articles” as the base are:
- the model articles are fully compliant with the CA 2006 (unlike Table A); and
- the model articles are more modern, in language and approach, than Table A and are written in plain English.
For most private companies it is likely that the model articles for private companies will be used as the base, with the additional amendments being dependent upon the nature of the company in question (e.g. is it a wholly-owned subsidiary? what has the company been incorporated for?).
Conflicts of interest to be authorised by the board
One of the changes introduced by the new conflicts of interest regime for directors (as of 1 October 2008) is that, pursuant to section 175 of the CA 2006, boards are able to authorise a director’s conflict of interest, even without express provisions allowing them to do so in their articles. However, private companies incorporated before 1 October 2008 need to pass an ordinary resolution giving the board the right to authorise conflicts in this way.
Accordingly, if not already done so, it would be sensible to pass such a resolution at the same time as the new articles are adopted, in order to take full advantage of the new regime.
As from 1 October 2009, the CA 2006 will be fully in force. Careful consideration should be given as to whether now is the time for a private company to adopt new articles of association.
Although not an absolute requirement, there are certainly specific advantages to adopting new articles. Furthermore, in more general terms, the advantages of adopting new articles of association are that:
- the constitutional position can be simplified (e.g. the deemed inclusion of much of the memorandum of association into the articles post 1 October 2009 can be removed);
- legacy provisions which may conflict with the CA 2006 can be removed;
- the new articles can be drafted in such a way as to ensure that any deregulation or simplification arising out of the CA 2006 can be taken advantage of fully; and
- if not already done so, a resolution can be passed at the same time as the new articles are adopted in order to allow the board to authorise conflicts of interest.