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What’s the value in updating my articles of association?

06 December 2016

There is no obligation to keep your articles of association (articles) up to date but there are definite benefits. It would be cost effective to update your articles to reflect, and take advantage of, the significant changes introduced by the Companies Act 2006 (the Act) and some more recent changes to that regime. This guide explains why.

This is mainly for private companies limited by shares that have not changed their articles since 1 October 2009, the last date when the Act’s key provisions came into force. It is also for companies limited by guarantee — those companies should ignore references in here to “shares” and read“member” instead of “shareholder”.

Why update? Briefly

  • Here are the benefits. Updating your articles should enable you to:
  • remove dangerous inconsistencies with the current company law regime and avoid doing anything unlawful;
  • take advantage of the Act’s deregulatory provisions and cut some red tape;
  • remove administrative burdens that the Act imposes; and
  • remove provisions that are no longer applicable to you and add provisions to assist the smooth operation of your company.

Where we refer in here to “your articles”, that includes any provisions that are incorporated by reference. For example, if your articles are based on a previous statutory regime, not only will they refer to the Companies Act 1985 (or even an earlier Companies Act) but they may also incorporate by reference one of the versions of “Table A”.
“Table A” was the previous set of statutory default articles for a company limited by shares. It used to be the basis of the articles for most of those companies. The “Model Articles” have replaced Table A as the current statutory default articles.

This guide now looks at each of the above benefits of updating articles.

What are the dangers of not updating?

Procedures that follow your out of date articles (where they are inconsistent with the current law) could be challenged. This is because the Act has made some changes to areas covered by articles and, with some exceptions, it overrides whatever your articles say. Here are the most common areas where your articles may be misleading:

  • Article providing for the passing of a shareholders’ resolution by written resolution signed by all the members now ineffective. This should not be used. There is now only one method for the passing of written resolutions of shareholders and that is as specified by Part 13 of the Act, which only applies to private (not public) companies. A purported written shareholders’ resolution following this provision in the articles may now be invalid.

    In any case, the written resolution method set out in the Act only requires a 75% or simple majority vote to pass a special or ordinary resolution respectively; whereas this article requires unanimous agreement from shareholders.

    In rare cases, a decision which all shareholders have agreed to by following the procedures in that article, could be effective under the Duomatic principle. This should not be relied on when planning shareholders‘ resolutions.
  • The chairman of a shareholders’ meeting no longer has a casting vote. Even if your articles give the chairman a casting vote at shareholders’ meetings, in general he no longer has that right. So any resolutions that are passed by the use of the chairman’s casting vote may now be invalid.
  • Rights of proxies extended. A proxy – a person appointed by a shareholder to attend a shareholders’ meeting on his behalf - is now entitled to attend, speak and vote, on a show of hands as well as on a poll, at a shareholders’ meeting. It is very common for “old” articles to state that proxies may only vote on a poll. If a company were to prevent a proxy from voting on a show of hands, it may be faced with a legitimate claim that it is in breach of the Act.
  • You can communicate electronically. The Act contains provisions for communicating electronically. These apply even if the articles don’t mention electronic communications, or if they say you can’t communicate electronically

    The company could take advantage of the Act’s electronic communications provisions by adding further provisions in its articles to facilitate communication via a website and alter the Act’s timing for the deemed delivery of notices and documents.
  • Remove article which terminates a director’s appointment automatically upon the making of a mental health court order removing his powers. This method of terminating a director’s appointment was deleted from the Model Articles on 28 April 2013. It was considered that its effect could be discriminatory. It would therefore be advisable, to avoid the risk of a discrimination claim, to consider deleting this provision if it applies to you...

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