10 Reasons to Change your Articles of Association. Private Companies existing before 1 October 2009

Tuesday 29th September 2009

The final parts of the Companies Act 2006 come in to force on 1 October 2009.

What changes should an existing private company make to its articles of association?

There is no legal requirement for an existing company to change its articles as a result of any of the changes under the Companies Act 2006.

However, amendments could be considered by private companies existing before 1 October 2009 if they want to:

1. remove any express requirement to have a company secretary if the company does not wish to have one. Note that public companies must still have a company secretary;
2. remove existing objects so that the objects are effectively unrestricted. If the objects are not removed they will be deemed to be moved in to the articles from the Memorandum;
3. remove the need to hold an AGM (for example under 1948 Table A). An AGM is no longer a requirement unless expressly required under the articles;
4. remove authorised share capital. A company no longer needs to have an authorised share capital but the authorised capital of an existing company will become part of its articles and act as a limit on the amount of shares it can issue. This limit can be removed by passing an ordinary resolution. This would then mean that in future, for example, authorised share capital would not have to be checked or increased before issuing shares. Conversely a company may wish to retain a limit on the shares that could be issued;
5. enable directors with only one class of shares to allot shares without shareholder authority (this used to be called section 80 authority). Existing companies will still be able to rely on any existing authorities given to directors to allot shares under section 80 of the Companies Act 1985. Conversely, new companies will automatically have this power and may wish to change their articles to restrict the directors' power to allot shares. Note that directors of public companies and private companies with more than one class of share still need authority to allot shares;
6. restrict the company's ability to a) consolidate and sub-divide its shares; b) issue redeemable shares; c) buy back its shares; and d) reduce it share capital, if required. Companies were previously able to do these things with shareholder consent but only if permitted by their articles. Now this is reversed so that these things can be done simply with shareholder consent unless there is a prohibition in the articles. However, a company may wish to retain such prohibitions;
7. authorise the directors to change the name of the company rather than needing a shareholder resolution;
8. reduce the notice period for calling a general meeting involving a special resolution or an AGM to 14 days if the articles contain a longer period;
9. give directors (as opposed to shareholders) the ability to authorise 'situational conflicts' of their fellow directors. This covers situations where directors have or may have a conflict of interest with the company, particularly in relation to the exploitation of property, information or opportunity. This could arise, for example, where a director is a major shareholder, an adviser to the company or a director of a supplier. The articles could also cover how directors deal with conflicts including how they deal with confidential information in order to avoid being in breach of their directors' duties; and
10. remove reference to EGMs: the Companies Act 2006 only recognises the terms 'general meeting' and 'AGM'.

Other changes to consider include amendments to:

• remove any requirement that a director retire when he reaches 70 years. The Companies Act 2006no longer requires this limit and in fact such a limit could breach the Employment Equality (Age) Regulations 2006, especially if a director is also an employee;
• remove any provision which does not allow written resolutions to be passed by the shareholders of private companies. The Companies Act 2006 allows a written resolution to be passed by either a majority or 75% of the members depending on the type of resolution. It overrides anything to the contrary in the articles. It will be confusing if the articles require unanimous consent when this is not the case;
• ensure the rights of proxies are not restricted by the articles. The Companies Act 2006 overrides such an article if this is the case;
• ensure the chairman does not have a casting vote at general meetings unless the company had such a provision immediately before 1 October 2007, in which case it may stay;
• provide that if the company refuses to register the transfer of a share it will give reasons for its refusal within 2 months. This is a requirement under the Companies Act 2006 and overrides anything to the contrary in the articles;
• indemnify directors of companies which are trustees of occupational pension schemes against liability incurred as a result of the company's activities as trustee. This is a new ability to indemnify; and
• authorise the directors rather than the shareholders to decide how redeemable shares are to be redeemed.

In summary, changes may be required to:

• take advantage of the Companies Act 2006 to its full extent: the new law will apply automatically in some respects, but will not apply in others unless specifically adopted;
• ensure the new law does not affect the validity of any of the existing articles; and
• ensure the articles are not misleading, refer to out of date legislation or contain provisions which are now automatically overriden by the new Act.

Earlier Companies Act 2006 changes and more detail:

For a summary of some of the key changes already in force under the Companies Act 2006 and more detail on 1 October 2009 changes please see our website http://www.ashfords.co.uk/news/companies+act+2006+new+law+articles+of+association

Public Companies

In some respects the Companies Act 2006 applies to public companies as it does to private companies but there are some crucial differences. We can advise on changes that public companies may wish to make to their articles.

What next?

A company changing its articles must give notice to Companies House with a copy of the resolution authorising the change and the new articles. Changing the constitution may also require additional approvals under, for example, funding or investment agreements.

Ashfords can help with reviewing articles of assocation, implementing changes and supplying briefing notes on aspects of the Companies Act 2006.

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