Articles of Association Explained

"Articles of Association" are the administrative rules, or constitution, of a company, defining the power and duties of the directors, shareholder rights etc. Most Articles are variations on "Table A", which is a model set of rules incorporated into the Companies Acts. Where a particular company's Articles are "silent" on any issue, then the rules in Table A will prevail.

No two company's Articles will be identical and Table A is not reproduced in full in this text. The following is therefore a brief description of the main points of interest in a typical set of Articles.

Shares

The total number and value of shares the company can issue will be stated. In modern Articles, shares will usually have a "nominal" value of £1.00 each - this is not necessarily the market value of the shares, but is the amount of money the company originally received for them when they were first issued.
There can be more than one "class" of share, each class entitling the holder to the specific rights attaching to that particular class. Different classes are appropriate if not all the shares issued are to have identical rights as to voting and dividend payment etc. If different classes of shares are permitted, the Articles should detail the rights attaching to each class and regulate the alteration of those rights.

Shares can be issued either fully, or partly "paid". "Fully paid" means the full issue price has been paid to the company and the company is due no more. "Partly paid" means only a portion of the issue price has been paid. For partly paid shares the company has a right to "call" for payment of the outstanding amount, at any time or at a time agreed when the shares were issued. In such situations, the company is said to have a "lien" on any unpaid balance on which the call has been made. If payment of the balance is refused, the shares may be forfeit. Partly paid shares will receive any dividend payable pro rata to the amount paid up.

Where justified by commercial circumstances, shares can be issued at a premium. This is an amount in excess of the par value of the share.
Once the shares have been subscribed for, the holder cannot get his money back from the company unless the shares are redeemable shares, or a reduction in capital is authorised by the court.

Transfer of shares

There are occasions when restricting the power to transfer shares would be prudent; the company may be a family business and a transfer outside the family is undesirable, or perhaps the members would like some control over who else should join them as members. These issues will be regulated in the Articles and are referred to as "pre-emption rights". The Articles will state when the transfer of shares is without restriction ("permitted transfers", normally to other family members), and what the procedure should be for all other transfers.

There are many "levels" of pre-emption rights but at their most basic, mean that shares first have to be offered for sale to the existing members. This prevents shares being transferred without the knowledge of the existing shareholders, giving them the opportunity to prevent "undesirables" becoming members by buying the shares themselves. The Articles will frequently include a valuation formula for such shares.

There may also be occasions when a transfer of shares is both desirable and compulsory, eg an employee or director, who is also a member, is required to give up his shares if he ceases to be an employee or director. Events surrounding compulsory or "deemed transfers" will be defined and regulated by the Articles.

Pre-emption rights generally give the directors an absolute veto on who should be registered as members. The market for shares in a private limited company is therefore very limited.

Pre-emption rights are a complex area requiring careful drafting in order to be most effective. Peterkins has wide experience in drafting such provisions and ensure the correct rights are included to best meet the company's needs.

General Meetings

"General" meetings are meetings of the members of the company, either of different classes of shares (class meetings), annual or extraordinary general meetings. The Articles will state who can call general meetings and in what circumstances, the procedure for convening a meeting, how many members will constitute a valid meeting and how that meeting should be conducted, including the procedure for voting. The Articles should also state what happens if insufficient members are present. In these circumstances the meeting is said to be inquorate and may have to be adjourned until a quorum is available.

Directors

Any minimum and/or maximum number of directors that can hold office at the same time will be stated together with what their powers are and how and when they should retire or cease to hold office. Provision will be made concerning directors' remuneration and expenses and any outside interests they might have including what should happen if these interests are in conflict with the interests of the company.

Directors are not expected to be experts in every field and a company may frequently effect Directors Errors and Omissions Insurance.

Board Meetings

The Articles state the procedure for meetings of directors. Issues addressed include how many directors should be present, who should receive notice of forthcoming meetings, appointment of a chairman, what happens if any director is repeatedly absent from meetings and how decisions are made and recorded. Provision for meetings held by electronic means, ie tele/video conferencing, should be made.

Miscellaneous

Good Articles will cover many other aspects of the company's administration. They may help prevent disputes arising amongst and between directors and shareholders and, if disputes do arise, may help to resolve matters.