Companies Act 2006: Do my articles need updating? - August 2009
Does my company need to update its articles?
This bulletin focuses on how changes introduced by the Companies Act 2006 (”the 2006 Act”) impact on the articles of association of a company which was formed before 1 October 2009 (”an Existing Company”) and why such a company might wish to review and amend its articles. Caroline WilliamsConstitution
Shares and share capital
Company names
Company officers
General meetings and resolutions
Reasons to review - a summary:
Does my company need to update its articles?
An Existing Company may continue to operate after 1 October under its existing constitution. The existing articles will remain in force to the extent that they are not overridden by any provision of the 2006 Act. There will no longer be a memorandum of association as such and provisions previously in this document will be treated as provisions of the articles. This means that the powers or “objects” of the company will be treated as provisions of the articles restricting the company’s business activities. However, it is no longer necessary for a company to set out its objects, and if a company wishes to remove any restrictions, it can do so by amending or adapting its articles.
Shares and share capital
Authorised share capital
From 1 October, the authorised share capital will be regarded as a cap on the number of new shares the company may issue. The restriction can be lifted by removing the authorised share capital provision, either by ordinary resolution or by adopting new articles.
Allotment of shares
From 1 October, the directors of a private company with only one class of shares will no longer need shareholder authority to allot new shares, provided that there are no conflicting provisions in the articles. This provision will apply automatically to companies incorporated on or after 1 October 2009, but Existing Companies will need to pass an ordinary resolution to take advantage and to check there is nothing in their articles which would prevent directors exercising the power. Where Existing Companies already have authorities in place, these will be treated as continuing under the 2006 Act until their expiry date. For all other companies, an authority to allot will need to be obtained.
In addition to the above power, directors of private companies with one class of shares can be authorised by its articles (or by special resolution) to allot shares as if pre-emption rights do not apply.
Alteration of share capital
At present a company must have specific authority in its articles to make certain alterations to its share capital, for example redemption of shares. From 1 October the position is reversed - so that if the articles say nothing then the company is deemed to have the authority to make the alteration (although it may still need shareholder approval by ordinary, or in some cases special, resolution). This applies, for example to purchase of own shares, reduction of capital. Companies which do not want the ability to alter its share capital in various ways must make sure this is clearly prohibited in its articles.
From 1 October a company will be allowed to change its name by means other than a special resolution, which is currently required. The procedure for doing so must be set out in its articles.
Directors conflict of interest
Directors now have a duty to avoid situations which conflict with the company’s interests. The duty casts a wide net and is relatively easily infringed. However the duty is not infringed if the matter has been authorised by the directors. The directors of a private company incorporated on or after 1 October 2008 have an automatic power of authorisation unless the articles contain conflicting provisions, but companies incorporated prior to this date need either to pass an ordinary resolution or amend their articles to take advantage of this power. The articles may also contain provisions which provide a “safe harbour” against infringement of a director’s duties for a director who acts in accordance with provisions.Companies might wish to review and if necessary amend their articles to make sure that the provisions dealing with directors’ conflicts of interest are clear, remove any provisions which would prevent the directors from taking advantage of the provisions of the 2006 Act and include safe harbour provisions.
Company Secretary
Since 6 April 2008, private companies no longer need to have a company secretary, subject to contrary provisions in their articles.
General meetings and resolutions
Notice period of general meetings
The notice period required for a general meeting is now 14 clear days for any type of resolution (except for meetings called to deal with the removal of auditors or directors). Companies should check to see if their articles specify the longer period previously required by Table A and the Companies Act 1985, as such provisions will override the 2006 Act.
Private companies may now hold shareholder meetings on short notice with the consent of a majority (in number) of shareholders holding 90% or more of voting shares. This is a reduction from the 95% previously required, but is subject to any higher percentage (not exceeding 95%) specified in the articles. A company may wish to amend its articles to take advantage of the reduced threshold.
Written resolutions
Since 1 October 2007, private companies have in most circumstances been able to pass written ordinary resolutions by a simple majority and written special resolutions with a 75% majority of those eligible to vote. These provisions override anything in the company’s articles, so companies should consider removing any conflicting provisions to avoid confusion.
Proxies
The 2006 Act allows a member to appoint a proxy to exercise any of his rights to attend, speak and vote at a meeting - previously the proxy was only allowed to vote on a poll, and a member of a private company could not appoint more than one proxy to attend on the same occasion. The rights of proxies under the 2006 Act override any conflicting provisions in a company’s articles.
AGM
Since 1 October 2007, private companies no longer need to hold an AGM unless required to do so by their articles.
Reasons to review - a summary:
•Provisions of the articles may have been overridden by the new Act, misleading directors or members as to their rights and obligations. For example :
• provisions relating to written resolutions, proxies
• If companies want to restrict the subdivision/consolidation/redemption or repurchase of shares, they will have to provide for this expressly in their articles
• A company can take advantage of the “safe harbour” allowed by the Act in relation to directors conflicts of interest by including appropriate provisions, including giving independent directors the ability to authorise conflict situations.
• The company may wish to take advantage of provisions of the Act, such as the allotment of shares without the need for shareholder approval or regard for pre-emption rights or the ability to change name other than by special resolution
• The company may wish to remove obsolete references eg references to AGMs, extraordinary meetings, company secretaries, which are no longer required.
Does my company need to update its articles?
There is clearly no legal requirement for an Existing Company to change its articles as a result of any of the 1 October 2009 changes. The articles of a company incorporated under the 1985 Act (or earlier companies acts) will remain in effect but, subject to limited exceptions, the 2006 Act will override inconsistent provisions. Where the articles refer to a section number of the 1985 Act which has not materially changed, the articles will
usually operate as if the reference were to the relevant section in the 2006 Act.
However, we recommend that companies should review and update their articles of association to take advantage of new powers and remove any misleading provisions or outdated restrictions.
Please contact us if you would like us to undertake a review of your company’s articles. For most companies based on the current Table A articles, the cost will be in the region of £200 - 400, although the cost will be higher for companies with more bespoke articles.
This update is only a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist advice should be sought from a member of Freeth Cartwright in relation to any queries that may arise.
If you would like further information, please contact:
Caroline Williams
0115 934 3986
caroline.williams@feethcartwright.co.uk
or your usual contact at Freeth Cartwright