At the start of the COVID-19 pandemic, we outlined the potential thoughts and considerations that businesses needed to take in relation to commercial contracts and corporate transactions.
In the present circumstances, you should also think about a less obvious matter which can sometimes be overlooked – your business’ constitution.
The Constitution for a Private Limited Company
Many of the same or similar considerations will equally apply to other types of business such as LLPs or traditional partnerships.
A private limited company’s constitution is the foundation of its business. It’s primarily based on the Company’s Memorandum of Association and Articles of Association which are sometimes supplemented with a Shareholders’ Agreement. These documents contain key governing rules on how your company should operate.
We have seen over the past 18 months how the COVID-19 outbreak has affected people all around the world and consequently brings matters such as your business’ constitution into sharp focus as we continue to look forward. There could however be many more incidents that could result in a re-assessment of your company’s constitution, such as a change of directors or shareholders or a significant increase (or downturn) in business.
Articles of Association
Your company’s Articles of Association are a public document. Anyone can download your company’s articles from Companies House online.
It is a statutory requirement that all registered companies must have a set of Articles filed at Companies House. If a bespoke set of Articles are not adopted, a set of default Articles now known as the Model Articles will be applied (previously these default Articles were known as the Table A Articles).
Memorandum of Association
Following the introduction of the Companies Act 2006 the Memorandum of Association became much less important. If you own an older company, the Memorandum set limits on what business your company could do and how it could go about doing it (known as the objects and powers). The Memorandum for older companies also set out the kind and number of shares that your company could issue.
Following the introduction of the relevant parts of the Companies Act 2006, it is no longer necessary for a company to set out objects and powers in its Memorandum. Instead, for companies incorporated after the relevant sections of the Companies Act 2006 came into force, it is assumed that they have unlimited objects and powers unless their Articles limit them in some way.
Likewise, some of the requirements concerning the shares which previously appeared in the Memorandum were relaxed and now appear in the Articles.
If you own an older company, you should consider whether any of the restrictions which appeared in the Memorandum continue to apply. This may not be obvious as, under the Company Act 2006, some of these provisions were implied into a company’s Articles. Unless you took steps to remove them, these provisions could continue to apply.
Shareholders’ Agreement
A shareholders’ agreement is optional and will usually supplement the Articles. It contains additional provisions on the governing, running and ownership of the company that the shareholders wish to keep private. Unlike the Articles, this document is not readily available to the public and there is no requirement to file it at Companies House.
A shareholders’ agreement, for example, often includes restrictive covenants to prevent shareholders from competing with or undermining the business of the company. The shareholders may not want the wider world to know what restrictions apply as they could be used by competitors to target key people once the restrictive covenant has expired.
Key Provisions to Consider
As long as the directors and shareholders follow the basic rules concerning the day-to-day running of the company, a company’s constitution will be a safety net which is only there to help out if things go wrong. From time to time, especially if there is a change in circumstances, you should review your company’s constitution to make sure it is still fit for purpose and up to date. This may be especially important as the events of the last 18 months have illustrated the potential impact of uncertain times.
Key considerations are likely to be:
Transfer of Existing Shares: are the provisions adequate in the context of the current shareholdings? Or can bespoke provisions be drafted to deal with unusual circumstances – e.g. customised pre-emption provisions to be included in either/both the Articles or shareholders’ agreement which state that the sale of any shares must first be offered to existing shareholders before being sold to anyone else.
Issue of New Shares: should the existing shareholders get a right of first refusal if the company wants to issue some new shares to prevent their shareholdings from becoming diluted?
Transmission of Shares on Death: if a shareholder was to pass away, do the Articles or shareholders’ agreement state who is to receive these shares? Can a deceased shareholder gift his shares to his family under his Will or do remaining shareholder have the right to buy them? What happens on the death of the sole shareholder and director of a company?
Board and shareholder decisions: Who can take the decisions to bind the company and how are these decisions to be made? How many directors or shareholders need to be present for a decision to be valid? Should a chairman have a casting vote? What would happen if a director or shareholder becomes incapacitated? Please see what our article on Lasting Powers of Attorney & Why Business Owners Should Have One as a possible solution to this latter issue.
Reserved Matters: Do the directors need to get the approval of the shareholders before a specified list of key decisions are made? If so, do all of the shareholders need to approve the proposal or just a specified majority? What key decisions should this cover?
This is not an exhaustive list of issues to consider.
For a confidential, no-obligation discussion on your Company’s constitution or any other issues or concerns, please contact any members of our Corporate & Commercial team on 0115 9 100 200 or click here to send an email.
Posted on January 7, 2022
