What are Articles of Incorporation and why do they matter?

Setting up a company in England and Wales starts with paperwork that protects you, your company and your investment. As a business owner, you need written clarification on how to run the company to protect yourself and ensure smooth operations. 

This article explains what Articles of Incorporation are, why they’re important, the different aspects, and how to draft them. 

For tailored advice on setting up a company, contact Helix Law today. 

What are Articles of Association?

Articles of Association (AoA), or Articles of Incorporation, are written rules that address various aspects of running a business. Under Section 18(1) of the Companies Act 2006, a company must have AoA. When individuals form a company, it becomes a separate legal entity. The AoA, therefore, represent the legal agreement between the company and its shareholders. 

The shareholders can choose from the Model Articles or prepare bespoke articles.. The Model Articles are a pre-written standard set of rules, and different ones apply depending on whether the business is:

• A private company limited by shares;
• A private company limited by guarantee; or
• A public company. 

If you use Model Articles without changes, you don’t need to file them. If you tailor them, you must register your Articles at Companies House as a single document containing consecutive numbered paragraphs. 

The Importance of Articles of Association

There are various reasons why having AoA is so important, including:

• Legal compliance: Without valid AoA, your company isn’t properly constituted. The AoA also provides a legal framework for the business’s operations, reducing the risk of disputes and regulatory breaches.
• Governance: The effective running of a business depends upon the people involved understanding their roles and responsibilities. 
• Investment: A clear and well-drafted document is more likely to attract external investors who want to feel confident that there’s full transparency and effective management. 
• Shareholder rights: The AoA addresses shareholder voting powers and dividend entitlement. The rules can also help protect minority shareholders with fewer powers by requiring their consent to certain decisions. 

The AoA forms the company’s foundation, so it must be adequately drafted and address the relevant issues. 

Understanding Articles of Association

To ensure the AoA are effective, they must deal with the following. 

Classes of Shares

It should clarify what types of shares the company can issue in future. The class of shares and the interest of each member directly affect voting powers and dividends.

Company Resolutions 

Resolutions are company decisions and must follow certain formalities to pass. The AoA should specify voting procedures, record keeping, and the process for calling a resolution. Under UK law, there are two main types of resolution:

• Ordinary: These require votes of over 50% in favour of a resolution to pass. They apply to routine decisions such as approving annual accounts or increasing the business’s share capital. 
• Special: These require votes of over 75% to pass. They are reserved for more significant decisions, such as amending the AoA or winding up the company. 

The standard position in the Model Articles requires only an ordinary resolution for company decisions, so members must amend them accordingly to incorporate any special resolution requirements. 

Director Appointments

The AoA should highlight how the company will appoint and remove Directors, and whether there are any restrictions on who can take on the role. 

Usually, a company appoints new directors through an ordinary resolution, but the AoA must state if it requires a special resolution.

Director’s Responsibilities 

Identifying each director’s role and responsibilities ensures the business operates smoothly. Directors are legally obligated to act in the company’s best interest, so the AoA can set guidelines to help them comply with this duty. One example is that they must declare any personal interest in a proposed business transaction. 

The AoA should clarify what decisions directors can make independently and what they need shareholder approval for.

Shareholder Rights and Liability 

The AoA must identify how and when the company will distribute dividends to its shareholders if it declares them. Some members may also have pre-emption rights, which give them priority in purchasing new shares before the company issues them to an external investor. These rights can be a valuable tool to prevent dilution of ownership, so it’s essential they’re highlighted in the AoA if applicable. 

Shareholders generally have the right to transfer their shares to another party, but the Articles should highlight if there are any restrictions. 

Frequently Asked Questions

How Do I Get My Articles of Association?

Companies can access the Model Articles on the gov.uk website. However, to ensure the document addresses the business’s specific needs, it’s advisable to ask a solicitor to review it and make any necessary amendments. Once registered, it becomes a public document available on Companies House. 

What Is the Difference Between Articles of Association and Memorandum?

The Articles are the written rules governing the business’s operations, agreed to by the shareholders, directors and company secretary. The Memorandum is a legal statement signed by the founding shareholders that confirms basic details about the company, including its name and purpose. Together, the documents form the company’s constitution and must be registered to become a legal entity. 

Final Thoughts

Correctly drafted AoA reduce risk, speed up decisions, and help you grow with fewer headaches. They define how you vote, invest, appoint, remove, pay, and protect.

Our specialist commercial litigation team litigate boardroom disputes between directors, and shareholder disputes including unfair prejudice. Reviewing, assessing and accurately analysing the position in relation to core items such as Articles of Association, are fundamental to our work in this area. We work nationally including in disputes where share values range from tens of thousands to tens of millions. We are well placed to assist you. Contact our expert team today and we will be happy to assist you.