A Memorandum of Association (Memorandum) and Articles of Association (Articles) are the backbone documents required when incorporating a company. In order to comply with the Companies Act (CA) 1996 these documents must be prepared and filed with Companies House.
In this article we will explain the purpose of the Memorandum and Articles and how they must be drafted.
What is a Memorandum of Association?
Section 7 of the CA 1996 states:
7 Method of forming a company
(1) A company is formed under this Act by one or more persons:
- subscribing their names to a memorandum of association (see section 8), and
- complying with the requirements of this Act as to registration (see sections 9 to 13).
(2) A company may not be formed for an unlawful purpose.
Section 8 goes on to state that the Memorandum must declare that the subscribers:
- Wish to form a company under the CA 2006, and
- Agree to become members of the Company and if the Company has share capital, take at least one share each.
This is the beginning and end of what a Memorandum must contain. In the past, details regarding the purpose of the Company and addresses of registered offices were required, but these now sit in the Articles.
The Memorandum must be on the correct form and signed by all subscribers. Interestingly, the CA 2006 does not restrict who can be a subscriber, who may therefore be a bankrupt, a minor, and/or an incorporated company if it has the requisite power [Palmer’s Company Law (Sweet & Maxwell), at paragraph 2.903)]. Forming a company requires only one subscriber, who needs to subscribe only to one share to comply with the CA Act 2006.
Note – It is against Companies House policy to allow joint subscribers on a Memorandum for a company limited by shares. A married couple must therefore put their names and signatures separately, otherwise the one share requirement under section 8 of the CA 2006 would be compromised.
A company limited by guarantee is also not permitted to have joint subscribers.
Subscribers of a private company with share capital do not need to pay anything for their share/s unless such payment is called for. However, in the case of a public company, section 586 of the CA 2006 provides that, unless the shares have been allotted under an employees’ share scheme, all subscribers must pay a minimum of one-quarter of the nominal value and all of the premium in cash.
Note – Once the Memorandum is filed at Companies House it cannot be amended or updated during the lifetime of the Company.
Anyone who adds their name to the Memorandum during incorporation will become a member of the Company and will continue to be a member until they resign. Details of members will be made public on the Companies House website under the company details.
Do I need to set out the objectives of the Company in the Memorandum?
As stated above, the Memorandum needs to contain only minimal information. Under the Companies Act 2006, your organisation’s objectives will be unrestricted unless the Articles limit them in some way. If your Company was incorporated before 2006 then restrictions on objectives can be removed by amending the Articles. The Registrar must be notified of any changes and no amendments will be recognised until they are registered at Companies House.
What are Articles of Association?
A company’s Articles are a fundamental constitutional document. They provide for the regulation of the Company and form the basis of the statutory contract between the members as a group and between individual members and the Company.
Every Company must have Articles. A company may choose to use the Model Articles, which can be adapted if required.
What should be contained in a company’s Articles?
Model Articles exist for:
- Private companies limited by shares
- Private companies limited by guarantee
- Public companies
The Model Articles for companies limited by shares are divided into five parts, covering:
- the limited liability of shareholders;
- shares and distributions;
- decision-making by shareholders;
- administrative arrangements.
The model articles for private companies limited by guarantee comprise four parts, dealing with the:
- limited liability of members;
- administrative arrangements.
Note – In 2013 the Model Articles were amended by section 3 of the Mental Health (Discrimination) Act 2013. That Act revoked article 18(e) of the Model Articles, which stated that a person would automatically cease to be a director upon a Court order that “wholly or partly deprived a person from personally exercising any powers or rights which that person would otherwise have”. Therefore, if a company is incorporated on or after 28 April 2013 then its model articles will not include model article 18(e) unless the Company chooses to insert a comparable provision. Companies incorporated before that date should consider removing article 18(e). This is because, unless the Company can justify that article’s inclusion by arguing that doing so is a proportionate means for achieving a legitimate business aim, then to include it may be seen as discriminatory under the Equality Act 2010.
If you change certain provisions of the Model Articles then you must inform Companies House when applying for incorporation so the changes can be checked for compliance.
Changing Articles after incorporation
Under section 21 of the Companies Act 2006 the general rule is that a company can amend its Articles by special resolution. Members need to pass the special resolution agreeing to the changes and the altered document must be presented to Companies House within 15 days of the resolution being passed.
There are exceptions to the general rule, including:
- Articles cannot be amended to require a member to take or subscribe to more shares than they had at the date of the amendment or to increase the Members’ liability to contribute to the Company’s share capital or to pay money to the company for some other reason unless they give written consent.
- Section 21 does not apply to a provision of the articles of a company formed and registered under the earlier Companies Acts that were not capable of being amended by special resolution immediately before 1 October 2009.
- The fact there is no provision for entrenchment is presumed [see below].
- It is subject to certain charity legislation rules regarding the ability to change the Constitution.
What is entrenchment of Articles?
Entrenchment of Articles means that members can adopt a special clause making it harder to pass a resolution. Instead of simply being able to pass a resolution following a majority vote, additional provisions and procedures can be added that must be met.
Under section 23 of the Companies Act 2006, if you wish to include entrenchment provisions in your Company’s articles then notice must be given to the Registrar. The same applies if any provisions regarding entrenchment are to be removed. Furthermore, if your Company’s articles are subject to provision for entrenchment or to a Court – or other – order that constrains or eliminates the ability of the Company to amend its Articles, and its Articles are subsequently amended, a Statement of Compliance in accordance with section 24 of the Companies Act 2006 must be sent to the Registrar notifying them of the change.
The provisions in sections 23 and 24 of the Companies Act 2006 are in place to ensure that the Registrar and any person who searches the public register is aware that the Articles contain entrenchment provisions, wherefore special procedures must be followed for a resolution to be adopted.
The importance of carefully drafting the Memorandum and Articles of Association
A Company’s Memorandum and Articles of Association are the main framework documents to which all of its policies and procedures link back. When incorporating your Company it is important to ensure that the Articles are drafted meticulously, since any ambiguity could give rise to a dispute. As an example of what can happen if care is not taken when drafting the Articles, see Sugarman v CJS Investments LLP & Ors  EWCA Civ 1239. In this legal case the Court of Appeal ruled that the Articles should be interpreted as written, despite the fact that members who owned multiple flats and therefore held the majority of shares in the company were permitted only one vote, which meant that they could be routinely outvoted by the remaining flat owners who only owned one flat.
To avoid any dispute over the interpretation of your Company’s articles we at Uniwide Formations Ltd can provide very well prepared standard articles which will cover the needs of nearly all companies that are registered through our firm.
If you think, however, that there may be good reasons why the particular company that you wish to register may need different, specially writted articles then we would recommend that you seek professional advice from a company such as Uniwide Formations Ltd. that specialises in company registration and/or a Solicitor with the relevant expertise.
Uniwide Formations Ltd specialises in the registration of limited companies and LLPs. As professional business service providers we offer a wide range of related services and can advise you on all aspects of creating and drafting a Memorandum and Articles of Association. You are most welcome also to call us to discuss any of the points raised in this article.