A Memorandum of Association (Memorandum) and Articles of Association (Articles) form the essential documents required when incorporating a company. One must prepare these documents to comply with the Companies Act (CA) 1996. They must also be filed with Companies House. In this article we will explain the purpose of the Memorandum and Articles. Additionally, we will discuss how they must be appropriately 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 take at least one share each if the Company has share capital.
This is the beginning and end of what a Memorandum must contain. Previously, the Company had to provide details regarding its purpose and the addresses of its registered offices. However, these now sit in the Articles of Association.
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 also cannot have joint subscribers.
Subscribers of a private company with share capital need not pay for their shares unless the company calls for such payment. In contrast, section 586 of the CA 2006 sets specific rules for a public company. If the company has not allotted the shares under an employees’ share scheme, all subscribers must pay at least one-quarter of the nominal value. Additionally, they must pay 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. The Companies House website will publicly display member details under the company information.
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 you incorporated your Company before 2006, you can remove restrictions on objectives by amending the Articles. You must notify the Registrar of any changes. Moreover, Companies House must register the amendments before they are officially recognised.
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 and can adapt them if required.
What Should a Company’s Articles of Association Include?
Model Articles exist for:
- Private companies limited by shares
- Private companies limited by guarantee
- Public companies
The Model Articles for companies limited by shares divide into five distinct parts. These parts cover:
- 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, you must inform Companies House when applying for incorporation. This process enables a compliance check for the changes.
Changing Articles of Association after incorporation
Under section 21 of the Companies Act 2006, a company can amend its Articles by special resolution. Members must pass a special resolution to agree to the changes, and they must present the altered document to Companies House within 15 days after passing the resolution.
There are exceptions to the general rule, including:
- The company cannot amend the Articles to require a member to take or subscribe to more shares than they held on the amendment date. Additionally, the Articles cannot increase the members’ liability to contribute to the Company’s share capital without their written consent. The company also cannot amend the Articles to require members to pay additional money for any other reason without receiving written consent from the members.
- Section 21 does not affect a provision in the articles of a company that was formed and registered under the earlier Companies Acts. A special resolution could not amend these provisions 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 the entrenchment of Articles?
The entrenchment of Articles means that members can adopt a special clause making it harder to pass a resolution. Instead of simply passing a resolution with a majority vote, a company can add additional provisions and procedures that it must meet.
Under Section 23 of the Companies Act 2006, you must give notice to the Registrar if you wish to include entrenchment provisions in your Company’s articles. The same rule applies if you want to remove any entrenchment provisions. Furthermore, if a court order or other order constrains or eliminates your Company’s ability to amend its articles, and you subsequently amend the articles, you must send a Statement of Compliance to the Registrar. This statement, in accordance with Section 24 of the Companies Act 2006, notifies the Registrar of the change.
The provisions in Sections 23 and 24 of the Companies Act 2006 exist to keep the Registrar and any public register searcher informed. They indicate that the Articles contain entrenchment provisions, and therefore special procedures are necessary for adopting a resolution.
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 draft the Articles meticulously. This careful attention reduces the risk of ambiguity, which could lead 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 company must interpret the Articles as written. Despite holding the majority of shares in the company through ownership of multiple flats, members received only one vote. This voting structure meant that single flat owners, with fewer shares, could routinely outvote those with majority shareholdings.
To avoid any dispute over the interpretation of your Company’s articles, we at Uniwide Formations Ltd can provide meticulously prepared standard articles. These articles will meet the needs of nearly all companies that register 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.