What are articles of association? Model articles, bespoke articles and how to amend them

Every director and shareholder of a UK company is bound by its articles of association, yet many have never read them. The articles are the company's internal rulebook: they say how shares are transferred, how new shares are created and how the directors must behave. If you have never amended them, you have the model articles that Companies House generates on incorporation. You can change them, but only by special resolution, and one of the reasons to do so is that a well-drafted article can stop other shareholders removing you as a director.

Articles of association and the model articles

Articles of association are sometimes described as the bylaws of a company. They dictate how the company is to be run and include rules on, for example:

• how to transfer shares;
• how to create new shares; and
• how the directors are to behave.

If you are a director in the UK, you are bound by the articles of association even if you never created them yourself. That is worth pausing on. A director who joins a company years after incorporation is bound by rules written by someone else, so reading the articles is part of understanding the job.

If you have never amended your company's articles, you have the model articles. These are the standard articles generated through Companies House when a company is incorporated without uploading its own. They are published on GOV.UK, and if you have never read them, that is the place to start.

Why have bespoke articles of association?

Some companies prefer to amend their articles to create a bespoke set. In my experience there are two main reasons.

• Flexibility. Bespoke articles let you make the company's rules reflect how the business is actually run. For example, you might want to create different classes of shares for different types of shareholder, with different rights attached to each.
• Control. If you are an investor in a company, you might want the articles changed so that certain decisions can only be made by you, or with your consent. The articles are where that control is written down and made binding on everyone.

The model articles are a one-size-fits-all document. The moment a company has more than one type of shareholder, or someone whose position needs protecting, they tend to stop fitting. That is usually the point at which a company moves to bespoke articles, and it is better done deliberately than in a hurry.

Bushell v Faith clause: protecting directors

Here is the situation I see often. You are currently the sole director and shareholder of your UK company, and you are considering bringing in more directors or shareholders. Once other people hold shares, there is a risk that they could combine to remove you as a director of your own company.

In that situation I advise clients to include a Bushell v Faith article in the articles of association. This article gives you, as a director and shareholder, the ability never to be removed from the company as a director. In practice it works by ensuring that, on any vote about whether to remove you as a director, you as a shareholder always have enough votes to decide the outcome. The other shareholders can vote however they like; you cannot be outvoted on that one question.

It is far easier to put this protection in place before new shareholders arrive than to negotiate it afterwards, when the people you want protection against are the ones who have to approve the change.

How to amend articles of association

When amending the articles of association, you must comply with the Companies Act 2006. The Act requires any change to the articles to be passed by a special resolution, which is a decision of the shareholders requiring at least 75% of the shareholders to be in favour.

So the steps are, in outline:

• Draft the amended articles, or the new article you want to insert.
• Put the change to the shareholders for a special resolution.
• Obtain at least 75% in favour. If that threshold is not met, the articles do not change.
• File the change at Companies House so that the amended articles are on the public record.

Special resolution vs written resolution

If there are several shareholders in your company, you may want to consider passing the special resolution as a written resolution rather than at a meeting. It can be quicker, because you do not need to give notice of a meeting and people do not need to attend in person. The resolution is circulated, the shareholders sign it, and once the required majority has signed, it is passed.

Where you are the only shareholder, the formalities are light either way. Where there are several shareholders, the written resolution usually saves time and removes the need to get everyone in the same room.

Next steps

Read your current articles, whether they are the model articles on GOV.UK or a bespoke set filed at Companies House, and check whether they still reflect how your company is run. If you are about to take on new directors or shareholders, consider adding protection for your own position before they arrive. Changes need a 75% special resolution and a filing at Companies House, so speak to a corporate solicitor about the drafting before you put anything to a vote.