Setting up the structure of your new company
The Companies Act 2006 prescribes a "model" set of articles of association. Although most new companies adopt these by default when they are incorporated (often because it is easier to adopt the standard rather than write your own beforehand), no company is obliged to do so.
The model set was written as an example of what a company might have as articles and as a safety net for any shareholders wanting to incorporate without fuss. They certainly provide useful guidance. But most private companies should change. The model articles of association are a starting point not as a recommendation.
The reason is explained in more detail here, but in short, company owners need to agree how things will be done in a given set of circumstances before the company finds itself in that situation. So you should decide how you want to structure and operate your business and record it in the company's articles as early as possible.
It does not matter what trade or business you want to use your company for. Your company's articles set out the way you operate it, the role of directors, and who is really in control. It is essential at this time that you also create an private agreement between the shareholders that covers how decisions are made by owners, as well as other matters.
Decide on your starting point
At the time of incorporation of a company you have three options:
- adopt and leave in place the model articles - the default if you choose neither of the other two options
- edit the model articles so that they suit your company
- draw a new set
The most efficient way forward is also the easiest: take the third option and buy a ready-drawn set suitable for your company and the structure you want.
Be aware of the default application of model articles
If you draw your own articles and unintentionally leave some matters silent, then the model articles comes into picture and automatically be applied to plug any gaps in your articles.
Depending upon the situation it may be beneficial, or it may be rigid for your company. The following is what the law says about the "default application" of the model articles (section 20(1) Companies Act 2006).
- If your articles are silent about the casting vote at the directors’ meeting, then by application of the model articles, the chairman will have the casting vote.
- If you do not mention in the articles who will determine the directors’ remuneration then the model articles allow the director himself to set it. You are unlikely to want the directors to have this power.
- If your articles do not fix the quorum at general or directors’ meeting - it is just two people.
To cater for such problems, you may include an “excluding provision” in your company articles. This provision should be worded so as to exclude the application of the model articles to the fullest extent. But note, by having such a provision, you can avoid the process under the model articles but you cannot deviate from, or override, the law.
What you need to change?
This following should give you ideas as to what to change in the broad structure. However, there will also be finer points.
- Different classes of shares
The majority of new companies need no more than a very simple share class structure consisting of a round number of ordinary shares of £1 each.
If you do want different classes of shares, you should put them in place now, because the different rights you attach to them will affect other clauses within the articles. For example, "employee" shares may well have different rights to “founder” shares.
- Who may be a shareholder
Unless the articles say otherwise, any shareholder may transfer some or all of his shares to some other person. That other person could be someone’s aggressive niece, or a complete stranger, or maybe another shareholder, who now controls the company and wants you out!
The transfer provisions in the model articles are very broad. You should draw articles to deal with the questions of how shares can be transferred, to whom and under what circumstances. Remember that the Companies Act 2006 lays down the law as to what can be done through the articles. When you want to make an arrangement with specific people who are now shareholders, or to cover the detail of any situation, you should always use a shareholders’ agreement.
Books have been written about “exit strategies” and we cannot cover it in a few words, but your starting point must be to consider what restrictions should be placed on all or specific shareholders. This subject is covered more fully in share transfers and exit strategies.
- A shareholder-director will want personal control
If your business model is for a single shareholder-director effectively to control the company without interference, your company articles will require many small changes to make that easy.
- Increasing shareholders protection
An alternative model to the autocratic shareholder director is for two or more people to operate the company together, as both directors and shareholders. In this case, the company structure must provide for fully democratic control and decision-making. For example, the appointment, removal and pay of directors should be subject to the shareholders’ consent.
- General meetings
A private company is no longer required to hold an annual general meeting There is, therefore, no provision made for AGMs in the model articles on the assumption that most small private companies will take advantage of this change in the law. However, there are advantages in calling the shareholders together once a year to vote at one time on whatever important issues will affect the company in the near future. So, if you want your company to hold annual general meetings, you may provide for it.
So, in summary, if possible, set up your articles in a form that will last for at least a few years.
Then use a shareholders’ agreement for all the detail. You may like to read about shareholders’ agreements here.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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