What are the benefits of my company updating its memorandum and articles of association in light of the Companies Act 2006?
The Companies Act 2006 (“the Act”) has overhauled and consolidated company legislation in the UK. The Act was drafted with the intention of reducing the amount of red tape imposed upon companies. One of the key changes in the Act will be the creation of new model articles for both private and public companies incorporated after 30 September 2009. The new model articles, together with the accompanying provisions of the Companies Act 2006, offer new freedoms to companies and will make a significant difference to the day to day bureaucracy that a company must comply with. In addition, a company incorporated under the Act will no longer need to have an objects clause in its memorandum of association. This will allow the company to evolve and to move into different industries without the need to amend its memorandum, something that has often been overlooked by directors in the past.
The effect of the Act
Companies that were incorporated under former companies legislation will not automatically have their articles and memorandum amended by the Act, either now or when the new model articles are introduced on 1 October 2009. This means that if a company wishes to take advantage of some of the benefits provided by the Act, it is necessary for the company to make amendments to its articles and memorandum. While making changes to the memorandum and articles will require the company to pass a special resolution, the time and money saved by the company (and its members) going forward, will pay dividend.
Benefits
There are some advantages from the Act that will come into force, irrespective of whether a company amends its articles of association, for example:
• Currently, for a private company to pass a written resolution, all the members of the company who are entitled to vote on the issue must sign the resolution. The law now only requires the requisite number of votes to be cast in order to pass the resolution, being 50% of the votes for an ordinary resolution and 75% of the votes for a special resolution. This should avoid the need to convene a meeting to pass shareholders resolutions, except where the resolution is one to remove a director or the auditors, where a meeting must still be convened.
The main advantages to a company amending its articles now are:
• The required notice for a general meeting has been reduced to 14 days, whereas previously it was necessary to give 21 days notice of a meeting convened to consider the passing of a special resolution. Often the articles of a company state that a minimum of 21 days notice must be given in order to pass a special resolution, in which case it will not be possible for the company to take advantage of the reduced notice time, without first amending its articles.
• A private company need no longer hold an AGM, but the articles of the company must be reviewed to check that there are no provisions which require the company to hold an AGM. If the articles state that an AGM does need to be held, then the articles will need to be revised in order to take advantage of the change. This change in the law will be of particular benefit to small family run companies that do not need to meet to discuss the business of the company on an annual basis.
• The articles can now allow the directors of a company to authorise a conflict of interest of one or more members of the board of directors. The articles can specify the circumstances within which the directors may authorise a conflict of interest (say, for transactions with a value of less than £X) or they can give a blanket authority to cover all potential situations where a director may have a conflict of interest. At present, if the articles do not authorise the board to approve such conflicts of interest, it will be necessary for the members of the company to pass a special resolution. This can be expensive, time consuming and may delay a proposed transaction by the company.
• It is now possible for a company to change its articles to allow it to communicate with shareholders by electronic means (being by email or using the company’s website). This is likely to be of most benefit to public companies who have a large number of shareholders, but it will help save all companies time and money. Shareholders are still entitled to receive communications in hard copy, if they so request.
There are a few provisions that come into force on 1 October 2009. A company will not be able to make these amendments until after 1 October 2009:
• The articles of a company may allow the board of directors to make decisions in a more informal manner and without the need to hold meetings. The articles can also state which type of decisions require unanimous approval and which decisions can be made by a majority.
Share capital
The Act gives the directors of a company the authority to allot an unlimited number of shares in the company and, for private companies, shareholder approval for share issues will no longer be necessary where a company has only one class of shares.
However, as the articles of a company incorporated prior to 1 October 2009 will state the maximum authorised share capital of a company, this will act as a “restriction” on the new relaxed statutory “default” provision. It will therefore be necessary for the maximum authorised share capital provisions to be removed from the articles if the company wishes to take advantage of this relaxation of the law.
Shareholders will continue to be protected by rights of pre-emption which may be contained in the articles. Such rights will allow shareholders an opportunity to prevent their shareholdings from being diluted.
How are changes made to the company’s articles and memorandum or association?
Making changes to a company’s articles and memorandum is simple and quick. Lawyers will usually draft the articles and then they will be adopted by a special resolution of the company or, in the case of private companies, it is possible to use the written resolution procedure (which, as stated above, does not now require the unanimous consent of all shareholders, merely the 75% required to pass a special resolution).
When should my company have its articles reviewed?
If the company amends its articles now, then in order to take advantage from the further changes coming into force on 1 October 2009, it will need to amend its articles a second time on or after 1 October 2009. The directors will therefore need to consider whether the benefits obtained over the first nine months of 2009 justify the time and cost incurred in amending the articles twice. Many directors will consider it worth waiting until after 1 October 2009 and then making all amendments to the articles at the same time. An alternative is to instruct lawyers now to prepare two sets of articles. The first set will take advantage of the benefits that are already available under the Act. These will take effect immediately. The second set of articles will incorporate the additional benefits that will become available from 1 October 2009. The company will then need to pass a special resolution on or after 1 October 2009 which adopts the second set of articles. Proceeding in this way will allow the company to take full advantage of all the available changes without instructing lawyers on two separate occasions.
Fox Williams’ corporate team are well placed to assist the board of directors with amending the articles and memorandum of your company. If you would like to discuss this or any other matter then please contact either James Daughtrey on +44 (0) 20 7614 2597, jdaughtrey@foxwilliams.com or Paul Taylor on +44 (0) 20 7614 2512, ptaylor@foxwilliams.com
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