When setting up a company, it is normal to focus on the business you will be undertaking, and the industry demands that lie ahead. Constitutional documents soon fall to the bottom of your priority list and inevitably, standard precedents are adopted.
So, why bother with switching to a more tailored set of ‘rules’?
Every private and public company formed in the UK is legally required to have articles of association at the time of incorporation. These govern the relationship between a company and its shareholders and are usually supplemented in this role by shareholders’ agreements.
Articles of association are publicly available documents which set out the management and administrative structure of a company. They can include provisions concerning allotments of new shares, transfers of shares, board, and shareholder meetings.
Model articles of association
Often, companies will adopt template model articles provided by the Companies Act 2006. These can act as a good starting point for companies because they set out the management and administrative structure of the business.
However, model articles may not always be suitable, so it is important to check the provisions upon incorporation.
A shareholders’ agreement is a private, ‘behind the scenes’ agreement between directors and shareholders of the company. Several pitfalls can arise if no shareholders’ agreement exists, but if drafted appropriately, it can benefit the running of your company and provide solutions for situations that may arise in the future.
Unlike articles of association, there is no ‘standard’ form of shareholders’ agreement; it can be drafted to fit the shareholders’ and the company’s needs. If this is done without reviewing your company’s articles, however, contradictions between the two documents can emerge.
Setting your own rules
If the model articles in place don’t work for your company, or the needs of your company have changed over time (i.e. new shareholders have come on board or the founders are deciding to take a step back from day-to-day management), then it would be prudent for the articles of association to be reviewed and possibly amended, to better suit the needs of the company.
Having a bespoke set of articles which are practical and align with the company’s shareholder agreement will help to prevent inconsistencies in future. So, whether you are a small company with two shareholders or a large company with many, it may be time to dust off your constitutional documents.