Every company is required to have some form of articles of association to act as the ‘official rule book’ of the company; whether the company adopt bespoke articles or the Model Articles.
The Model Articles for a private company limited by shares are contained in Schedule 1 of The Companies (Model Articles) Regulations 2008 SI No. 3229 as amended by the Mental Health (Discrimination) Act 2013. These were preliminary designed for use of small companies and constitute the default provisions for companies incorporated on or after 1 October 2009 should a company refuse to register with bespoke articles. However, with 170,143 companies incorporated within the first quarter of this year, it begs the question “do business owners understand the implications of the model articles?”
There are three sets of model articles: one for private companies limited by shares, one for companies limited by guarantee and one for public companies. For simplicity here, I will be commenting on the Model Articles for private companies limited by shares. Let’s run with this scenario: Bill and Ben have skipped down to Companies House and incorporated “Bill & Ben’s Gardening Limited”. Having been in a rush to get started and not knowing much about articles of association, they have adopted model articles.
Model Article 11(2)
Bill & Ben’s Gardening Limited has been running smoothly for 6 months now. Bill has a great idea for a motorised trowel but Ben is not so keen to enter into a contract with a trowel supplier for Bill’s experiments. Having incorporated with the model articles, Model Article 11(2) states that the quorum for directors’ meetings is 2. Ben decides the best way to not be swayed by Bill’s sweet talk is to not show up for the board meeting scheduled to discuss the idea, and Bill is without any recourse to avoid the blockade Ben has imposed.
Model Article 14
After much persuasion, Ben has come around to the idea of the motorised trowel. Bill’s delighted, and he has worked out he can get extra money on the side if he can supply the batteries to the company that go into the trowels and Bill agrees. They hold a board meeting to note the transaction, but Model Article 14 states that a director with an interest in a proposed transaction cannot vote or count in a quorum. Again, Bill and Ben are blocked by the company’s rule book from carrying on in business. They will now have to ask their shareholder and holding company “Flobaboba Inc” for permission to dis-apply this provision.
So, Flobaboba Inc have passed an ordinary resolution to dis-apply Model article 14, allowing Bill to vote and count in a quorum. The board meeting is scheduled for this afternoon, but last night Ben stayed up late to watch the moon and caught a nasty cold. He can’t possibly make the meeting, but Bill cannot put off this transaction any longer as the batteries have cost him a fortune to make. Weed kindly steps in and suggest she goes to the meeting to represent Ben. However, there is no provision in the Model Articles to allow for an alternate director to be appointed. The meeting will have to wait until Ben is well enough to attend.
Bear in mind, the Model Articles were designed for small companies much like Bill & Ben’s Gardening Limited and they can still run into such troubles let alone companies with sophisticated or complex share structures. The above is a small snippet of problems a company can run into should they adopt the Model Articles where bespoke articles would be more appropriate. Don’t let your company fall victim to the “one size fits all” mentality when every company’s aims, circumstances and management is bespoke.
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Featured in Legal Spill
This article was featured in the August 2017 edition of Legal Spill.
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