Articles of Association are an important legal document that provides the foundation for how a company operates.

In the UK, Article of Association outlines the rules and regulations that govern the internal management of a company and defines the relationship between the company, its directors, and its shareholders.

The articles form part of a company’s constitutional documents, which makes them essential for the smooth and lawful operations of the company.

What Are Articles of Association?

The Articles of Association specify a company’s structure, purpose and operational framework. They act as the legal framework for management, decision-making and the allocation of rights and responsibilities among stakeholders.

For companies registered in the UK, the Companies Act 2006 mandates that every company is required to have articles of association.

When a company is being registered it will need a memorandum of association, which is a legal statement signed by all initial shareholders or guarantors agreeing to form the company and articles of association, which are the written rules about the running of the company agreed by the shareholders or guarantors, directors and the company secretary.

When a company is registered online, the memorandum of association is created automatically as part of the registration. It cannot be updated once the company has been registered.

When completing articles of association standard or model articles may be used or they can be customised to suit the company. They are then uploaded when the company is registered.

Customising Articles of Association

Even though the government provides model articles of association as a default template, companies are permitted to customise them to match their business’s unique requirements.

This degree of flexibility allows a business to address its specific operational requirements while ensuring they comply with UK law. Customising the memorandum & articles of association to align with a business’s goals is the best step, as this offers flexibility while still ensuring compliance with UK law.

The Role of Articles of Association

The articles of association have a few important purposes.

1. Governance and compliance

The articles of association ensure the company operates so that it complies with legal requirements, lowering the risk of disputes that can arise and penalties being imposed.

2. Defining Operational Rules

The articles of association offer a clear framework for the managing of decision-making, ownership, and roles in the company.

3. Providing stakeholders with transparency

The articles describe the rights and responsibilities of both directors and shareholders, ensuring that transparency is evident and trust occurs among stakeholders.

4. Guidance during disputes

If a disagreement takes place, the articles provide a reference point for the resolution of conflicts.

Why Articles of Association Are Essential?

Without robust articles of association a company could face operational inefficiency, misunderstanding occurring among stakeholders, or even legal challenges.

By defining how the company operates, the articles assist by:

• Preventing conflicts through establishing rules for ownership and decision-making;
• Supporting directors in fulfilling their duties which helps to ensure accountability;
• Offering assurance to stakeholders and investors about the company’s governance practices.

💡 A start-up company with several founders may depend on the articles to showcase voting rights and profit-sharing ratios, which helps to avoid potential disputes as the business grows.

Main Components of Articles of Association

A comprehensive articles of association document typically includes the following components:

Rules on decision-making

The articles specify how decisions are made within the company. This includes:

• Board decisions including how directors conduct meetings, vote on issues, and pass resolutions;
• Shareholder decisions including the procedures for the convening of a general meeting, voting rights, and the passing of resolutions.

💡 For example, a plastics manufacturing company could require unanimous board approval for major investments which ensures all the directors are in agreement on tactical decisions.

Shareholder rights

The articles define shareholders’ rights such as voting rights on company issues which could include:

• The election and removal of  directors; 
• Changing the name of the company;  
• Authorising the director(s)  in the allocaton of shares;
• Approval of key property transactions; 
• Approval of share buybacks; 
• Approval of dividend payments;
• Alterations to the articles of association.

Appointment of directors

The articles of association provide the process for the appointment, removal, and replacement of directors, and what their roles and responsibilities are. This section of the articles makes sure the company has a competent leadership as well as offering a mechanism for the addressing of performance issues.

💡 For example, a retail company’s articles could require the directors to have specific qualifications or useful experience in the industry.

Handling of shares and dividends

This includes the issuing, transferring, and valuing of shares, and the rules for the declaration and distribution of dividends. Key matters include:

• The restrictions on the transfer of shares.
• The procedures for the issuing of new shares.
• The dividend policies based on the company’s profits.

💡 For example, in a family-owned business, the articles could restrict the transfer of shares to non-family members which keeps the company ownership in the family.

Articles of Association Complying with Legal Requirements

Articles of association are required to align with the provisions of the Companies Act 2006. Any non-complying could result in enforcing penalties or end up with legal disputes, which could jeopardise the company’s operations.

The main compliance considerations are:

• Ensuring that the articles do not conflict with any statutory regulations;
• Submitting the articles to Companies House at the time of company registration;
• Amending the articles if required, with the shareholders’ approval.

The Practical Applications of the Articles of Association

There is a practical use for the articles of association which is that they provide a guide for the day-to-day operations of a company and longer-term planning.

Example 1: Decision-making in a start-up

A start-up company begins to operate with two founders, but as it grows, it decides to appoint more directors and issue shares to investors.

The articles of association will ensure that the decision-making processes will adapt to the expansion by preventing conflicts and maintaining the company’s efficiency.

Example 2: Shareholders’ disputes

In a medium sized business, a dispute takes place between the shareholders over the distribution of dividends. The articles of association should be able to clarify the profit-sharing formula and resolve the matter without the need for any legal intervention.

Example 3: Succession planning

A family business is eager to transfer ownership to its next generation while still ensuring the company stays under family control.

The articles should include precise provisions for the transferring of shares and directors’ appointments which will allow for a smooth transition.

The Importance of Clear and Customised Articles

Each company is unique, and even though there is a model articles of association which provides a standard framework, it’s important to customise the articles so that they reflect the company’s precise needs. Clear and customised articles of association do the following:

• Improve a company’s operating efficiency.
• Decrease any ambiguity for both the directors and the shareholders.
• Improve confidence among investors.

💡 For example, a company operating in a regulated industry, such as finance, may include additional compliance measures in its articles in order to meet industry standards.