Along with providing the rules on how a company is run and governed the company constitution binds contractually the company and its members, therefore the provisions should be discussed and agreed by all parties involved in the company.

The articles are amendable and the company may use the prescribed articles under the act under which it was incorporated or it may draft its own. For example an article which allows the directors to refuse a share transfer which is supported by the Companies Act 2006 may be too restrictive for the shareholders. The members may with agreement amend the articles and draft a share transfer provision that suits all members.

The ability to amend and draft articles is beneficial to preempt the occurrence of events that may preclude the company from operating efficiently and without disruption, in particular agreed pre-emption clauses that control shareholdings in the event of the death of shareholder, or a shareholder requiring to dispose of their holdings to prevent a company losing control of its shares.

Generally a company will want to keep to control of its shares and who owns them. For the most part the articles will be restrictive on a range of matters that may interrupt the smooth running of the company.

Restrictions on drafting rules

Every company formed under the Companies Act 2006 and its predecessors is required to have articles of association.  All articles of association are subject to the Companies Act 2006 under which they are formed, the company is in addition constricted by case law (rules made by judges’ decisions in court). Consequently, the articles may not contain provisions that are against the law, that said, the company has complete freedom to draft their company articles and develop rules to suit the individual company and the requirements of the members.

In reality, as the Companies Act 2006 and the case law is arguably beyond the typical company director whose main focus is the running of the company and turning a profit, the majority of companies utilise the new model articles.

All companies formed in the past 150 years, under the various Companies Acts (Companies Act 2006 being the most recent) must have articles of association.

The company articles of association are the internal policies, rules and procedures that the directors and shareholders must adhere to. Shareholders delegate all powers to the directors who in turn make decisions at board meetings. Shareholders will require assurance that any decision making by the directors follows a written procedure. The articles duly provide a detailed decision making and voting procedure together with rules on appointing directors, the distribution of profits and general administration.

A more simplistic explanation is they provide an aide-memoire for the directors of the main statutory regulations imposed by the immense Companies Act 2006 legislation. The articles are in reality a summary of the main points of the Companies Act 2006 that a small limited company should be focused on.

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