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Companies Act 2006 - The Final Countdown
Changes To Company Constitutions From 1 October 2009

September 2009

Summary

This is the second article in our three-part series on the principal changes that are being introduced by the Companies Act 2006 (the “Act”) on 1 October 2009. In this article we consider the restructuring of a company’s memorandum and articles of association.

Changes relating to the memorandum of association

The limited role of the memorandum. For companies incorporated after 1 October 2009, the memorandum (which typically runs to several pages and sets out the activities a company is authorised to carry on) will no longer form part of the company’s constitution. Instead, the memorandum will merely be a statement that the founders wish to form the company, and a statement of the company’s type and its initial share capital.

Matters that would currently be set out in the memorandum (e.g. statements of the company’s name and objects) will be set out in the articles. In other words, the memorandum will give a “snapshot” at the point of registration which, as it cannot be altered, will have limited continuing relevance.

For companies incorporated before 1 October 2009, matters that are contained in the memorandum that do not form part of the founders’ statement (as mentioned above) will be treated as provisions of the articles. This means that such companies do not need to take any action to transfer the relevant provisions from memorandum to articles, although they may expressly state which provisions will be deemed to transfer if they wish (see below).

Abolition of the objects clause. The Companies Act 1985 (the “1985 Act”) states that the memorandum must include a statement of the company’s objects. This has lead to a raft of case law on the validity of actions taken by the directors outside of the company’s objects, and has become a fairly complex area of law.

The Act has simplified the position somewhat, by abolishing the objects clause in the memorandum. Companies will now have unrestricted objects unless expressly restricted by the articles.

This relaxation applies to new and existing companies alike, although an existing company will continue to be restricted by the objects clauses set out in its memorandum (since, as mentioned above, provisions included in the memorandum will be treated as provisions in the articles).

Where a company’s objects are restricted, the company will not generally be able to avoid liability by arguing, for instance, that entry into a particular kind of contract was forbidden by its articles, or that particular internal approval procedures were not followed. Under the Act, in favour of any person dealing with a company in good faith (who is not a director of the company or its holding company or a person connected with such a director), the power of the directors to commit the company or authorise others to do so will be deemed to be free of any limitation under the company's constitution. For this purpose, a person will not be regarded as acting in bad faith by reason only of knowing that an act is beyond the powers of the directors under the company's constitution.

Potential action. Companies should consider taking this opportunity to amend their articles to incorporate or remove (in other words, “cherry pick”) provisions of the memorandum. A number of companies (including listed companies) have passed resolutions which will become effective on 1 October 2009 deleting particular provisions in their memorandum which would otherwise become part of their articles or adopting new articles which do not contain such provisions.

Changes relating to the articles of association

Given the limited constitutional significance of the memorandum going forward, the articles of a company will be of even greater importance. There are two key changes to note in relation to the articles:

New model articles. Under the Act, there will be three new sets of “model” articles for the three most commonly used type of company:

private company limited by shares;
private company limited by guarantee; and
public company limited by shares.

A set of articles will apply by default to any company of the relevant type which is formed and registered post 1 October 2009. These model form articles are shorter and simpler documents than the existing default articles commonly known as “Table A”. This is because many of the default provisions are now in the Act.

Companies can choose to modify or exclude the provisions of the relevant model articles (by stating this in their own articles) or, indeed, include provisions from any of the other models.

Existing companies need not take any action as their articles will remain valid despite the changes outlined above. However, such companies may wish to review their articles with a view to bringing them into line with company law changes brought in by the Act (i.e., to reduce the scope for confusion where the existing articles no longer reflect the statutory position).

Entrenchment. Articles may be altered (both under the 1985 and 2006 Act) by special resolution.
Under the 1985 Act, the memorandum can provide for absolute or conditional “entrenchment” of a constitutional provision, i.e., stating that the provision cannot be altered or that it can only be altered on the satisfaction of a particular condition. Entrenched provisions are sometimes seen in joint ventures where one shareholder has under 25% of the voting rights.

Under the Act, absolute entrenchment is no longer permitted. Conditional entrenchment will still be available, however, with any conditionally entrenched provision being included in the Articles. Such a provision can be changed either by fulfilling the condition, by a court order or by the unanimous decision of the shareholders of the company. Any such provision must be included either on incorporation or, subsequently, with the unanimous consent of all the members of the company.

There are specific filing requirements for an entrenched provision: the Registrar must be told if a company’s articles contain an entrenched provision and this information is then placed on the company’s publicly available file. Going forward, the Registrar must be given confirmation that any alteration of the articles complies with any entrenchment provision.

For existing companies, absolutely entrenched provisions that are already in existence will remain effective. These can be changed by order of the court or other competent authority.

Note: On 9 September, the Secretary of State made regulations delaying the coming into force of the provisions described above relating to conditional entrenchment (originally due to come into force on 1 October 2009), as there is some concern that, as drafted, these could have the unintended effect of making it difficult to create or modify rules for classes of shares).