Updating the constitution

It is now just over three years since the full implementation of the Companies Act 2006. However, the majority of active companies were incorporated prior to 1 October 2009 and many will have done nothing to review or update their articles of association. As the articles of a company now constitute its principal constitutional document, it is worthwhile to reflect on the status of the unamended articles.

The articles of a company incorporated prior to 1 October 2009 continue to be valid and binding (paragraph 1, schedule 2 of The Companies Act 2006 (Commencement No 8, Transitional Provisions and Savings) Order 2008), save for any that contravene, or are inconsistent with, a mandatory provision of the Companies Act 2006. For example, if the articles state that the directors do not need to give a reason for refusing to register a transfer, then that particular article will contravene section 771(1) of the 2006 Act and be of no effect.

The provisions of an existing company's memorandum are now automatically incorporated in such company's articles (section 28 CA 2006), but it is not necessary to give notice of the alteration to the articles effected by section 28 (paragraph 8, schedule 2 of the 2008 Order.

Any restrictions in the memorandum now contained in the articles will bind the existing company. Thus, the clause setting out the existing company's authorised share capital is treated as a provision of the existing company's articles setting the maximum amount of shares that may be allotted by the company. Such provision may be amended or revoked by an ordinary resolution.

An amendment of an existing company's articles on or after 1 October 2009 authorising the directors to allot shares in excess of the amount allowed by any such provision as is mentioned above has effect although not expressed as amending or revoking it.

 

Power to allot shares

Section 550 of the 2006 Act (power of directors to allot shares etc: private company with only one class of shares) applies to an existing private company only if the members of the company have resolved that the directors should have the powers given by that section. Such a resolution may be an ordinary resolution even if it takes the form of an alteration of the company's articles.

Any provisions of the articles of an existing company authorising the directors to allot shares in accordance with section 80 of the Companies Act 1985, or added following an elective resolution under section 80A of the 1985 Act and authorising the directors to allot shares, are not to be treated as provisions prohibiting the directors from exercising the powers conferred by section 550 2006 Act in cases to which the authority does not extend.

An authorisation in force immediately before 1 October 2009 under section 80 or 80A of the 1985 Act has effect on and after that date as if given under s 551 of the 2006 Act. Where the statutory rights of pre-emption under the 1985 Act have been excluded in an existing private company's articles, then the exclusion continues in force as if effected pursuant to section 567 of the 2006 Act (exclusion of right of pre-emption by private companies) excluding the corresponding provisions of section 561 or 562 of the 2006 Act.

 

Objects clauses

The memorandum has now ceased to have any significance as a constitutional document. As mentioned above, the provisions of the memorandum will now be automatically incorporated in an existing company's articles.

Traditionally, the objects clause has been a lengthy document comprising extensive objects to avoid the possibility of a company acting ultra vires. For a new company incorporated after 1 October 2009, its objects are automatically unrestricted unless specific restrictions are contained in its articles. The terms of the objects clause of an existing company are now contained in the articles. Some commentators take the view that the expression of those objects in the articles (transferred automatically from the memorandum) will operate as a restriction on the existing company's objects. Therefore, an existing company should amend its articles by deleting the express objects clause, leaving section 31 (1) of the 2006 Act to render the objects unrestricted. It states: "Unless a company's articles specifically restrict the objects of the company, its objects are unrestricted."

It is open to a company to have restricted objects (charitable companies for example) and it would be prudent to express those restrictions negatively in view of the wording of the sub-section. Any amendment of a company's objects must be notified to Companies House and is not effective until duly registered.

According to sections 39-42 of the 2006 Act, the concept of ultra vires is now broadly obsolete so far as third parties dealing with the company in question are concerned, but continues to be relevant between the members and directors.

Share capital

All existing companies have an authorised share capital, the amount being set out in the memorandum (as may have been amended from time to time - section 121 of the1985 Act). New companies no longer need to have an authorised share capital and nor do existing companies, but the provision setting out the existing company's authorised share capital is treated as a provision of the existing company's articles setting the maximum amount of shares that may be allotted by the company. Such provision may be amended or revoked by an ordinary resolution.

 

Entrenching articles

A company's articles may contain entrenched provisions to the effect that specified provisions may be amended only if certain conditions are met. Entrenched provisions do not prevent amendment of the articles by agreement of all the members.

Section 22 (1), of the 2006 Act, which has not yet been implemented, provides that entrenched provisions may only be made in the company's articles on formation or by amendment agreed by all the members.

The Department for Business, Innovation and Skills has explained why it has not been implemented, saying: "it was pointed out to us that there was some uncertainty as to whether the definition of "provision for entrenchment" in section 22(1) could catch provisions sometimes included in articles in connection with rights attached to classes of shares. This was a cause for concern because provisions that were caught could only be introduced by unanimous consent of all members, which might make it difficult to introduce or amend such provisions."

Entrenched provisions in an existing company's memorandum are now transferred to the existing company's articles and the provisions concerning provision for entrenchment apply to such provision as they apply to provision made on the company's formation, except that the duty under section 23 (1) (a) in the 2006 Act to give notice to the registrar does not apply.

The power conferred by section 21(1) of the 2006 Act (amendment of company's articles by special resolution) does not apply to provisions of the articles of an existing company that were not capable of being so amended immediately before 1 October 2009.

The power conferred by section 22(3)(a) of the 2006 Act (amendment of entrenched provisions of articles by agreement of all the members of the company) does not apply to provisions of the articles of an existing company that were not capable of being so amended immediately before 1 October 2009.