Any company director will be familiar with the terms Memorandum and Articles of Association. These founding documents form the basis for the legal incorporation of a new company, outlining how the business is managed and run. Both are required by company law and must be agreed and approved by the founding members of the company – either shareholders or guarantors.
The difference between the Memorandum and Articles of Association
These two documents form the foundation of the company structure. Whilst the Memorandum of Association is a short, straightforward document, the Articles of Association are far more thorough. The Memorandum simply declares the founder’s intentions to create the company. It will include basic details about the company, who its founding members are, and the limits of their liabilities. Since the Companies Act 2006, many of the provisions included in the Memorandum of Association are now incorporated within the Articles of Association. Under the 1985 Companies Act (under which some companies still have their Memorandum and Articles) the Memorandum was more significant and would typically contain more detailed provisions about the purpose and operation of the company.
The Articles will outline the basis of the governance and structure of the company, laying out the responsibilities and rights of each of its members. Their contents will influence how the company is managed going forward and so the terms included require a great deal of consideration by the shareholders to ensure their interests are protected.
The Memorandum of Association is a legal declaration, signed by the founding members of the company. It must be registered at Companies House where it is stored on public record. The Memorandum comes in a simple, standard format, which includes the following:
By signing the document, each member takes on liability for the portion of their shares in the business. They are referred to as subscribers, since they subscribe their name to the formation of the company.
The Articles of Association are a comprehensive document outlining all the rules and requirements for the ownership and running of the company. They will specify how the company is governed and managed on a day to day basis, as well as the balance of power between shareholders and directors.
Whilst every company will adopt Articles on incorporation, these are typically ‘model articles’ which will not address many practical situations that the company, directors and shareholders will encounter. It is therefore typical for a company’s shareholders to approve the adoption of new Articles which will typically contain various bespoke and negotiated provisions. .
The Legal Stop provides templates for the Articles of Association that can be used as they are or amended to suit your company’s individual requirements. For example, you may wish to include entrenched provisions, as explained below, or to put certain restrictions on the power of the directors, in order to protect the shareholders’ interests.
The following areas are covered:
Part 1: Interpretation and limitation of liability – Definition of the terms and liability of each member.
Part 2: Directors – This includes decision making powers, responsibilities and requirements for directors meetings. It also covers the appointment of directors, their remuneration and expenses.
Part 3: Shares and Distributions – Outlining how shares are to be issued or transferred and the rights attaching to different classes of shares including how dividends or other distributions will be paid out.
Part 4: Decision-Making by Shareholders – laying out how general meetings are organised and chaired along with voting rights.
Part 5: Administrative Arrangements – including means of communication and company seals, in addition to directors’ indemnity and insurance.
Making changes to the Memorandum and Articles of Association
Once signed and submitted to Companies House, the Memorandum of Association cannot be altered in any way. It remains on public record in its original form, regardless of any later changes to ownership of the business.
Conversely, the Articles of Association can be altered at a later date, under a special resolution. Typically for changes to be made they would need to be approved by shareholders holding at least 75% of the voting rights in the company.
It is possible to include restrictions – entrenched provisions - within the original Articles of Association, limiting the options for making alterations following incorporation by requiring additional criteria to be met. Additional clauses could require 100% shareholder approval before any changes can be implemented. This can protect founders against future members changing how the company is structured without their consent, and is particularly useful for any founding members who are minority shareholders.
Creating Articles of Association
Although companies can create their Article based on a standard template, many prefer to personalise the template to create a more bespoke document. If you require amendments to your Articles of Association, the Legal Stop offer fixed fee bespoke document drafting, to help you suit your Articles to the needs of your company.
The contents of this article do not constitute legal advice and are provided for general information purposes only.
The Legal Stop offers online legal documents and fixed fee legal services. We believe that legal services should be accessible and transparent, and we aim to provide relevant, practical solutions for businesses of all sizes.
Our range of services includes:
Expertise: Legal Services
The Legal Stop is a straightforward online business using information technology for the public good. We aim to make the law and provision of legal services accessible and transparent to people and businesses alike!