Company formation - Constitutional documents

Learning Outcomes

This article explains the core constitutional documents required for company formation and operation under the Companies Act 2006. It details the roles and legal effects of the Articles of Association and the Memorandum of Association, including the concept of the statutory contract under s 33 CA 2006. For the SQE1 assessments, you will need to understand the significance of these documents, the process for their amendment, and their enforceability. This knowledge will enable you to apply these legal principles to SQE1-style single best answer questions regarding company structure and governance.

SQE1 Syllabus

For SQE1, you are required to understand the practical implications of a company's constitutional documents. This includes knowing their content, legal effect, and how they can be altered. You will likely need to apply this knowledge to scenarios involving company governance and member rights.

As you work through this article, remember to pay particular attention in your revision to:

  • the composition of a company's constitution under the Companies Act 2006
  • the specific roles and content of the Articles of Association and the Memorandum of Association
  • the legal effect of the constitution as a statutory contract (s 33 CA 2006)
  • the procedure and limitations for altering a company's Articles of Association (s 21 CA 2006).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which document forms the main internal rulebook of a company under the Companies Act 2006?
    1. Memorandum of Association
    2. Certificate of Incorporation
    3. Articles of Association
    4. Shareholders' Agreement
  2. Under s 33 CA 2006, the company's constitution creates a statutory contract between which parties?
    1. The company and its directors
    2. The company and its members, and between the members themselves
    3. The directors and the members
    4. The company and its creditors
  3. What resolution is typically required to amend a company's Articles of Association?
    1. Ordinary resolution
    2. Board resolution
    3. Unanimous consent of directors
    4. Special resolution

  4. True or false? A company registered after 1 October 2009 without submitting bespoke articles will automatically adopt the relevant Model Articles.

Introduction

A company's constitutional documents are foundational, establishing its legal framework and internal governance structure. For the SQE1 exam, understanding these documents – primarily the Articles of Association and the Memorandum of Association – is essential. They dictate how a company operates, the powers of its directors, and the rights of its members. This article examines the nature, content, legal effect, and amendment process of these key documents as defined by the Companies Act 2006 (CA 2006).

The Company's Constitution

Under s 17 CA 2006, a company's constitution includes:

  • The company’s articles; and
  • Resolutions and agreements affecting the company’s constitution (such as special resolutions).

The significance of the Memorandum of Association has diminished under the CA 2006, with the Articles of Association now forming the principal constitutional document governing the company's internal affairs.

Articles of Association

The Articles of Association act as the company's internal rulebook. They regulate the relationship between the company, its directors, and its members (shareholders).

Key Term: Articles of Association
The primary constitutional document of a company, outlining its internal rules and regulations concerning governance, management, and the rights and duties of members and directors.

Companies can draft bespoke articles tailored to their specific needs, adopt the standard 'Model Articles' provided by regulations, or adopt the Model Articles with amendments.

Key Term: Model Articles
Standard default sets of articles provided under the Companies (Model Articles) Regulations 2008 for different types of companies (eg, private companies limited by shares). These apply automatically if a company does not register its own articles.

Typical provisions found in the Articles include:

  • Appointment, powers, and removal of directors.
  • Rights attaching to different classes of shares (eg, voting rights, dividend rights).
  • Procedure for calling and conducting shareholder meetings (General Meetings).
  • Rules regarding the transfer and transmission of shares.
  • Provisions for the distribution of profits (dividends).

Legal Effect of the Articles: The Statutory Contract

Section 33(1) CA 2006 gives the Articles contractual force.

Key Term: Statutory Contract
The legal effect given to a company's constitution (primarily the Articles) by s 33 CA 2006, binding the company and its members as if they had entered into covenants to observe its provisions.

This statutory contract binds:

  1. The company to its members.
  2. The members to the company.
  3. The members amongst themselves.

However, enforceability is generally limited to rights and obligations arising in a member's capacity as a member (member qua member rights). Rights conferred on a member in another capacity (eg, as a director or solicitor) within the articles are generally not enforceable under s 33.

Worked Example 1.1

A company's articles state that Liam, a shareholder, shall be the company's permanent solicitor. The company later dismisses Liam and appoints another solicitor. Can Liam enforce the article provision requiring the company to use him as its solicitor?

Answer: No. The provision relates to Liam's capacity as a solicitor, not his capacity as a member. Therefore, it does not form part of the statutory contract under s 33 CA 2006 and is unenforceable by him in that context (Eley v Positive Government Security Life Assurance Co).

Worked Example 1.2

The articles of XYZ Ltd state that any member wishing to transfer their shares must first offer them to existing members pro rata. Sarah, a member, attempts to sell her shares directly to an external buyer without first offering them to the other members. Can another member, David, prevent this transfer?

Answer: Yes. The provision regarding pre-emption rights on share transfers is a membership right. David can enforce this provision of the articles against Sarah under s 33 CA 2006, as it forms part of the contract between the members themselves.

Alteration of the Articles

A company can alter its Articles of Association by passing a special resolution (requiring a 75% majority vote of the members) under s 21(1) CA 2006.

This power is subject to certain limitations:

  • The alteration must comply with the CA 2006 and general law.
  • The alteration must be made bona fide for the benefit of the company as a whole (Allen v Gold Reefs of West Africa Ltd).
  • An alteration cannot require a member to take or subscribe for more shares, or increase their liability, without their written consent (s 25 CA 2006).
  • Certain provisions can be 'entrenched' (s 22 CA 2006), requiring a higher majority or specific procedure for alteration, though complete unalterability is not permitted.

Revision Tip

Remember the distinction between rights enforceable under s 33 (membership rights) and rights related to other capacities (eg, director, employee, solicitor). Also, be aware of the bona fide requirement for article alterations, which acts as a safeguard for minority shareholders against oppressive changes.

Memorandum of Association

Historically, the Memorandum was a key constitutional document outlining the company's external powers and objects. Under the CA 2006, its role is significantly reduced.

Key Term: Memorandum of Association
For companies formed under the CA 2006, this is primarily a historical document signed by the first subscribers, confirming their intention to form a company and take at least one share each. It no longer contains the company's objects or restricts its capacity.

For companies registered under the CA 2006, the Memorandum simply provides evidence of the intention of the subscribers to form the company (s 8 CA 2006). It is submitted during the incorporation process but does not form part of the ongoing constitution in the same way as the Articles. Provisions previously found in the Memorandum of older companies (like objects clauses) are now generally treated as provisions within the Articles (s 28 CA 2006).

Exam Warning

Do not confuse the current, limited role of the Memorandum of Association under the CA 2006 with its historical significance. For SQE1 purposes, focus on the Articles as the primary governing document and the Memorandum as largely a formation formality for post-2006 companies.

Key Point Checklist

This article has covered the following key knowledge points:

  • A company's constitution primarily consists of its Articles of Association and relevant shareholder resolutions.
  • The Articles of Association form the internal rulebook, governing director powers, shareholder rights, and meeting procedures.
  • Companies can adopt Model Articles, bespoke articles, or amended Model Articles.
  • The Articles create a statutory contract under s 33 CA 2006 between the company and its members, and amongst the members, enforceable concerning membership rights.
  • The Memorandum of Association for companies formed under the CA 2006 confirms the subscribers' intent to form the company but has limited ongoing constitutional significance.
  • Articles can be altered by special resolution (s 21 CA 2006), subject to statutory limits and the requirement to act bona fide for the benefit of the company as a whole.

Key Terms and Concepts

  • Articles of Association
  • Model Articles
  • Statutory Contract
  • Memorandum of Association
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