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. In addition, know what constitutes the company’s constitution under s 17 CA 2006, how resolutions and agreements can affect the constitution and must be filed (s 29–s 30), the default application of Model Articles (s 20), the mechanics and limits on alteration (s 21, s 22, s 25), and how class rights are varied (ss 630–634). Be able to distinguish membership rights enforceable under s 33 from rights in other capacities and understand how articles are interpreted as a business document.

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, with a focus on the following syllabus points:

• 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).
• how and when resolutions and agreements affect the constitution and must be filed (s 29–s 30 CA 2006)
• the possibility and limits of entrenching provisions in the articles (s 22 CA 2006)
• the protection of members against increased liability without consent (s 25 CA 2006)
• the variation of class rights and the need for class consent (ss 630–634 CA 2006)
• the default application and scope of Model Articles (Companies (Model Articles) Regulations 2008; s 20 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). It also addresses how resolutions and agreements can affect the constitution post-incorporation and the limits on alteration to protect members, including entrenchment and class rights.

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.

Resolutions and agreements affecting the constitution are specifically defined in s 29 CA 2006 and include, among others: special resolutions, resolutions of any class of members, unanimous or written decisions that would otherwise have been passed as a special resolution, and decisions by a sole member. A copy of such resolutions or agreements must be filed at Companies House within the prescribed time (typically 15 days) under s 30. While failure to file does not invalidate the resolution, it is an offence and undermines the public record of the constitution. This filing obligation ensures that the constitution remains accessible and clear to members and those dealing with the company.

Key Term: Shareholders' Agreement
A private contract between members (and sometimes the company) regulating matters such as voting, transfers, and funding. It does not form part of the company's constitution under s 17 and does not have statutory contract effect under s 33, though it binds its parties as a normal contract.

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. Under s 20 CA 2006, where a company does not register bespoke articles, the relevant Model Articles apply by default to the extent not excluded or modified.

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).

Articles for a private company limited by shares normally vest management in the directors, specify board and shareholder meeting quorums, and provide mechanisms to declare and pay dividends. The Model Articles are designed to be simple and functional, but many companies adopt tailored provisions. Common bespoke amendments include: removing the chair’s casting vote at board meetings, increasing board quorum above two, allowing the company name to be changed by board resolution if permitted by the articles (s 77(1)(b) and s 79 CA 2006), tightening directors’ authority to allot shares, and adding transfer pre-emption provisions (the default Model Articles do not include member-to-member pre-emption on transfers). Practitioners also review statutory pre-emption on allotments of equity securities (s 561 CA 2006) alongside any bespoke article-based pre-emption so both regimes align in practice.

Articles are interpreted as a business document. Courts construe them to give reasonable business efficacy rather than by overly literal rules of contract interpretation. Authority confirms that articles should be read in a practical, commercial way (Holmes v Keyes), avoiding interpretations that produce commercial absurdity (Thompson v Goblin Hill Hotels Ltd). Importantly, rights and obligations will not be implied into articles; anyone inspecting the public register should be able to ascertain member rights directly from the document (Bratton Seymour Service Co v Oxborough).

A recent practical issue concerns sole director decision-making under the Model Articles. Case law indicates that the unamended Model Articles generally permit a sole director to act by virtue of the provision that the quorum rules do not apply when the company has only one director. However, where bespoke articles fix a board quorum at two without preserving the sole director override, decisions taken by a sole director may be invalid. This highlights why careful drafting of bespoke articles is critical to avoid governance gaps.

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. The leading authority is Hickman v Kent or Romney Marsh Sheep-Breeders’ Association, where a member was compelled to comply with an article requiring disputes to be referred to arbitration: the article bound him because the dispute concerned his rights as a member. By contrast, provisions purporting to confer rights on an outsider or on a member in a non-membership capacity cannot be enforced under s 33 (Eley v Positive Government Security Life Assurance Co; Beattie v E & F Beattie Ltd).

Membership rights enforceable under s 33 include voting rights, dividend rights, meeting participation, and transfer mechanics provided by the articles. A member can seek declaratory or injunctive relief to restrain the company from acting contrary to its articles, or damages where appropriate. Where the alleged wrongdoing is broader than a discrete article breach, members may also consider statutory remedies such as unfair prejudice (s 994 CA 2006), but that sits outside the s 33 contract and involves different tests.

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.

Worked Example 1.3

The articles of a members’ association require disputes between a member and the association to be referred to arbitration. A member sues in court to challenge an expulsion decision taken under the articles. Can the association rely on the arbitration clause?

Answer:
Yes. The member is bound to follow the dispute resolution mechanism in the articles insofar as the dispute concerns membership rights (Hickman v Kent or Romney Marsh Sheep-Breeders’ Association).

Worked Example 1.4

A member is prevented by the chair from voting his shares on a resolution to remove a director, contrary to the voting provisions in the articles. Can the member enforce his voting rights?

Answer:
Yes. Voting is a core membership right. A member can enforce an article that confers the right to vote and compel the company to count his vote, typically by injunction or declaration (Pender v Lushington).

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 can be done at a general meeting or by written resolution (s 283 and s 288), noting that written resolutions are not available for certain matters such as removal of directors or auditors, but they are available for altering articles.

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). The courts apply this standard objectively, asking whether reasonable shareholders would think the change benefits the company’s enterprise rather than the faction proposing it (Shuttleworth v Cox Bros & Co; Sidebottom v Kershaw, Leese & Co).
• 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.
• Where an alteration affects class rights, the statutory regime on variation of class rights must be followed (ss 630–634 CA 2006).

Key Term: Entrenchment
A mechanism under s 22 CA 2006 allowing articles to require more onerous procedures or higher thresholds than the default special resolution for amendment. It can be adopted on formation or later, and must be notified to the registrar (s 23). Articles cannot be made absolutely unalterable.

Key Term: Class rights
Rights attached to a class of shares (eg, A shares vs B shares) relating to dividends, voting, capital, or other privileges. Under ss 630–634 CA 2006, variations require class approval in accordance with the articles or statute and may be challenged in court if unfairly prejudicial to the class.

Alterations may be used to address governance issues, but attempts to expropriate or oppress minorities are scrutinised closely. For example, a compulsory transfer provision can be valid if adopted for genuine business reasons (eg, to exclude competing members: Sidebottom v Kershaw, Leese & Co) but invalid if aimed solely at transferring control without benefit to the company (Brown v British Abrasive Wheel Co; Dafen Tinplate Co v Llanelly Steel Co).

On procedure, after passing a special resolution to amend the articles, the company must file a copy of the resolution and the amended articles with Companies House within the relevant period (s 26 and s 30 CA 2006). The change takes effect when the resolution is passed unless a later date is specified in the resolution or the articles. Where entrenchment is in place, ensure that any additional conditions (such as class consent or unanimous approval) are met. If class rights are involved, compliance with ss 630–634 is required: obtain the class consent (normally a special resolution of the class or written consent of holders of at least 75% in nominal value of the class), and note the right of class members holding at least 15% of the class to apply to court under s 633 if the variation would unfairly prejudice them.

Worked Example 1.5

The majority propose to amend the articles to require minority shareholders to transfer their shares to the majority at book value, citing no commercial purpose beyond consolidating control. Is this valid?

Answer:
Likely not. An alteration that expropriates minority shares without a bona fide company benefit is invalid. The courts have struck down similar changes where the sole purpose was to benefit the majority rather than the company’s business (Brown v British Abrasive Wheel Co; Dafen Tinplate Co v Llanelly Steel Co).

Worked Example 1.6

The company’s articles are amended to fix board quorum at two, removing any provision referring to a sole director. The sole director then approves a major contract. Is the decision valid?

Answer:
Potentially invalid. Where bespoke articles fix a quorum at two and do not preserve the sole director override, decisions by a sole director may lack authority. Careful drafting is required to ensure that quorum rules and any sole director mechanism operate coherently.

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. Where class rights are affected, check both the variation mechanism in the articles and the statutory procedure in ss 630–634.

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). After 1 October 2009, companies have unrestricted objects unless they choose to include objects in their articles (s 31 CA 2006). Further, acts of a company are not invalid merely because they are outside any objects set out in the constitution (s 39 CA 2006), though internal limitations still regulate directors’ authority and can give rise to fiduciary and statutory duty issues.

A transitional point for pre-2009 companies is the old authorised share capital clause that used to appear in the memorandum. On transition, any authorised share capital clause became part of the articles (s 28(1) CA 2006). If still present, it can be removed without a special resolution under specific transitional regulations by ordinary resolution, which is an exception to the usual rule that articles are altered by special resolution. The ordinary resolution must be filed to update the public record.

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 Term: Pre-emption rights
Rights giving existing members the first opportunity to acquire shares. On transfers, these are article- or contract-based. On allotments of equity securities by a company, statutory pre-emption applies unless disapplied (s 561 CA 2006).

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 and agreements that affect the constitution (s 17, s 29 CA 2006), which must be filed (s 30).
• The Articles of Association form the internal rulebook, governing director powers, shareholder rights, and meeting procedures, and are interpreted as a business document; rights will not be implied.
• Companies can adopt Model Articles, bespoke articles, or amended Model Articles. The relevant Model Articles apply by default if bespoke articles are not registered (s 20 CA 2006).
• 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 (eg, voting, dividends, pre-emption on transfer).
• Outsider rights and rights conferred in a non-member capacity are not enforceable under s 33.
• Altering the articles requires a special resolution (s 21 CA 2006), must be bona fide for the benefit of the company as a whole, and cannot increase a member’s liability or compel subscription without consent (s 25 CA 2006).
• Entrenched provisions can require more onerous amendment procedures but cannot be made unalterable (s 22 and s 23 CA 2006).
• Where article amendments affect class rights, the class rights variation regime must be followed, with potential court challenge for unfair prejudice to the class (ss 630–634 CA 2006).
• 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; objects are unrestricted unless included in the articles (s 31), and capacity cannot be impugned by constitutional limits (s 39).

Key Terms and Concepts

• Articles of Association
• Model Articles
• Statutory Contract
• Memorandum of Association
• Entrenchment
• Class rights
• Shareholders' Agreement
• Pre-emption rights