The final sections of the Companies Act 2006 (the new Act) came into force on 1 October 2009. Many of these provisions affect company constitutions. Below is a guide to some of the changes that come into force on 1 October which affect a company’s articles of association and those matters which companies incorporated before this date (existing companies) should consider.  

Constitution

·        Must a company update its Articles?

There is no legal requirement for a company to changes its Articles as a result of any of the 1 October 2009 changes. The Articles of a company incorporated under the earlier Acts will remain in effect but, subject to limited exceptions, the 2006 Act will override inconsistent provisions. Where the Articles refer to a section number of the 1985 Act which is not materially changed, the Articles will usually operate as if the reference were to the relevant section in the 2006 Act.  

·        Does the Memorandum of Association of your company set out specific objects of the company? If so should they remain? 

The Objects clause of an existing company’s Memorandum will be deemed to form part of its Articles under the new Act. Existing Objects will continue to restrict the company’s capacity. If those Objects are no longer relevant consider whether you wish to pass a special resolution to amend or remove those Objects. 

·        Check if the Articles of Association contain any provision for the appointment of a person as attorney of a member. 

Any purported power of attorney in the Memorandum or Articles of Association of your company (for example, allowing a director to sign a stock transfer form as attorney of a defaulting transferor) may be invalid. You may wish to consider replacing any reference in the Articles as to the grant of a power of attorney with an appointment of an agent instead. 

Issues of Shares

·        If the company has only one class of shares do you wish the directors to have power to allot further shares without the need for further shareholder approval?

From 1 October 2009, subject to any restriction or prohibition contained in the Articles, the directors of a private company that has only one class of shares will no longer need authority from the shareholders to allot new shares. For companies which were incorporated before 1 October 2009, this provision will not apply unless the shareholders pass an ordinary resolution granting the directors such power. 

·        If the company has only one class of shares and the directors are authorised to allot shares as above should the directors also have the power to allot those shares without observing the statutory pre-emption procedure?

Under the new Act the directors of companies with only one class of shares can allot shares as if pre-emption rights do not apply if they have been authorised to do so by the Articles or by special resolution. If you wish to take advantage of the authority to allot further shares, you should also consider whether to grant this further power to the directors. 

·        Do you want your company to retain the current statement of the authorised share capital?

From 1 October 2009 a company no longer needs to have a maximum authorised share capital and a resolution granting authority to allot shares will no longer need a resolution amending the statement of authorised capital. Companies incorporated before 1 October 2009 will however continue to be subject to any authorised maximum capital stated in their Memorandum. 

Alteration of Share Capital

·        Does the company wish to restrict a sub-division or consolidation of its shares?

Under the new Act a company will have the power to sub-divide or consolidate its shares unless it is restricted or prohibited from doing so in its Articles (under the old Act a company’s power to do so had to be authorised in the Articles). Existing authorities in a company’s Articles will be superfluous. 

·        Does the company wish to restrict a re-denomination into other currencies of any of its share capital?

The new Act contains a new power for a company to re-denominate its share capital or any class of shares into another currency by passing an ordinary resolution to that effect. If an existing company wishes to restrict or prohibit the exercise of that power it must insert an appropriate provision into its Articles. 

Redemption and Purchase of Own Shares

·        Does the company wish to restrict its ability to issue redeemable shares? 

The new Act will permit companies to issue redeemable shares without a specific authority under the Articles (the old Act required a company to first have the authority to do so under its Articles). An existing company whose Articles contain that authority should consider deleting it to avoid repeating what is already in the 2006 Act. An existing company whose Articles do not contain that authority must, if it wishes to continue to restrict or prohibit the issue of redeemable shares, modify its Articles by special resolution to that effect.  

·        Should the company’s directors be able to determine the terms, conditions and manner of redemption of any redeemable shares?

Under the old Act redeemable shares could be redeemed as set out in the company’s Articles. The new Act extends this permitting directors to determine how shares are redeemed if they are authorised to do so by the Articles or an ordinary resolution. If they are not, the terms of redemption must be set out in the Articles. Giving the directors’ power to determine those terms may reduce the administrative burden on a company, although the shareholders may wish to retain control over those terms through their ability to amend the Articles.  

·        Does the company wish to restrict its ability to purchase its own shares?

The new Act will permit a re-purchase of shares unless and to the extent restricted or prohibited by the company’s Articles. The new Act therefore reverses the position under the old Act which was that a company’s Articles must authorise a company’s purchase of its own shares. An existing company therefore must if it wants to continue to restrict or prohibit the purchase of its own shares modify its Articles by special resolution.  

·        Does the company want to be able to fund a purchase of its own shares from capital?

From 1 October 2009 a company has the right to redeem or purchase shares out of its capital unless its Articles restrict or prohibit that right in accordance with the provisions of the new Act. Unless the issue of redeemable shares or a company’s purchase of its own shares is already prohibited by the Articles a company should consider whether to restrict or prohibit its ability to redeem or purchase shares out of its capital. 

Company Names

·        Does the company wish to have the flexibility to change its name without a need for a special resolution of the shareholders?

From 1 October 2009 the power under the old Act for shareholders to change a company’s name by special resolution is restated. However the new Act also allows a company to provide an alternative procedure for changing its name within its Articles. The form of the procedure is not prescribed by the new Act and could simply involve vesting such power in the directors.   

Provision for employees on cessation or transfer of business

·        Do the company’s Articles permit the directors to make provision for the directors, former directors or shadow directors of any group company on the cessation of that group company’s business or its transfers to any person? 

The new Act says that directors can no longer use this power to sanction payments to themselves, ex-directors and shadow directors unless such payments have been authorised by the shareholders.

Provisions of the 2006 Act already in force – Changes relevant to the Articles of Association

A company reviewing its Articles as a result of the changes from1 October 2009 may also wish to consider whether any further changes can be made to take account of any of the changes which came into effect earlier. These changes include; 

·        New regime for communications between companies, shareholders, holders of debt securities and others allowing for electronic communications for the shareholders and others. 

·        New powers to authorise directors conflicts with the company’s interests.

·        Changes to the notice period for general meetings and to hold meetings on short notice with the consent of 90% or more of the voting shares (as opposed to the previous requirement for 95%).

·        Since 1 October 2007 private companies have been able to pass written ordinary resolutions by a simple majority of those eligible to vote and written special resolutions with a 75% majority of those eligible to vote rather than requiring unanimity. Companies should consider removing any conflicting provisions from their articles. 

·        The rights of proxy’s under the 2006 Act will override any conflicting provisions in the companies articles. Articles can extend the proxy’s statutory rights but not reduce them. The articles should therefore be checked to ensure that they are consistent with the new Act.   

·        AGM’s and the retirement of Directors by rotation. Since 1 October 2007 private companies no longer need to hold an Annual General Meeting unless they are require to by their articles. If your company does not want to have to hold an AGM, reference to that should be removed from the articles.  

·        EGM. The new Act only recognises general meetings and Annual General Meetings, therefore all references to EGM’s should be removed. 

·        Company Secretary. Since 6 April 2008 private companies no longer need to have a Company Secretary subject to any contrary provisions in their articles. If a company no longer has a company secretary, it may wish to update its secretarial arrangements and its articles (although the act will determine who has power to carry out the secretary’s functions where no one is appointed).  

·        Director’s age limits. Any articles requiring the director’s age to be disclosed if he has attained the age of 70 years or more or limiting the age of a director who can be appointed may breach the Employment Equality Age Regulations 2006. 

·        The Chairman’s casting vote. Since October 2007 the casting vote of the chairman of a meeting has been ineffective unless the Company’s Articles made provision for a casting vote in the same terms as regulation 50 of table A. 

Indemnities for Directors

The new Act introduced new provisions under which a director of a company that is a trustee of an occupational pension scheme may be indemnified against liability incurred in connection with that company’s activities as trustee of the scheme. Companies should check and consider amending any indemnity provisions in their articles to cover. 

·        Register of Transfers. Since 6 April 2008 if a Company refuses to register a share transfer it must give reasons and notify the transferee as soon as practicable and in any event within 2 months. Any articles that state that a company does not have to provide reasons for refusing to transfer a certificated share should be amended to reflect section 771.  

·        Reductions of Capital: The powers of a company to reduce its capital under section 641 to 653 which have been in force since October 2008 are subject to any restrictions or prohibition in a companies articles. If the articles do not include such provisions you may consider modifying the articles by a special resolution to do so. 

Nomination of third parties to enjoy shareholder rights. Where authorised under the articles, members that have the right to elect that certain shareholder rights may be exercised by that members nominee. The extent to which any rights may be delegated may be restricted in the articles.

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