INSIGHT: Are Your Articles Filed and Forgotten?
Remember when you first set up in business and took lots of legal advice to make sure that everything was properly established and above board?
How long ago was that?
Chances are that your business has grown and changed since then, but many companies don’t take a step back to ensure that their articles of association have changed to meet the current structure and circumstances of their company, consequently they may no longer be fit for purpose.
Articles of association are the framework constitution for the day to day management of a company. Contrary to common business practice, articles of association are not a ‘file and forget’ once-in-business-lifetime requirement, particularly if you just bought your articles “off the shelf”; your articles should be a current document which you review on a regular basis just like you would review the contents of your employment contracts or your health & safety policy.
It is essential that your articles not only address the specific needs of your business, but also that they reflect changes in the law. For example, many SMEs still have articles that are rooted in the Companies Act 1985, or even 1948, rather than the Companies Act 2006, which introduced greater flexibility for English SMEs.
For example, prior to the Companies Act 2006, the default position was that owner-managed businesses were required to hold an AGM every year, which was an onerous stipulation for many. The Companies Act 2006 changed the default position such that companies don’t need to hold an AGM, but if your articles have not been changed you are still required to hold one.
Companies registered after 1 October 2009 have very different articles of association from those registered prior to that date. As a result, the issue of articles that are no longer fit for purpose can affect any company that is more than five years old.“ A review of your articles is particularly important where there are two or more directors and shareholders in the company to ensure that they develop and progress with the business so that the shareholders and directors rights and interests are protected by being embedded in the documentation,” says head of corporate, Steve Hartley.
“A shareholders’ agreement is also highly advisable in that it can set out how the shareholders’ will govern their relationship between each other and with the company, such as how shares can be transferred, must a director sell his shares if he ceases to be a director, or what happens if a majority of shareholders want to sell their shares to a third party but a minority do not; how decisions will be made; whether any individual shareholder has a right to veto any decision.”
In many owner-managed businesses the directors’ focus is so firmly set on running day-to-day operations that the fundamental building blocks of a company’s structure can sometimes be overlooked.
However, just a small investment with a company law specialist would not only be beneficial in streamlining your obligations but could also be vital in protecting your company’s future and, if you are thinking of selling, making the company a more attractive proposition to prospective purchasers.
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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
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