What is the constitution of a company?
The constitution of a limited company outlines the rules governing its internal and external operation. Directors can only operate within the remit of their company’s constitution – if they fail to do so, they can find themselves in breach of their duties. It is therefore essential to ensure a company’s constitution is accurate and up to date.
Typically, the constitutional documents are established when the company is set up. Over the course of the life of the business, its needs may change. The administrative processes that need to be followed to enact these changes can be found in the Companies Act 2006 (CA 2006).
Changes under the Companies Act 2006
CA 2006 aimed to lighten the administrative burden on private companies. To this end, the two key constitutional documents – the memorandum and the articles of association (which were viewed as one for the purposes of the company administration) – were merged.
The memorandum of association used to contain the objects of the company, detailing the purposes for which the company would operate. These objects can now be outlined in the articles of association; where no objects are listed in articles of association established since October 2009, these objects are unrestricted.
Contents of the articles of association
The articles of association outline how directors need to conduct the business of the company, including how meetings are held or how meetings should be conducted. Necessary quorum levels are also included.
They also provide guidance to shareholders as to how the administration of their meetings should be undertaken. When a shareholder takes shares in the company they become bound by the provisions of the articles of association and will be part of any decision-making process in terms of changing the articles in the future.
Regardless of the type of change being proposed, it is necessary to get the approval of the shareholders. Typical changes will include changes to voting processes such as how proxy votes should be dealt with. Where there are dramatic changes in the structure of the organisation such as new share classes, changes will generally be required to reflect the different voting rights associated with these new classes.
To amend the articles of association a special resolution is required. This means 75 per cent of those present at the meeting and entitled to vote need to vote in favour of the changes for them to be valid. These then have to be filed at Companies House. Alternatively, there can be a written resolution where 95 per cent of those entitled to vote approve the changes in writing. This is useful when the changes are non-controversial or where shareholders are spread out making a physical meeting difficult.
Practical considerations with changing the constitution
Purpose of change
Even where the changes are not controversial, they can still prove to be administratively burdensome. For this reason it is recommended that regular reviews of the constitution are undertaken with changes made in one go, rather than on a piecemeal basis. While annual meetings are no longer required, these are still likely to form the basis of company administration and are a good opportunity to make changes to the constitution.
It is the responsibility of the company secretary (or if there is no secretary the directors) to maintain accurate records in relation to the constitution. Any changes should be incorporated into the articles and new versions maintained with the company books. Resolutions should be kept with the books and where appropriate, copies filed at Companies House.
- regularly review the constitution to ensure it meets the needs of the organization;
- where possible, use written resolutions to approve changes;
- ensure an individual is responsible for maintaining and administrative record of any changes.