What is the Constitution of a Company?
Regardless of the size of a limited company it is still essential to ensure that the constitution (i.e. the rules governing the internal and external operation of the company), are accurate and up to date. Not only is this important on a practical level but it is also important from the perspective of the directors. Directors are only allowed to operate within the remit of the constitution and therefore if the actions are not allowed under the constitution directors can find themselves in breach of their duties if they continue along this course of action.
Typically the constitutional documents are established at the outset when the company is set up. This can mean that over the course of the life of the business these need to change. Recognising that these changes need to take place is the first step and secondly then the administrative processes need to be determined so that they can be duly followed. These processes have recently been altered by the Companies Act 2006.
Changes under the Companies Act 2006
One of the main aims of the Companies Act 2006 was to simplify processes, particularly for the purposes of private companies. It was recognised that private companies were often placed under an undue administrative burden and as such the simplification of the processes were necessary. One of these changes was to merge the two key constitutional documents (the memorandum and the articles of association) which were in reality viewed as one for the purposes of the company administration.
Typically the memorandum of association would contain the objects of the company, detailing the purposes for which the company would operate. Under the new provisions the memorandum of association is no longer required with the objects being contained as part of the articles of association. Where there are no objects contained in the articles of association and these have been established since October 2009 it will be thought that the objects are unrestricted.
Contents of the Articles of Association
Central to the operation of a company is the contents of the articles of association. These contain provisions such as how the directors need to conduct the business of the company including factors such as how meetings are held or how meetings should be conducted. Necessary quorum levels are also stated in the articles of association.
It is not only relevant for the purpose of how the directors conduct their own business within the company but also offers guidance to shareholders as to how the administration of their meetings should be undertaken. With this in mind it is important to recognise that the articles of association are a matter that should be considered and understood by not only the directors but also the shareholders. When a shareholder takes shares in the company they become bound by the provisions of the articles of association and they will be part of any decision making process in terms of changing the articles in the future.
Regardless of the type of change that is being proposed, it will be 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. Similarly where there are dramatic changes in the structure of the organisation such as new share classes, changes will almost invariably be required to reflect the different voting rights associated with these new classes.
In order to amend the articles of association a special resolution is required. This means that 75% of those present at the meeting and entitled to vote need to vote in favour of the changes for them to be applicable. These then have to be filed at companies house. Alternatively, there can be a written resolution where 95% of those entitled to vote approve the changes in writing. This is a particularly useful opportunity 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 o the constitution are undertaken with changes made in one go, rather than on a piecemeal basis. Whilst annual meetings are no longer required, in reality these are still likely to form the basis of company administration and are a perfect 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 that it meets the needs of the organisation.
- Where sensible use written resolutions to approve changes.
- Ensure that an individual is responsible for maintaining and administrative record of any changes.