Over Taylor Biggs

This article looks at the impact on Articles of Association of private limited companies only and is intended to provide a brief overview of some of the points arising out of the new changes and is not intended to provide a comprehensive guide and does not cover every aspect of the topic and is not intended to provide legal or other advice.  If you do require assistance after reading this article please contact Karl Taylor.

Is it necessary for a company incorporated prior to 1 October 2009 to amend its Articles of Association to comply with the new legislation?

The answer is no.  The relevant sections of the Companies Act 2006 (CA 2006) will, where relevant, override inconsistent provisions between the CA 2006 and the company's current Articles of Association.  There is a danger that there will be some duplication and certain inconsistencies between the provisions of the CA 2006 and the Articles of Association of the company.

What are the principal changes brought about by the new provisions of the CA 2006?

Broadly, they are as follows :-

1.         Entrenched share rights -

It is now possible for a company to include certain entrenched rights within its Articles so that they can only be changed if specified conditions or procedures that are more restrictive than simply passing a special resolution are fulfilled.

2.         No need for objects -

The company no longer requires a Memorandum of Association containing the objects of the company.  The objects of the company restrict what the company can and cannot do.  For most companies, incorporated as general commercial companies, there will be very little change in this regard.  Following 1 October 2009 the objects of any existing company will be deemed incorporated into its Articles of Association and will continue to restrict the company's capacity.

3.         No need for authority to allot -

Where a private company has only one class of shares the directors will no longer need authority from the shareholders to allot new shares.  It will be necessary for companies incorporated before 1 October 2009 to pass an ordinary resolution that the directors should have the powers under that section.   As such, when the company's current authority to allot shares expires, the directors have the ability to seek an ordinary resolution from its members providing that they will no longer need authority from the shareholders to allot new shares. 

The directors of companies with more than one class of shares will need authorisation to allot shares either through the company's Articles or via an ordinary resolution. 

4.         Pre-emption rights on share issues still apply -

The CA 2006 restates the pre-emption provisions in relation to the issue of shares under the current Companies Act 1985 (CA 1985).  However, the directors of companies with only one class of shares can allot shares as if pre-emption rights do not apply if authorised to do so by the Articles or by special resolution.  Any companies with existing dis-applications of the current statutory pre-emption rights will still be valid.

5.         No requirement for an authorised share capital -

With effect from 1 October 2009 a company will no longer need to have a maximum authorised share capital.  It may be sensible to remove any reference to the stated maximum after 1 October 2009 under the circumstances where the relevant provisions of the CA 2006 have been authorised by the shareholders of the company in relation to the authority to allot shares. 

It should be noted though that companies incorporated before 1 October 2009 will continue to be subject to any authorised maximum capital stated in the Company's Memorandum of Association.

6.         Companies are able to redenominate and subdivide their share capital -

A company will be able to sub-divide or consolidate its shares unless it is expressly restricted or prohibited by its Articles. 

A company will be able to re-denominate its share capital or any class of shares into another currency by passing an ordinary resolution to that effect.

7.         A company can issue redeemable shares -

The CA 2006 permits companies with effect from 1 October 2009 to issue redeemable shares without specific authority under its Articles.  Existing companies who have such a provision within their Articles may wish to consider deleting it to avoid repeating what is in the CA 2006 and those existing companies who do not have such authority and wish to continue the ability to restrict the issue of redeemable shares, will need to amend their Articles to put an express restriction within those Articles, otherwise under the CA 2006 the company will be authorised to issue redeemable shares. 

8.         Changes to redeemable preference share rights -

Two important points arising out of the new provisions of the CA 2006 in connection with redeemable shares are :-

(a)        The directors of the company will be entitled with effect from 1 October 2009 to determine how shares are redeemed, if they are authorised to do so by the Articles or an ordinary resolution.  If they are not so authorised, the terms of the redemption must be set out in the Articles.  This may be a concern for existing shareholders, who may wish to retain control over the terms of redemption (ie limit it to amendment to the Articles of Association only).

(b)        Whereas historically it was not possible for a company to redeem shares whereby payment was made at a date later than the date of redemption, the new provisions of the CA 2006 allow this, provided the terms of redemption (whether fixed by the Articles or by the directors) allow this and the holder of the shares agrees.  It is possible for companies with redeemable shares in issue before 1 October 2009 to take advantage of this new flexibility by amending the terms of redemption in the company's Articles by way of a special resolution (as well as any necessary class consents) following 1 October 2009.

9.         Changes to company own share purchases -

There have been some substantial changes as a result of the CA 2006 in relation to the repurchase of shares by a company.  Historically, it was necessary for a company to be able to repurchase any of its shares, for that right to be included within the Articles of the company.  The new legislation permits a repurchase of shares unless (and to the extent) restricted or prohibited by the company's Articles.  The position is, therefore, reversed to the current position.  The existing safeguards of the purchase requiring approval by a special resolution have been maintained.

In addition to the changes to rights in connection with the purchase of own shares, with effect from 1 October 2009, a company will have the right to redeem or purchase shares out of capital unless its Articles restrict or prohibit the right in accordance with the provisions of the CA 2006.  There are once again certain safeguards maintained in relation to redemptions or repurchase out of capital, which include the passing of a special resolution and also the giving of a director's statement, which is in effect a solvency statement with regard to the financial position of the company when a capital reduction takes place. 

10.        Change of company name made easier -

Historically, companies if they wished to change their name needed to do so by way of shareholder approval by special resolution.  However, the new provisions of the CA 2006 provide an alternative procedure for changing its name.  This procedure has not actually been prescribed in the CA 2006 and as long as it is included within the Articles it could simply involve vesting such power in the directors.  Including a change of name procedure in the Articles will not exclude the shareholders' right to change the name by special resolution.

11.        A quick recap on the provisions of the CA 2006 already in force in relation to the Articles of Association of a private limited company -

• The CA 2006 permits communication between a company's shareholders and holders of debt securities via an electronic route.  For example, the company can now communicate with its members via a website. 
  
• There are now detailed provisions with regard to the approval of directors' conflicts of interest.  Directors have since 1 October 2008 been required to avoid conflicts with the company's interests.  The duty is not infringed if the matter has been authorised by the directors.  The directors of a private company incorporated on or after 1 October 2008 have an automatic power of authorisation unless the Articles state otherwise.  Private companies incorporated before that date need to resolve to make such an authorisation.
  
• Notice periods for general meetings have now changed and the notice period required for general meetings is 14 clear days, even if a special resolution is proposed.  Private companies may now also hold shareholder meetings on short notice with the consent of a majority (in number) of shareholders holding 90% or more of the voting shares.  This reduces the previous requirement for 95% approval.
  
• Since 1 October 2007 private companies have, except in very limited circumstances, been able to pass written ordinary resolutions by a simple majority of those shareholders eligible to vote and written special resolutions with a 75% majority of those eligible to vote, rather than the historic position where unanimous consent was required. 
  
• The rights in connection with proxies have changed and the rights of proxies under the CA 2006 override any conflicting provisions in the company's Articles.  Articles can extend proxy statutory rights but not reduce them. 
  
• Since 1 October 2007 private companies no longer need to hold annual general meetings unless they are required to do so by their Articles.  For example, if a private company dispenses with holding AGMs but its Articles still require the retirement of directors by rotations at an AGM, the directors will still have to vacate office within the period set out in the Article, even if no AGM is held.  It is, therefore, important that Articles are amended to clarify the position.  It is likely that the retirement by rotation provisions should now in most cases be deleted.
  
• The CA 2006 only recognises general meetings and annual general meetings and references to EGMs or extraordinary general meetings are now defunct and should be removed. 
  
• Private companies need no longer have a company secretary.  However, somebody else will need to take responsibility for carrying out the functions of the secretary if one is no longer appointed.
  
• The director age limit, which restricted the appointment of directors who were older than 70, has been repealed. 
  
• The chairman's casting vote, which applied in the event of an equality of a vote on a show of hands, has been ineffective since October 2007.  There is a caveat to this and this was that if immediately before 1 October 2007, the Articles made provision for a casting vote in the same terms as those provided in Table A, then those provisions would still apply. 
  
• There have been new and wider provisions incorporated in relation to directors' indemnities. 
  
• The company can refuse to register a share transfer as it historically could, but it must now give reasons and notify the transferee as soon as practicable and in any event within two months of the reasons for the refusal.  Any proposed transferee can request those reasons for refusal to register the transfer.
  
• The powers of a company to reduce its share capital under the CA 2006, which have been in force since 1 October 2008, are subject to any restrictions or prohibitions in the company's Articles. 
  
• Where authorised under its Articles members have the right to elect certain shareholder rights may be exercised by that member's nominee.  There can be restrictions on the level of delegation provided in the Articles. 

September 2009