Adopting Model Articles: Is It the Right Choice for Your Business?

My Company has Model Articles as adopted on incorporation: should I consider a new set of bespoke rules?

Model Articles are often the default choice when incorporating a company. When starting a business, it's common to focus on the operations and industry demands, while the company's constitutional documents are given little thought. Many simply adopt the standard precedents. However, these documents are crucial as they outline how you run your company and specify the rules directors and shareholders must follow.

The key constitutional document of a company is the Articles of Association (Articles). The standard Articles adopted are the Model Articles of Association (Model Articles). It is not always the better choice for these to be the Articles for your company.

What are Articles?

The Articles of a company define how it governs itself and establish the rules. The Articles stipulate things like how the directors make decisions on the day to day running of the company as well as other decisions that are not referred to in a Shareholders Agreement. This highlights the importance of the Articles. The Article also set out the minimum number of directors required at a board meeting or the rules and procedures in place for the transfer of shares.

The Articles are a public document, and anyone can access them through the company’s registry at Companies House. It is therefore usual that a private Shareholder’s Agreement is also in place. It is important that the Articles and the Shareholders’ Agreement work cohesively setting out the relationship between shareholders and the directors of the company.

What are Model Articles?

When incorporating a company, founders first adopt the Model Articles as the legal document. They are drafted and can cater for private companies limited by shares, private companies limited by guarantee and public companies. The Model Articles are automatically adopted unless and until a company approves and adopts a different set of bespoke Articles. The Model Articles act as a good starting point and covers the key provisions needed in a company’s Articles. However, difficulties arise as the document is drafted to fit the mould of all companies. Therefore may not benefit all companies in the long-term.

The issues with Model Articles

As a company expands, we recommend adopting a more specific set of bespoke Articles. The need for this will likely become apparent in the early stages of development as inconsistencies arise between the Model Articles and the company's daily operations.

There may be particular circumstances that arise that your company’s Articles do not cater for as the company has adopted Model Articles. For example, the Model Articles specify that at least two directors must be present at a meeting to be able to action any business. If a company has a sole director then this rule does not apply. Also, if a director becomes unavailable due to illness or other unforeseen circumstances, the company cannot conduct business. Therefore, the company should appoint alternate directors to prevent such stalemates.

Another important point to consider with Model Articles is that they do not contain all the rules that a company needs to contemplate. This means that if the Model Articles do not cover a specific decision or rule, the company's directors must interpret the way forward.

It is also important to note that once a company drafts a Shareholders’ Agreement, contradictions often arise between the two documents. Therefore, the company must amend the Articles to ensure decisions are made quickly and in line with the correct procedure,. This will help avoid conflicts between the documents.

­How can we help?

As stated previously, we recommend adopting a bespoke set of Articles as soon as possible and practical. Especially if the company has drafted a Shareholders’ Agreement. This will prevent inconsistencies in the running of the company and prevent any issues in the future. This will increase the time and legal fees needed to rectify and correct procedures taken.

If you require a set of rules that are unique to your company, please contact our Corporate & Commercial team on 01256 320555.