Briefing Note - Background, Nature and Effect
of Articles of Association under UK Company Law

A company limited by shares has the option adopting the standard 'Table A' Articles or amending those standard form Articles in accordance with the Companies Act. Along with companies limited by guarantee and unlimited companies, a copy of the articles of association and the memorandum of association must be lodged with the Registrar of Companies at Companies House. The Articles to be adopted by the company must be signed by subscribers to the Memorandum and prescribing regulations for the company.

Table A Articles

Table A contains a model set of regulations for the management of a company limited by shares. in the case of such a company, if articles are not registered with the memorandum of association or, if articles are registered, in so far as the articles do not exclude or modify the regulations in Table A those regulations are so far as applicable and as in force at the date of the company’s registration, the articles of the company in the same manner and to the same extent as if articles in that form had been duly registered.

Where a company is not formed under companies legislation but is authorised to register under the Companies Act 1985 and does register, the regulations in Table A do not apply unless adopted by special resolution. An article of Table A may be excluded by implication: see R Paterson & Sons Ltd v Paterson [1916] WN 352.

Table A Not Used

The articles must be printed, be divided into numbered paragraphs and signed by each subscriber of the memorandum, with a witness present. Since 1 August 1970 stamp duty has not been chargeable.

In the case of a company limited by shares - if articles are not registered, or, if articles are registered, in so far as they do not exclude or modify Table A, that Table constitutes the company’s articles to the same extent as if articles in the form of that Table had been registered.

The articles for an unlimited company having a share capital must state the amount of share capital to be registered with that company.

Under EC law it may be that the articles should, in a case where the number of directors is only one, explicitly state, for the purpose of registration, that such one director may alone represent the company, even though this is in any event the position under the general law.

Effect of the Articles

When the memorandum and articles of association are registered, the company is bound to its shareholders, as though those shareholders had individually signed and sealed it and also contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles: Companies Act 1985, s.14(1). The articles of association become a contract between the company and its shareholders; it is a statutory contract of a special nature.

Courts regarded these documents as a business documents and therefore construed so as to give them business efficacy.

As with a memorandum of association, how far the articles constitute a binding contract between a company and its shareholders on the one hand and between its shareholders inter se on the other hand, is not entirely unclear. It has been held that the contractual force given to the articles is limited to provisions which apply to the relationship of shareholders in their capacity as shareholders, not a private one.

Inconsistencies between the Articles and the Memorandum

The articles are subordinate to the memorandum; any clause in them which is inconsistent with the memorandum, is overruled: Guinness v Land Corpn of Ireland Ltd (1882) 22 ChD 349 at 376.

The memorandum is the charter of the company which defines its powers The articles of association play a another role. They outline the duties, rights and powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on and in which changes in its internal regulations may be made.

The memorandum and articles may, however, in certain circumstances be read together, at all events so far as may be necessary to explain any ambiguity appearing in the terms of the memorandum or to supplement it upon any matter as to which it is silent.

Altering the Articles

Articles of association may be altered through special resolution. The shareholders voting in favour of the resolution must do so using their power to vote bona fides for the benefit of the company.

Any alteration must be made in good faith for the benefit of the company as a whole: Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154, CA. This means the company as an entity, or as the interest of ‘an individual hypothetical member’: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 at 291, [1950] 2 All ER 1120.

It is for the shareholders to determine whether or not the alteration is for the benefit of the company. The alteration may affect the rights of a member as between himself and the company by retrospective operation, since the shares are held subject to the statutory power of altering the articles.

If a contract whether with a member or an outsider is so drawn as by its terms or implication to prohibit the company from altering its articles to the prejudice of the other contracting party, then, although the company cannot be precluded from altering its articles, thereby giving itself power to act upon the provisions of the altered articles, so to act may nevertheless be a breach of the contract.

The articles cannot be so altered as to increase the liability of a member to contribute to share capital or otherwise to pay money to the company without his consent; and a special resolution altering articles may be impeached if its effect is to discriminate between the majority of shareholders and the minority shareholders so as to give the former an advantage of which the latter are deprived. In a case where an order by the court by way of protection of a member of the company against unfair prejudice requires the company not to make any, or any specified, alteration in its articles, the company has no power without leave of the court to make any such alteration.

Invalid Articles

Articles are not valid if they restrict the rights of shareholders as conferred by statute or to breach the provisions of an Act of Parliament. Although, if contemporaneous with the memorandum, articles may explain ambiguities in the memorandum, they cannot alter or extend it. Thus, a power to borrow contained in the memorandum cannot be enlarged by the articles into a power to issue irredeemable debenture stock; and, if the memorandum defines the rights of the respective classes of shareholders, these cannot be altered by the articles. The importance of this doctrine against the alteration of the memorandum by the articles has, however, been diminished by the statutory power to alter conditions which could have been contained in articles of association.