Articles of association health check

Legal and regulatory changes, particularly those brought about by the Companies Act 2006, are prompting companies to assess whether their articles of association require updating.

This checklist enables private companies to assess how up to date their articles are. For guidance on the extra changes affecting private companies' articles, please consult a member of Wragge & Co's Public Companies team.

Director conflict of interests

Provisions come into force on 1 October 2008 providing statutory restrictions on a director participating in board decisions when his outside interests conflict with the company's. The new provisions enable a board of directors to sanction conflicts provided that where the company was incorporated prior to 1 October 2008 they have the approval of the shareholders and the articles do not prohibit this. For many companies, this will be appropriate, but in some cases (e.g. joint ventures or companies whose shares are held by different family groups) this may give rise to concern.

Depending on how your articles deal with conflicts of interest it may be necessary to make amendments to reflect the new provisions.

Extraordinary resolutions

Since 1 October 2007 the concept of an "extraordinary" shareholder resolution has ceased to exist. All resolutions are now either "special", "ordinary" or (until 1 October 2009 and only under Section 80A Companies Act 1985) "elective".

Do your articles contain references to "extraordinary" resolutions?

Director age limits

Under Section 293 Companies Act 1985, directors of public companies and their private subsidiaries could not remain in office beyond 70 years of age.

Since 6 April 2007 the upper age limit of 70 for directors has been repealed and directors no longer have a duty to disclose their age. Whether or not your company has a public parent company, if your articles contain director age limits then they could be breaching age discrimination provisions.

Do your articles impose age restrictions on directors?

Electronic communications

Since January 2007 the Companies Act 2006 has enabled companies to implement arrangements for distributing documents, such as annual accounts, to shareholders by website publication. Under these provisions, provided procedures are correctly followed, including amending the articles as appropriate to provide for website communication , shareholders will be deemed to have consented to these arrangements unless they expressly "opt-out". For private companies with a large number of members (e.g. where employees hold shares), the consequent savings in printing and postage costs could be substantial.

Do your articles permit the distribution of documents by website publication?

Indemnification of directors

Changes in the law have widened the scope of indemnities that can be given to directors. Older indemnity provisions in articles often do not make it clear whether the company could fund defence costs as they fall due during proceedings brought by third parties in which judgment is given in favour of the director.
Additionally, directors of pension trustee companies can now be indemnified in respect of liability incurred in connection with that role, either by that company or an associated company (i.e. normally the principal employer).

It is also advisable to provide expressly that directors can vote and be counted in the quorum in meetings where the board is considering providing a director indemnity or funding a director's expenditure in legal proceedings.

Do your articles expressly enable directors to be indemnified in respect of defence costs as they fall due?

Is the board empowered to vote on resolutions relating to director indemnification?

Proxy rights to vote on a show of hands at shareholder meetings

Since 1 October 2007 proxies have been permitted to vote on a show of hands as well as on a poll at general meetings. Many articles conflict with this provision as they are drafted under the assumption that proxies can only vote on a poll.

Do your articles conflict with the new law enabling proxies to vote on a show of hands?

Multiple proxies

Members holding more than one share are now legally entitled to appoint more than one proxy. This has prompted companies to amend their articles to make it clear that no proxy can be appointed to exercise rights which any other proxy has been appointed by that member to exercise. Some companies have gone further and inserted language to ensure that where additional proxies are appointed, the member must specify the number of shares that each proxy can vote on. In addition it may be prudent to provide that where a member purports to appoint multiple proxies in respect of the same share for the same meeting, none of those appointments are to be treated as valid.

Additionally, the Institute of Chartered Secretaries and Administrators now recommends that companies should not amend their articles to state that, when voting on a show of hands, multiple proxies should have no more votes than the member appointing them would have had if that member had attended in person. This reverses its previous recommendation.

This issue is most likely to be relevant where shares are held by trustees (e.g. for family interests or as part of an employee share scheme) and the trustees wish the underlying beneficiaries to direct how different shares are to be voted.

Do your articles adequately cater for the right of shareholders to appoint multiple proxies?

Does the drafting of the provisions in your articles deeming later proxy appointments to revoke earlier appointments conflict with the rights to make multiple proxy appointments?

Chairman's casting vote at shareholder meetings

The Department for Business, Enterprise and Regulatory Reform (BERR) has stated that it considers that the use of a chairman's casting vote to carry a shareholder resolution probably contravenes Sections 281 and 282 Companies Act 2006.

Many companies' articles contain provisions entitling the chairman to a casting vote on an equality of votes at shareholder meetings. BERR previously recommended that such articles be removed.

However, BERR has now ruled that companies whose articles provided for a chairman's casting vote immediately before 1 October 2007 may continue to rely on the relevant article notwithstanding the above sections. Furthermore, any such company which has subsequently amended its articles to remove the casting vote (whether or not in the belief that it was ineffective under the Companies Act 2006) may reinstate the provision and continue to rely on it. Other companies, including any incorporated on or after 1 October 2007, cannot rely on a chairman's casting vote provided for in their articles.

Do your articles contain provisions entitling the chairman to a casting vote at shareholder meetings? If so you should consider the incorporation date of the company and the impact (if any) on the validity of such a provision.

Or did you remove those provisions on or after 1 October 2007?

Notice of general meetings

General meetings can now be convened on 14 clear days notice even if special resolutions are to be passed. Companies are now amending their articles to reflect this change.

Do your articles still provide that general meetings with special resolutions must be convened on 21 days notice? Also, if your articles are based on a pre 1 October 2007 version of table A you will only be able to convene general meetings on shorter notice with the consent of holders of 95% of the issued share capital, rather than the 90% now permitted by the Act.

Shareholder nomination rights

Companies are now permitted to amend their articles to permit shareholders to nominate some other person to receive information and exercise certain rights instead of the registered member. This issue is again most likely to be relevant where shares are held by trustees who wish the underlying beneficiaries to receive company information.

Have your considered whether to amend your articles to include shareholder nomination rights?

Company Secretary

With effect from 6 April 2008 there is no longer a requirement for private companies to appoint a company secretary unless there is a specific requirement in your Articles for the company to have one.

Do your articles include a requirement to have a company secretary?

Annual General Meetings

Private companies are no longer required to hold Annual General Meetings (AGM) unless their articles contain an express requirement to hold AGMs.

Do your articles contain a requirement to hold AGMs?

Retirement by rotation

Where a company is no longer required to hold an AGM but its articles include provisions, requiring directions to retire by rotation it is not clear how and when such appointments terminate.

Do your articles exclude Articles 73, 74 and 75 of 1985 Table A? If not and there is no requirement to hold AGMs you should consider amending your articles to clarify the position.

Authorised share capital

Although not yet in force, provisions come into force in October 2009 abolishing the concept of authorised share capital and authorising the directions to allot shares. Existing restrictions on the amount of share capital which may be allotted and the directors' authority to do so will remain unless removed by an appropriate resolution of the members or amendment to its articles.

Do your articles include such restrictions?

These are just some of the amendments to be considered when reviewing your articles to ensure that you can take full benefit of the changes being introduced by the Companies Act 2006. You should also consider the following:

Do your articles contain out of date or incorrect statutory references?

Do your articles provide that there is no need to send notice of meetings to members for whom you have no current valid address?

Do your articles contain provisions regarding execution of documents? If so you should consider the implications of the Companies Act 2006.

Do your articles contain consent to short notice provisions which are affected by the new regime?

This checklist enables private companies to assess how up to date their articles are. If you would like us to review your articles and discuss with you our recommendations for updating then please contact Tracy Plimmer on +44 (0)870 903 1000. For guidance on the changes affecting public companies' articles, please consult a member of Wragge & Co's public companies team.