Model articles of association - risks and reasons to update

Model Articles of Association represent the default constitution for companies incorporated under the Companies Act 2006.

While they provide a basic governance framework, companies often need to modify these standard provisions to protect shareholder interests and ensure effective operations. Understanding when and how to adapt model or standard Articles proves crucial for long-term business success.

Risks of relying on Model Articles

Minority shareholders are most exposed under Model Articles as they lack protection against key decisions being made by simple majority votes, can have their directors removed by ordinary resolution, and have no pre-emptive rights or restrictions on share transfers to prevent dilution or unwanted new shareholders. Family businesses and owner-managed companies are also particularly vulnerable as Model Articles don't address succession planning or deadlock situations in 50:50 ownership structures.

Model Articles are very commonly changed to provide adequate protection, especially for minority shareholders or new investors. Changes we regularly implement for clients include :-

• Director appointment and removal - Under Model Articles, directors can be appointed by ordinary resolution of shareholders or by decision of the directors (board resolution) and directors can be removed by ordinary resolution of the shareholders. Changes may include allowing shareholders with defined shareholdings to appoint directors, ensuring board representation for key stakeholders even with minority holdings and/or requiring special majorities or specific conditions before directors can be removed, protecting against opportunistic removal by majority shareholders

• Key decisions - Model Articles specify that most board decisions can be made by simple majority of directors (subject to meeting quorum requirements), while shareholder decisions require either ordinary resolution (over 50%) or special resolution (75%) depending on the matter, with no specific protection for key/critical business decisions beyond statutory requirements. Enhanced provisions often prove necessary to protect minority interests and ensure efficient operations, such as higher voting thresholds for critical business decisions and reserving some issues for specific shareholder approval, such as borrowing limits or major asset sales.

• Clear deadlock resolution mechanisms - including structured processes for breaking board-level impasses, including mediation and buy-out procedures.

• Share transfer restrictions - model Articles provide minimal restrictions, often necessitating additional protections for existing shareholders such as comprehensive pre-emption rights giving existing shareholders first refusal on share transfers, protecting against unwanted new shareholders and maintaining intended ownership balance.

• Tag-along and drag-along provisions - including these mechanisms ensures that minority shareholders can join in sales on same terms or requiring all shareholders to join in approved sales, providing exit protection.

• Compulsory transfer triggers - specific events requiring share transfers, such as death, incapacity, or employment termination, ensuring orderly transition of ownership.

• Fair value determination mechanisms - clear processes for share valuation, including appointment of experts and valuation methods to prevent disputes.

• Information rights and financial reporting - requirements for regular financial updates and access to company information, ensuring transparency.

• Anti-dilution protections - mechanisms preventing unfair dilution through new share issues, maintaining proportional ownership.

• Dividend policy - clear criteria for dividend declarations and distributions, preventing majority shareholders from withholding returns.

• Exit mechanisms - defined processes for minority shareholders to exit at fair value if relationship breaks down

When to change model articles

We recommend that clients consider amending model articles as early as possible after setting up their company, especially for high growth companies. If that doesn't happen, the triggers for varying articles tend to include :-

• Introduction of new shareholders - ensuring proper protections for all parties and clear operating procedures.

• New share classes - such as preference shares, management shares, or alphabet shares for different dividend rights.

• Implementation of employee share schemes - protecting existing shareholders while enabling employee participation.

• Family succession planning - ensuring smooth transition between generations and maintaining family control.

• Preparation for external investment - meeting investor requirements and expectations while protecting founding interests.

• Responding to shareholder disputes - implementing stronger protection mechanisms and dispute resolution procedures.

How to change Articles

Minority shareholders often face significant hurdles when seeking to change Articles of Association because any changes require a special resolution with 75% shareholder approval - meaning without majority shareholder support, minorities cannot force through protective provisions.

The amendment process requires careful attention to both legal requirements and practical considerations. The process involves several key steps:

• Special shareholder resolution requiring 75% approval.

• Filing new articles at Companies House within 15 days of resolution passing.

• Integration with existing company documents and procedures.

Contact us

For expert assistance with reviewing or amending your company's articles, contact our corporate team. We provide practical, commercial advice tailored to your business needs.