The constitution of a company comprises two documents:
The Memorandum regulates the external affairs of the company; the Articles of Association regulate its internal affairs.
The memorandum of association is the formal, legal constitution governing a company, often simply called the memorandum. It is the document that governs the relationship between the company and the outside. It is one of the documents required to incorporate a company in the United Kingdom, Ireland and India, and is also used in many of the common law jurisdictions of the Commonwealth.
Typically, the memorandum will state the company's name, the location of its registered office, its objectives, that the liability of its members is limited and the amount and type of shares.
While it is still necessary to file a memorandum of association to incorporate a new company, since 1 October 2009 it no longer forms part of the company's constitution and it contains limited information compared to what was previously required.
It is basically a statement that the subscribers wish to form a company under the 2006 Act, have agreed to become members and, in the case of a company that is to have a share capital, to take at least one share each. It is no longer required to state the name of the company, the type of company (such as public limited company or private company limited by shares), the location of its registered office, the objects of the company, and its authorised share capital.
Companies incorporated prior to 1 October 2009 are not required to amend their memorandum. Those details which are now required to appear in the Articles, such as the objects clause and details of the share capital, are deemed to form part of the Articles.
The memorandum no longer restricts what a company is permitted to do. Since 1 October 2009, if a company's constitution contains any restrictions on the objects at all, those restrictions will form part of the articles of association.
Historically, a company's memorandum of association contained an objects clause, which limited its capacity to act. When the first limited companies were incorporated, the objects clause had to be widely drafted so as not to restrict the board of directors in their day to day trading. In the Companies Act 1989 the term "General Commercial Company" was introduced which meant that companies could undertake "any lawful or legal trade or business."
The Companies Act 2006 relaxed the rules even further, removing the need for an objects clause at all. Companies incorporated on and after 1 October 2009 without an objects clause are deemed to have have unrestricted objects. Existing companies may take advantage of this change by passing a special resolution to remove their objects clause.
If the company is to be a non-profit making company, the articles will contain a statement saying that the profits shall not be distributed to the members.
The memorandum of association records the agreement of the first subscribers to form a company under the 2006 Act, to become members and, in the case of a company that is to have a share capital, to take at least one share each.
The articles of association of a company, often simply referred to as the articles, are the regulations governing the relationships between the shareholders and directors of the company, and are a requirement for the establishment of a company under the law of India, the United Kingdom and many other countries. Together with the memorandum of association, they form the constitution of a company. A similar term, "articles of agreement", is often used for non-profit organizations.
In the United Kingdom, model (and default) articles of association known as Table A have been published since 1865. The articles of association of most companies - particularly small companies - are Table A, or closely derived from it. However, a company is free to incorporate under different articles of association, or to amend its articles of association at any time by a special resolution of its shareholders, provided that they meet the requirements and restrictions of the Companies Acts. Such requirements tend to be more onerous for public companies than for private ones.
The Companies Act 2006, which received Royal Assent on 8 November 2006 and was fully implemented on 1 October 2009, provides for a new form of model articles of association for companies incorporated in the United Kingdom. Under the new legislation, the articles of association will become the single constitutional document for a UK company, and will subsume the role currently filled by the separate memorandum of association.
Articles can be amended by a resolution formally approved by a meeting of the company's members. Directors should always study the articles of their company.
Action: Obtain a copy of your memorandum and articles and study it carefully so that you are aware of any processes and restrictions that might affect your board's behaviour.
By Richard Winfield, Founder of the Brefi Group.