The Articles of Association are the rules that specify how a company is governed and run. When you formed your company, the Companies House registry automatically generated a set of default company Articles for your company, known as the Model Articles. We bet you never read them. That’s okay, nobody does.
It’s great to get a set of default articles thrown in for free, but you should know that they come with a bunch of problems and limitations:
- Board meetings need a unanimous director vote – that’s bad, it can create decision gridlock.
- The default articles don’t give company founders any automatic right to transfer their shares – that’s bad for founders.
- There’s no provision for vesting of founder shares – i.e. if one founder leaves after a month, they keep all their shares – that’s really bad for your ability to raise funds in the future.
- There’s nothing about the Tag-along, Drag-along, Compulsory transfer provisions that you and your investors will be looking for.
- There’s nothing about Exit provisions, i.e. what happens if you sell your business.
All of which means that, when you raise your first funding round, your investors are going to be expecting an all-new Articles document, which adopts your existing Model Articles as a starting point and then picks up from there.
The good news is that updating your company’s Articles is pretty easy, all you need is a board meeting and majority (as specified in the articles that you want to replace!) agreeing to the adoption of a new set of articles. And then you need to file the new articles with Companies House within 30 days, so they have a copy too.
The company Articles are what’s known as a Public Contract, which means that unlike most other documents they’re not signed by the directors and private to only the parties to that agreement. Rather, the articles aren’t signed at the bottom, and they are posted on the Companies House site publicly for the world to see.
Because the articles are public, generally the goal is to avoid putting information that you’d like to keep private (the names of shareholders, share vesting details, founder stock options, whatever) in the articles, and instead specify that information in the Shareholder Agreement, which is private to just the shareholders.