What it means
Every company has articles, whether the founders drafted their own or simply adopted the standard model set the registry provides. They cover the plumbing of corporate life: share classes and the rights attached to them, dividend procedure, director powers and quorum, transfer restrictions and the process for amending the articles themselves.
They sit alongside the memorandum or certificate of incorporation, which is the document that brings the company into existence. The articles matter most on the days when people disagree.
Whether a minority shareholder can block a new share issue, whether a departing founder must offer shares to the others first, and whether the chair holds a casting vote are all answered by the articles rather than by fairness or by what everyone assumed. Investors read them closely before committing money.
Growing companies usually amend their articles at the first serious funding round. New share classes carrying preference rights, drag-along and tag-along provisions governing a future sale, and reserved matters requiring investor consent are all written in at that point.
Amendment normally requires a special resolution, commonly 75% of votes cast, and the amended articles must be filed with the registry. The common confusion is between the articles and a shareholders' agreement.
The articles are public and bind everyone who holds shares, while a shareholders' agreement is private, binds only those who sign it and keeps commercially sensitive terms out of view. Where the two conflict, the articles generally prevail on matters of company law, so the two documents have to be drafted to line up.
Finance leaders should treat the articles as an operating document rather than a filing formality. Dividend timing, director authority limits and the mechanics of issuing shares to a new hire all depend on what the articles actually say.
A share option scheme, for example, can stall for weeks if the articles cap the authorised share capital or require consents nobody anticipated. Reviewing the articles is also a standard part of any due diligence exercise.
A buyer or investor will check the transfer provisions, the consent thresholds and whether past share issues actually followed the stated process, and unwinding a defective issue years later is slow and expensive.
In practice
Real-world examples
Example 1
A founding team wants to bring in a fourth shareholder but the articles contain pre-emption rights requiring new shares to be offered to existing holders first. The company must either follow that process or pass a special resolution disapplying it before the investment can complete.
Example 2
A venture investor requires new articles creating a class of preference shares that pay out first on a sale, plus a list of reserved matters the board cannot approve without investor consent. The amended articles are filed with the registry and become the public record of those rights.
Example 3
A departing co-founder tries to sell his 18% holding to a competitor, and the articles contain a compulsory transfer provision requiring shares of a leaver to be offered to the remaining shareholders at fair value. The sale to the competitor cannot proceed.
Think of it
Think of the articles as the rulebook for a board game. Before anyone starts playing or trading properties, everyone must agree on the rules for taking turns, winning, and settling disputes.
Case study
Seen in the real world
Ridgeway Analytics is an illustrative, fictional software company incorporated by three friends who used the free model articles supplied by the registry and never looked at them again. Five years later, one founder wanted out and expected the others to buy his shares.
The model articles contained no compulsory transfer mechanism, no pre-emption on transfers to outsiders and no agreed valuation method, so the departing founder was free to sell his 30% to anyone willing to pay. Negotiations took nine months and consumed far more in legal fees than a bespoke set of articles would have cost at the outset.
The fictional company ended up adopting new articles as part of the settlement, adding leaver provisions, a valuation mechanism and drag-along rights. The episode is a common one in early-stage businesses, where the cheapest document at incorporation becomes the most expensive one later.
Watch out
Common mistakes
- Treating the model articles supplied at incorporation as adequate for a company that has taken on outside shareholders or multiple share classes.
- Assuming a shareholders' agreement can override the articles on company law matters, when the articles usually take precedence where the two conflict.
- Amending the articles informally by board minute rather than passing the required special resolution and filing the change with the registry.
Questions
People also ask
Are the articles of association public?
Yes, they are filed with the company registry and can generally be inspected by anyone, which is why sensitive commercial terms often sit in a private shareholders' agreement instead.
How are articles changed?
Normally by a special resolution of shareholders, commonly requiring 75% of the votes cast, followed by filing the amended document with the registry.
What is the difference between the articles and the memorandum?
The memorandum or certificate of incorporation creates the company and records its founding subscribers, while the articles govern how the company is run day to day.