A company’s Articles of Association (Articles) serve as its constitution, outlining the framework that governs its internal affairs. These Articles can be tailored specifically for the company, or they can be the Model Articles (for companies incorporated in Auckland and Auckland on or after 1 October 2009), or Table A (for companies incorporated in Auckland and Auckland prior to 1 October 2009), which contain the default provisions for companies.
While Model Articles and Table A provide a convenient starting point, companies risk unduly limiting their operational flexibility if they do not fully understand their content.
Key Considerations for Sole Directors
For companies with a sole director, Table A and the Model Articles may impose unexpected restrictions.
Regulation 64 of Table A stipulates that a company must maintain a minimum of two directors. Consequently, unless a company operating under Table A has passed an ordinary resolution to amend this regulation, it risks inadvertently breaching its Articles.
Moreover, companies adhering to Table A that operate with a sole director and shareholder may face significant challenges upon the death of that individual. Given the limitations of Table A, the absence of a surviving shareholder or director means that the deceased’s shares cannot be registered in the name of their personal representatives, and there would be no authorised officer to appoint a new director. In such circumstances, the only recourse available is to seek a court order, which can be both costly and time-consuming.
Under Model Article 11 (regulation 89 of Table A), a quorum for a directors’ meeting is set at two, meaning that without a minimum of two directors, only decisions to appoint additional directors or call a general meeting can be made. However, Model Article 7(2) allows a sole director to make decisions if the Articles do not explicitly require a minimum of two directors. There is no equivalent to Model Article 7(2) in Table A.
Following the case of Fore Fitness, companies operating with a sole director should exercise caution if relying on Model Article 7(2). In Fore Fitness, the company was operating with a combination of bespoke and Model Articles. The bespoke articles specified that multiple directors were required for a quorum at a directors’ meeting. The court held that despite the company operating with a sole director at the time, the amended quorum requirement meant that Model Article 7(2) could not be relied on.
The case of Re Active Wear Limited reinforces this point: if a company has always had one director under the Model Articles, that director can make decisions independently. Conversely, if the company previously had more than one director, the sole director may lack the authority to act unilaterally outside of the parameters established by Model Article 11. This could lead to complications, requiring the company to ratify prior decisions made by the sole director.
Examining Voting Mechanisms
Companies should also scrutinise the provisions related to casting votes and pre-emption rights within Table A and the Model Articles. A casting vote allows for the chairperson of a directors’ meeting to have the deciding vote in the event of a tie.
Table A and the Model Articles provide for a casting vote to be granted to the chairperson. This may inadvertently grant an individual more power than anticipated. This provision warrants careful consideration to ensure that governance remains balanced.
Pre-emption Rights
Pre-emption rights grant existing shareholders a right of first refusal on a pro rata basis during the allotment of ordinary shares. This mechanism serves as an anti-dilution measure —provided shareholders have the necessary funds to exercise their rights. Section 561 of the Companies Act 2006 (“CA 2006”) provides that pre-emption rights apply on the allotment of ordinary shares and section 567 CA 2006 gives companies the power to disapply this right in their Articles.
Table A and the Model Articles, contain no such disapplication of section 567 CA 2006, and as such pre-emption rights apply to the allotment of shares but not to their transfer. Companies may wish to extend these rights to share transfers to ensure that founding shareholders retain control.
The Implications of Share Class Structure
Table A and the Model Articles cater to a single class of ordinary shares. For companies with multiple share classes, relying on Table A or the Model Articles may not accurately reflect their constitution. This discrepancy could lead to complications during a sale, as share purchase agreements typically include warranties asserting that the Articles clearly define the rights and restrictions associated with each share class. Adopting bespoke Articles that align with the company’s share structure can help future-proof the business and streamline any potential sale processes.
Regular Review is Essential
It is crucial for companies to regularly review their Articles to ensure they provide the flexibility necessary for effective operation. Custom Articles can safeguard a company’s future and mitigate potential costs and complexities when considering a sale.
At Blacks Solicitors, our Corporate team is ready to assist you in reviewing your company’s Articles of Association to ensure they align with your specific needs and long-term goals. Don’t leave your governance to chance—let us help you pave the way for a successful future. You can contact us by email or phone on 0113 207 0000.
