Company Structures
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How are companies owned and operated in England and Wales?
A company is generally owned by way of shares that are issued to investors. In principle, there are almost no limits to the number of shares that can be issued in a company and the various types of shares that can be created.
It’s the owners of the shares (the shareholders) who ultimately have the power to determine the direction of the company. This is done by exercising their voting rights at shareholder meetings. However, since shareholders generally don’t deal with day-to-day operational matters, such meetings tend to be held far less frequently than board meetings.
The overall framework in which directors and shareholders operate a company is set out in its articles of association. These essentially act as the 'constitution' of the company. Articles of association will often prove to be critical in your efforts to assert your rights as a shareholder.
What are articles of association?
'Articles of Association' and 'Memorandum of Association' are documents that regulate the powers of a company and the rights of shareholders. Being familiar with how they work will help you to protect your rights and promote your interests as a shareholder.
Every private limited company in England and Wales has its own 'Articles of Association' and 'Memorandum of Association' — often simply called 'the articles' or 'the memorandum'. Since October 2009, the role of the memorandum has been greatly reduced. This is because it has no real purpose beyond serving as evidence of the identities of a company’s original shareholders (although the memorandum of older companies can still be relevant in some circumstances, with certain provisions now deemed to form part of the articles).
On the other hand, a company’s articles are fundamental in regulating how it lawfully goes about its business and the rights of its shareholders. These remain a fundamental (and often the only) document in determining the operation and powers of any private limited company. When a company is created (or ‘formed’) it will be given a default form of articles of association — the ‘model form of articles’ or ‘Table A’ in older companies — unless some other form of articles are specifically requested.
What’s included in the model articles of association?
The contents of a company's articles are subject to the provisions of company legislation. It’s essential to obtain an up-to-date copy of a company's articles (available from Companies House) before you undertake any analysis of its (or its shareholders’) legal position.
While general statements about shareholder rights can be made, these are almost always subject to alteration by the articles.
There are five parts to the model articles of association:
- Limited liability of shareholders.
- Directors.
- Shares and distributions.
- Decision-making by shareholders.
- Administrative arrangements.
What role does the board of directors have in exercising the powers of a company?
The role of the board is to make the strategic and operational decisions of the company. Directors are charged with ensuring that the company meets its legal obligations and acting as agents for the company, appointed by the shareholders to manage its day-to-day affairs.
Directors are generally empowered to exercise all the powers of the company. Technically, the powers of the board must usually be exercised by the board (collectively) at board meetings. However, in practice many boards often act informally — particularly where the directors enjoy a close working relationship.
Board meetings can also be held casually, especially when all the directors are in agreement. There’s no minimum number of board meetings required by law, though directors must meet sufficiently often to ensure that they’re discharging their duties as directors. Resolutions of the board (where required) can also be reached in writing.
Each director has a legal obligation to the company to carry out certain duties, including:
- acting within the powers set out in the articles
- promoting the success of the company
- exercising independent judgment (and not just doing as someone else says)
- exercising reasonable care, skill and diligence (i.e., not acting negligently)
- avoiding conflicts of interest and not accepting benefits from third parties.
What duties do company directors and officers have?
Most company directors would be alarmed at the strict duties they owe to the company. These include maintaining registers of directors, their usual residential addresses, the company’s shareholders and people with significant control over the company. By law, these registers must be kept open to inspection by shareholders.
For many of the obligations on directors, a breach can be a criminal offence. That’s why it’s important for shareholders to be aware of their rights and the duties owed by the company directors.
Directors, secretaries and senior managers of companies can be referred to as company ‘officers’. Each of these hold a different role with different responsibilities.
While there’s no legal limit to the number of company directors that can be appointed, a company's own regulations or articles may regulate the maximum or minimum number of directors.
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