Whilst the company can set up its own rules, because they are legally binding on the company and its shareholders/members they cannot include rules that are against the law. Having said that, the majority of companies, especially small ones, tend to rely on model articles instead of drawing up their own. The company’s articles are not set in stone and sometimes the need to change them can arise for a number of reasons.
Any change must be in the genuine best interests of the company, not just designed to meet the needs of some members. While this doesn’t mean that every member must agree to a change to the articles, any change cannot be used by a majority to discriminate against the minority or deprive minority shareholders/members of their statutory rights.
Retrospective changes need to be both legal and fair. In particular, s25 of the Companies Act 2006 (effect of alteration of articles on company’s members) does not allow the company to insert retrospective provisions that need members to increase their shareholdings or give further funds to the company without the members specific agreement in writing.
The Articles also can’t be changed to remove the ability to make further changes to them in future. Having said that, there may be conditions attached to making alterations such as a contractual arrangement (like a shareholders’ agreement) for example which may effectively restrict the ways in which the articles can be amended.
Once a legitimate need to update the articles of association has been identified, this change can be implemented by:
- Amending the wording of one or more clauses in the existing articles;
- Adding in new or removing clauses from the existing articles; or
- Adopting an entirely new set of articles (completely replacing the previous set of articles).