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A company’s articles of association are a public document filed at Companies House that outlines the management and internal affairs. It is common for a new private company limited by shares to adopt the model articles contained in Schedule 1 to the Companies (Model Articles) Regulations 2008 (SI 2008/3229I) on incorporation. The Model Articles offer a standard set of rules and guidelines which contain provisions such as:
- the directors’ powers and responsibilities;
- the appointment and termination of directors; and
- share transfers and transmission of shares.
Our Corporate Solicitors will go on to explore how outdated articles of association could cause a deadlock situation when appointing authorities for the valuation of shares.
Bespoke Articles of Association
In some circumatances, a private company can prepare and adopt a bespoke set of articles of association tailored to that particular company’s affairs and requirements. However, it is more usual for a private company to have bespoke articles which incorporate and modify the Model Articles.
As the articles of association are a constitutional document, it is important for them to set out mechanisms for matters which may give rise to a potential dispute, one being the valuation mechanism when it comes to pricing shares and, as such, how to determine a fair valuation for the shares in question.
It is often the case that should there be a dispute in valuation for the shares; the shareholders can refer the matter to the President of the Institute of Chartered Accountants in England and Wales (ICAEW) to appoint an independent expert to value the shares.
Referring a Matter to the ICAEW
This is generally carried out under the President’s Nomination Scheme. In the absence of a contractual mechanism (i.e., in the absence of a provision contained in a company’s articles of association) for selecting the independent expert where the parties are unable to agree on this, the court has no power to intervene to make the appointment, and there is a significant risk that the determination process will break down as a result.
Since 2020, ICAEW will only take applications where both parties (rather than a single application by either party) agree to use the ICAEW President’s Nomination Scheme, known as a joint application. The independent expert will be nominated from a firm in the ICAEW directory.
Generally, the ICAEW will only accept single applications where one party has first obtained a Court Order (which can lead to additional expenses and time at the hand of the parties). This is to ensure that all parties concerned in the valuation of the shares in the company are involved in the process of determining the valuation.
President of the ICAEW as the Appointing Authority
Suppose the shareholders of the company in question wish for the President of the ICAEW to act as the appointing authority. In that case, any provisions in that company’s articles of association should be drafted to include a provision to detail the need for the shareholders to act jointly and co-operatively in making an application for the President of the ICAEW (to appoint an independent expert under the President’s Nomination Scheme).
In the circumstances when this is applicable, it is also useful to set out in the articles of association some of the criteria for the expert to take into account when reaching their determination.