Company Articles of Association (AoA) are a fundamental document that establishes a company’s legal existence and defines its internal governance structure.
Upon registering a business, companies must create Articles of Association, as outlined in Section 13 of the Companies Act. These articles define the company’s internal governance structure. Companies have the flexibility to choose between pre-drafted model articles provided by the Act or create custom-made articles (bespoke). Bespoke articles are ideal for incorporating unique clauses that address situations specific to the company, such as granting existing shareholders priority to buy new shares (pre-emption rights), allowing the company to buy back shares (buy-back provisions), or establishing procedures for resolving management disagreements (deadlock resolution mechanisms). Notably, charitable organizations registered as Companies Limited by Guarantee have mandatory clauses that they must include in their Articles such as the dissolution.
The AoA are a vital document, but they should not be static. Here are some key situations that call for a review of your AoA:
1. Ensuring Compliance: Aligning your Articles of Association with the latest provisions of the Companies Act, 2015 “the Act” and relevant regulations, guarantees legal adherence. This may call for revision of some clauses created under the repealed Companies Act (Cap 486) Laws of Kenya such as:
- Conversion of shares into stock
- Issuance of share warrants
- Company seal which is now optional under the new Companies Act 2015
Lien on shares except where except in a case where the shares are not fully paid up and the charge is for an amount payable; or the company’s ordinary business includes lending money; or provision of credit or hiring or selling goods under hire purchase, conditional sale or retention of title agreements, if it arises from a transaction entered into by the company in the ordinary course of that business
2. Streamlining Operations: Simplifying the Articles using the Model Articles for Public Companies limited by shares, promotes clarity and efficiency.
3. Tailoring Shareholders’ Rights: Structure the Articles to provide fair representation for all shareholders, reflecting the company’s current shareholding structure e.g Adding restrictions on share transfers, or creating different share classes with varying rights.
4. Embracing Best Practices: Incorporate good corporate governance principles outlined in applicable codes such as the Code of Corporate Governance Practices for Issuers of Securities to the Public 2015, the Code of Governance for State Corporations and Prudential Guidelines for Institutions Licensed Under the Banking Act etc fosters transparency and accountability.
5. Embracing Flexibility: Section 275 of the Companies Act mandates every company to hold an Annual General Meeting annually and with options to hold the meeting virtually arising from the ruling in Miscellaneous Application Number E 756 of 2020. Therefore, a review of the articles may be required to include the acceptable methods for the company meetings and communications.
6. Administration Efficiency: Companies with subsidiaries can improve administrative efficiency by adopting identical AoA for all subsidiaries, provided there are no legal or regulatory reasons for variation.
Under Section 23 of the Act, changes to a company’s articles generally do not affect existing members in forcing them to buy additional shares beyond what they already own due to an amendment and increasing their financial responsibility towards the company’s capital or other payments. However, this protection only applies if they became a member before the amendment. Existing members can choose to be bound by the changes by agreeing in writing.
Conclusion
It is important to note that Section 22 of the Act provides that a company may only amend its articles by a special resolution. Following any amendments to your company’s Articles of Association, it’s crucial to file a copy of the updated version with the Registrar.
It is important to ensure that your Company’s Articles are clear and fit to your unique structure, ownership situation and future plans.
Empower your company today with clear and compliant Articles of Association. We can draft or review your documents, saving you time and ensuring a smooth future for your business. Get in touch to discuss your goals.