Strategic commercial interventions - initiating companies in public ownership: standard operating procedures - part 1

Chapter 3: Articles of Association & Framework Documents

3.1 Articles of Association

Every company registered (incorporated) on Companies House, must have articles of association. This is a fundamental constitutional document outlining the internal decision making, governance and administrative arrangements of the company. Typically, the articles outline the issue and transfer of shares, board and shareholder meetings, director’s powers and duties, dividends, and borrowing powers and are open to inspection at Companies House.

The provisions within the articles are crucial to understanding where real responsibility lies for actions and omissions of the company. The Companies Act lays down the general duties of the directors such as promoting the success of the company, exercising independent judgment and reasonable care, skill and diligence, acting in the interests of the company, and avoiding conflicts of interest, but does not exclude that the articles may give Ministers, in their capacity as shareholder, an express authority to give directions to the board.

3.2 Amending Articles of Association

The Companies Act 2006 and Companies (Model Articles) Regulations 2008 provide default articles of association (also known as ‘model’ articles) for ease of use by those forming limited companies. The copy of the proposed articles of association that the company members must prepare and register may adopt some of the model articles or none of them. However, if articles are not registered, or as far as those that are registered do not exclude or modify the relevant model articles, those model articles will apply.

In the circumstances where an existing private company is brought into public ownership, the articles of association can be amended by special resolution (this is subject to exceptions) which requires a majority of at least 75% of the total votes of Ministers and other shareholders. This is a formal decision made by the company shareholders to set out the formal approval rights of shareholders and further Ministerial control. This will ensure that whilst the management and the board are responsible for the operations of the company, they are also accountable to Ministers (in their capacity as shareholders) for:

• The performance of the company;
• Regularity and propriety of expenditure;
• Value for money;
• Evaluation of mechanisms for delivering company policy objectives;
• The management of risk; and
• Accurate accounting for the use of resources.

The power to alter the articles of association must be exercised for the benefit of the company.

3.3 Approval of Articles of Association

There is an obligation to obtain Ministerial approval for amending the articles in their capacity as shareholder. However, there is no requirement for parliamentary approval of the articles or to make Parliament aware of its contents as the information is freely available to the public in the register of companies maintained by Companies House.

3.4 Framework Documents – Background

Information about companies classed as public corporations or NDPBs should also be furnished by preparing a Framework Document that adds detail to the provisions of the articles or of general company matters such as, but not limited to:

• The details of the relationship between Ministers, officials, and the company;
• The purpose and responsibilities of the organisation;
• Its legal basis;
• How it engages and work with Ministers and its SG sponsorship team;
• Corporate planning, budgeting, reporting obligations, accounts, and audit;
• Specific matters to be reserved for the decision of Ministers;
• The degree of operational independence of the body;
• How performance targets will be set; and
• What will happen if they are not met.

The agreement should be made publicly available and, be updated at least every three years to reflect any changes to the body’s remit or governance. The Public Bodies Support Unit and other relevant policy areas must be informed when updating the Framework Document. The updated version also requires Ministerial sign-off.

Framework Documents normally indicate that Ministers are responsible to Parliament for the activities and performance of the company even in cases where its document emphasises the intent that the body should enjoy "operational" or "day-to-day" independence. However, this Ministerial responsibility does not preclude direct parliamentary contact with company officials and board members, for example in the context of investigations by parliamentary committees.

The provisions of a Framework Document do not replace the legal safeguards which exist for shareholders in company law but rather set out the relationships between Ministers in their capacity as a shareholder and the company.

3.5 Framework Documents & Articles of Association

Normally a Framework Document states that it is not intended to create formal legal rights or obligations. That notwithstanding, AOs and Boards are expected to adhere to a Framework Document and the AO will be accountable for any failure to do so.

The articles of association will affect how the Framework Document can be drafted. These documents are also essentially different: the Framework Document is strongly associated with the accountability aspects of the Public Finance and Accountability (Scotland) Act 2000 whereas the articles of association are the creation of company law and are primarily regulated by the Companies Act 2006. The differences between the two should be used to good effect to meet the specific objectives of a company, Ministers as shareholders, and the public good.

Although, many of the provisions often contained in a Framework Document could equally have been inserted into the articles of association, there are no definite rules. Decisions often must be taken as to where to include a particular provision as Framework Documents are more flexible as to what arrangements they can contain while the articles of association must comply with company law.

Typically, Framework Documents are interpreted considering the articles with any legal and regulatory requirements (and the Companies Act, UK’s Subsidy Control rules) taking precedence over any part of the agreement. Additionally, Framework Documents should also be interpreted considering the SPFM, and any other SG instructions and guidance required.

3.6 Framework Documents – Advantages

An advantage of a Framework Document is that, unless the agreement provides otherwise, any significant changes will be agreed between the Board and the Scottish Ministers. A Framework Document can be brought into effect by officials (by Ministerial approval) and then terminated at any time (by Ministerial approval) whereas a company must always have a set of articles of association. This gives the Framework Document a greater degree of flexibility. Another advantage of a Framework Document is that its negotiation will often compel Ministers, officials, and the company to confront their concerns and discuss the most effective way to address some of the more difficult scenarios they may encounter, avoiding costly and detrimental disputes later down the line.

3.7 Establishing Framework Documents

The BIF states that where SG takes control of a company, officials will need to establish a framework to manage the sponsorship arrangements. The SPFM provides model Framework Documents which can be used and amended as necessary. Further examples of Framework Documents have been provided in Annex B. The Public Bodies Unit have developed a helpful checklist used to review Framework Documents which can also be used by sponsorship teams to help inform amendments to model Framework Documents. Further guidance can be sought from the Public Bodies Unit as required.

3.8 Approval of Framework Documents

The checklist sets out the necessary process for amending and obtaining Ministerial approval for the Framework Document.