Appendix 1 – Company Rules (Articles of Association)

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Company Limited by Shares
……………………………………………… Ltd

WHEREAS, the subscribers wish to promote the success of the Company by:

A. aligning the financial incentives of employees and investors in the Company;
B. safeguarding the value of shareholdings;
C. subject to aims A and B, facilitating employee ownership of shares in the Company;
D. subject to aims A and B, allowing free trade in shares in the Company.

NOW THEREFORE, the subscribers to the Company agree to the following Articles:

1. Construction.

These Articles shall be interpreted so as to give business efficacy to them, including the aims above, and the rule in Foss v Harbottle shall be construed accordingly.

2. Definitions. In these Articles:-

“Cash” means immediate payment and includes cheques, electronic transfers, and money orders.
“Close Associate” means or a partner, spouse, dependent, parent or sibling, business associate or partner, co-director in any other company, or co-shareholder (each holding above 24% of the shares in any other company) of the person in question.
“Distributable Profit” means the Profit less Retained Profit, less corporation tax.
“Employee Shares” means Ordinary Shares which are held by, or on trust for, an Employee and which are Forfeitable. They may only be issued to Employees.
“Employee” means a person currently employed by the Company, or employed by the Company during the previous twelve months, or the Close Associates.
“Fair Price” means the value of Ordinary Shares set in accordance with the valuation formula.
“Forfeitable Shares” means Ordinary Shares which are either partially paid up, or redeemable, or forfeitable, or in respect of which there is an outstanding loan from the Company to assist in their purchase.
“Investor Shares” means Ordinary Shares which are not Employee Shares.
“Member Authorisation” means:
i) an ordinary resolution of the Trustees of the Employee Trust passed by a simple majority at a meeting or poll, which may be taken by postal- or e-ballot, and;
ii) a resolution of Investor Shareholders, or, if existing, of the Trustees of the Investor Trust, passed by a simple majority at a meeting or poll, which may be taken by postal- or e-ballot.
“Pay” means wages, salary, bonuses, commissions, maternity/paternity pay, benefits, (including healthcare, childcare, clubs) paid to an Employee, plus PAYE and employee’s NI Contributions.
“Shares” means Ordinary Shares and includes Employee Shares and Investor Shares.
“The Act” means the Companies Act 1985, as amended, or successor legislation.


3. Share Capital.

(a) The Company may issue Ordinary Shares.
(b) All Ordinary Shares rank equally on a distribution and on a winding-up.
(c) Ordinary Shares are divided into two Groups of Share: Employee Shares, and Investor Shares:
(d) Employee Shares become Investor Shares 12 months after the holder ceases to be an Employee, or on those shares becoming fully paid up, or on repayment of any loan associated with those Shares.
(e) The Directors may issue Employee Shares, un-paid up, to any new employee (or to the Employee Trust on his behalf) on his joining the company.
(f) Any other share issue requires Member Authorisation if it amounts to more than 10 per cent of issued share capital, or if it is an issue to anyone (including a new employee) who is a Close Associate of any Director or Employee.

4. The Employee Trust.

Employee Shares shall be held in The Employee Trust. The trustees shall be chosen by the beneficial owners of Employee Shares by one vote per Employee Share beneficially held. Their powers, contained in the Trust Deed at Schedule 1, shall be exercised equally as between all Employee Shares regardless of the holder, and include the power to cast Employee Shareholders’ votes at Meetings or Member Authorisations.

5. Investor Trust.

The Directors may set up The Investor Trust which will hold all Investor Shares. The trustees shall be chosen by the beneficial owners of Investor Shares by one vote per Investor Share beneficially held. Their powers, contained in the Trust Deed at Schedule 2, shall be exercised equally as between all Investor Shares regardless of the holder, and include the power to cast Investor Shareholders’ votes at Meetings or Member Authorisations.

6. Alteration of Share Capital.

The Company may increase its authorised share capital by ordinary resolution.

7. Liability in respect of surrendered Shares.

Any Shareholder may surrender some or all of his/her Shares at any time, and he shall not remain liable for call on any portion of the surrendered Shares which is unpaid up.

8. Transfer of Shares.

(a) Share transfers are made by a Share Transfer Form, and the transfer shall be completed by being entered on the register of members.
(b) Shares are freely transferable to any person except as stated in these Articles, or except where those Shares are not fully paid up, or except where the holder owes money to the Company in which case the transfer may only happen if the proceeds of that transfer are paid direct towards settlement of the debt to the Company.

9. Valuations and Auditors

(a) The valuation formula for establishing the Fair Price, at Schedule 4, shall be set on adoption of these Articles, and may only be changed by Member Authorisation.
(b) Shares are to be valued at the end of every financial year, and this will become the new Fair Price, unless the new Fair Price has been set by Member Authorisation.
(c) The Fair Price will be set by the Valuers, who shall be:
(i) an independent accountant or company valuation professional, chosen by Member Authorisation;
(ii) or, failing that, an independent accountant or company valuation professional, chosen by the Institute of Chartered Accountants.
(d) An ordinary resolution at a General Meeting or at a meeting of the Investor Trust, or of the Employee Trust, can demand that new Valuers are chosen, and may demand the Fair Price to be re-set so long as at least 3 months has elapsed since the Fair Price was last set.
(e) The Auditors shall be chosen by a meeting of the Investor Trust.

10. Audit of the Profit.

Before any Dividend is paid, the Profit shall be audited by the Auditors to determine whether any item should be included in the calculation of the Profit, either as income or as costs or expenses. The Investor Trustees or Employee Trustees may, during the accounting period, ask the Auditors to determine at whether an item should be included in the Profit.

11. Borrowing.

The board of Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and assets (present or future) and to issue debentures. Such powers may only be exercised toward, with, or for the benefit of, any Director or Employee, or Close Associate thereof, with Member Authorisation.


12. The business of the Company shall be decided at meetings of Directors (“board meetings”).
13. Directors are appointed by ordinary majority at a General Meeting. Non-voting directors may be appointed. Unless otherwise specified, a director is a voting director.
14. A resolution in writing signed by all the directors entitled to vote at a board meeting or at a meeting of a committee of directors shall be as valid as if it had been passed at that meeting and may consist of similar documents each signed by one or more directors.
15. A director may call a General Meeting, and will do so for a date within 4 weeks if asked to by Shareholders holding at least 10% of Shares in issue, or by the Employee or Investor Trustees.
16. Every Shareholder and anyone else who receives a notice can attend, speak and propose resolutions at a General Meeting. On a poll, every Shareholder present, in person or by proxy, has one vote for every Share held. The chairperson has a casting vote. A General Meeting may not make a decision that requires Member Authorisation.
17. Unless required by law or by these Articles, decisions at General Meetings are made by ordinary resolution, i.e. by a simple majority of votes cast. Meetings may be held by conference call.
18. An entry in the minutes is conclusive evidence that a resolution has been carried or lost. The proceedings of a meeting are not invalidated by the accidental omission to give notice of the meeting to, or the non-receipt of notice of the meeting by, a person entitled to receive notice.
19. A written resolution signed by all members is valid as if passed at a meeting.
20. Audited accounts are to be prepared annually. Any Shareholder may inspect the accounting records during normal working hours. Unless commercial confidentiality dictates otherwise, these records should include a list of all Employees, their normal working hours and their Pay.
21. The Company may buy directors and officers indemnity insurance covering Company business.


22. Employment Contracts and Pay
(a) Each Employee is to sign an Employment Contract, setting out his/her duties and Pay, and stating that he agrees that these Memorandum and Articles, and any Shareholder Agreement, including subsequent modifications to those documents, are part of the Employment Contract.
(b) An Employee may agree with the Company, subject to Member Authorisation, to be paid or part-paid in Shares.
(c) Rises in Pay above the inflation rate, to existing Employees, must be by Member Authorisation.

23. Business Expenses and Benefits and Facilities
(a) Directors and Employees shall be paid expenses incurred for the business purposes of the Company.
(b) The Company may pay such reasonable benefits as it wishes to new Employees, but all other Employee benefits may only be paid with the agreement of the Auditors.

24. Purchase of own Shares
(a) Subject to the provisions of the Act and of these Articles, the Directors may issue shares which are to be redeemed, or are redeemable, on such terms as may be provided by these Articles.
(b) The Company may repurchase its own Shares (including redeemable Shares) and may pay for the purchase otherwise than out of distributable profits or proceeds of a fresh issue of Shares.
(c) The Company may not,without Member Authorisation, purchase its Shares for consideration higher than the current Fair Price, or the Fair Price when the Employee bought them from the Company (whichever is the higher).

25. Employee Share Ownership
(a) The Company may not, without Member Authorisation, or as otherwise provided in these Articles, give financial assistance for the purchase of its Shares.
(b) The Directors may, without Member Authorisation, on the recruitment of a new Employee, agree to assist Share purchase by him/her, by way of loans to purchase Shares or agreements to repurchase Shares, or by issuing Shares which are unpaid up in whole or in part. Thereafter the Directors may, with Member Authorisation or with agreement of the Auditors, increase or add to such assistance. Such Share issues shall be an “employees’ share scheme” pursuant to the Act.
(c) The Directors may, with Member Authorisation, grant Share options to Employees.

26. Retained Profit and the Dividend
(a) A percentage of the Profit for each year shall be retained by the Company according to the following formula, which may only be changed by Member Authorization:
R%  P  IS/OS where:
i) R = the figure set at the end of the first full financial year under these Articles, and;
ii) P = profit during the financial year in question, and;
iii) IS = No of Investor Shares during the financial year in question.
iv) OS = No of Ordinary Shares during the financial year in question, and;
(b) Once all Share issues for that accounting period have been made, the Directors shall pay the Distributable Profit, less any corporation tax, as a Dividend (unless a Shareholder waives part of his/her dividend) on all Shares equally, and within 3 months of the end of financial year.
(c) Dividends may be paid on Shares which are unpaid or partly paid.

27. Loans to Employees.

The Company may loan money to any Employee, during the financial year, up to the level of dividend that the Company reasonably expects to pay to that Employee in respect of his/her Employee Shares for that financial year. Such loans shall be set off against the dividend payment to that Employee and any excess shall be paid after that.