Article of association default rule or comapanies in the UK and newzealand


2 Articles of Association and Default Rules
2.1 Importance of Articles of Association
A UK company’s core constitutional document is its articles of association.21
It has been stated that ‘a remarkable feature of British company law is the extent
to which it leaves regulation of the internal afairs of a company to the company
itself through rules laid down in its constitution, in particular in its articles of association’.22 This includes the balance of powers between the board of directors and
shareholders,23 which has been described by the New Zealand Law Commission as ‘entirely unsatisfactory’ and ‘an anachronism which is misleading’

.24 Regardless of
the criticisms of the approach, the UK has left a large amount of corporate law to be
decided in each company’s constitution since 1856.25 When adopting the Companies Act 2006, the UK government decided not to ‘change the principle’26 of matters left to constitutions, and such constitutions being default rules. In doing so, it
tried to maintain the policy objective of ‘thinking small frst’, by keeping the Model
Articles as ‘simple as possible’ to meet the ‘needs of small, owner-managed businesses’.27 The rationale for this was that they should ‘focus on the requirements of
the small businesses which make up the majority of this class of company, rather
than the minority of such companies whose needs are more complex’.28 Articles of
association, therefore, remain able to be chosen by shareholders on incorporation,29
or amended thereafter.30 If bespoke articles of association are not chosen, then the
Model Articles will apply.31 This makes the Model Articles default rules.
A large number of companies use formation agents in respect of their formation,
also known as presenters.32 Davies and Worthington have stated of these presenters
the promoters must determine the extent to which the appropriate model
is ousted or adopted (whether explicitly or by default). Company formation
agents normally have their own standard forms, which formally exclude the
model altogether, though these standard forms are themselves typically developed from the statutory model and its predecessors. The other extreme, the
option of not registering any articles and relying on the mode, is rarely chosen
because most companies wish to defne their own rules.33
As the Model Articles apply unless market participants choose otherwise, they are
opt-out, or default, rules. Considerable literature has been dedicated to default rules.
Some scholars have debated whether they are of relevance at all. This is based on
the Coase Theorem, that in the absence of transaction costs, default rules are irrelevant and an efcient outcome will arise anyway.34 This can be divided into a ‘hard’
version of the theorem, that parties will reach a Pareto Optimal35 outcome regardless
of default rules, and a ‘soft’ version of the theorem, that the default rules in question do not afect the efciency of the outcome that would have been achieved.36 Each
version is predicated on the idea that default rules do not matter because in a totally
frictionless market, the parties will bargain away any default legal allocation of risk
between them. However, even when initially raising the principle, Coase claimed
that a world without transaction costs was unrealistic.37 It could be said that a world
without transaction costs would provide unintended and unexpected consequences
to all transactions.38 Transaction costs are usually quite high in any given scenario,39
and so the world of the Coase Theorem does not exist. Indeed, Coase’s initial analysis has been adapted in ways which Coase did not intend—he wanted to fag the
importance of transaction costs rather than minimise their role.40
There is a corollary of the Coase Theorem: that in a world with transaction costs
(i.e. the real world), legal allocation of risk by default rules afects the efciency of
the ultimate bargains struck between the parties.41 Indeed, knowledge of the content
of the underlying default rules itself is, ultimately, a transaction cost that will feed
into this analysis.42 As a result, we can say that default rules are of importance to
bargains struck, and therefore should be ‘correct’. The question then becomes how
to pick correct default rules. It is commonly stated that default rules should ‘mimic
the market’ and produce laws that those in the market would have made on the
grounds that these are the most efcient.43 This is known as a ‘majoritarian default’.

 The logic is that a majoritarian default (in the context of a contractual term) will be:
the meaning that most parties to […] contracts would use, which will often
be the same as the customary meaning or trade usage. If parties expect that
courts will apply a majoritarian default when disputes arise over the meaning of the contract, they will know that most of the time the court will choose
the term that maximizes the probability of efcient trade. Accordingly, they
would be more willing to enter a contract in the frst place, despite high transaction costs, than they would under an alternative rule. Choosing a majoritarian default rule reduces the negative consequences of high transaction costs.

The advantage of a majoritarian default rule is therefore that it would refect what
the market considers to be the appropriate default rule. However, this approach is not
universally popular. In situations whereby one party is aware as to a market standard
position and the other is not, a majoritarian default rule provides the informed party
with no incentive to inform the other party of the true meaning, which may in turn
lead to inefcient results. Accordingly, rather than a majoritarian default rule, it is
argued that sometimes the law should seek to apply a ‘penalty default’, being a rule

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