Abstract
The fnal provisions of the UK’s Companies Act 2006 have now been in force for
10 years. Part of this regime included a new form of model constitution, known as
the Model Articles. This article uses empirical data to establish whether the Model
Articles have been used in practice or not. To do so, it tracks the constitutions of a
sample of companies (those incorporated in Scotland in October 2009) from their
incorporation until December 2017. It undertakes a leximetric methodology to code
12 variables across the constitutions, with a 0 being coded for convergence to the
default regime and 1 being coded for divergence from the default regime. The results
show that the majority of companies do not deviate from the default regime, other
than in one respect: most allowed for the ability to appoint alternate directors. More
importantly, however, the dataset shows that few of the sample companies amended
their articles of association following incorporation, and that there is a strong correlation between certain coding patterns and the presenter, or formation agent, used
to incorporate the company.
Keywords Company law · Corporate law · Leximetrics · Empirical methodology
1 Introduction
It has now been 10 years since the fnal provisions of the UK Companies Act 2006
were brought into force.1
One of the provisions that was introduced was a new system for incorporating companies.2
The new system was incredibly similar to the old system. In particular, UK company law left a large amount of corporate law contained in the constitution of the company rather than in statute,3
with the articles
of association the key constitutional document.4
This voluntary approach has often
proved controversial.5
To assist those who cannot or do not want to incur the cost
of drafting a bespoke constitution the UK government lays out default rules which
apply in the absence of contrary agreement.6
Prior to the implementation of the
Companies Act 2006 these default articles were known in the UK as ‘Table A’,7
and
since the implementation are now the ‘Model Articles’.8
Thus the Model Articles
provide the default regime for company constitutions in the UK for all companies
incorporated since 1 October 2009. The UK adopts a slightly unusual approach, in
that should a company elect to apply the default rules, any change in the default
rules will not result in any change to such company’s articles of association: such
an election only applies the articles of association as at the date of incorporation,
not from time to time.9
There has only been one minor change to the Model Articles
since their introduction,10 but the content of the Model Articles varied greatly from
that in Table A.11 Accordingly, the change on 1 October 2009 from Table A for new
companies to the Model Articles represented somewhat of a break in continuity for
UK company law. This article explores how the market has re-acted to the introduction of the Model Articles.
This article focuses on private companies. There are a number of reasons to do
so.
Firstly, a company is a private company by default in the UK.12 This makes them
the core company entity within the UK corporate law framework. This is refected
by the number of legal vehicles—as at 2015, while there were in excess of three
million companies on the UK companies register, only around 7,500 were public
companies, with the vast majority being private.13 Secondly, private companies play
a key role in UK business. It is sometimes stated that private companies are, as a
rule, associated with smaller companies while public companies are seen to denote larger companies.14 However, many larger UK companies are structured as private
companies,15 and private companies are used structurally in several industries, most
notably in private equity.16 Private companies are, therefore, important commercial
vehicles in their own right, in addition to being the frst step towards having a public company. Thirdly, while considerable research has been undertaken into public
companies,17 private companies remain under-analysed and they are therefore ripe
for study. This means that a study of private companies flls an important gap in corporate law literature.
The purpose of this article is, therefore, to explore these Model Articles for private companies within the UK. To do so, it frstly establishes what the Model Articles were meant to achieve in terms of default rule literature. It identifes that the
Model Articles were intended to be a ‘majoritarian default’, that is refecting the
norms that the majority of market participants would have picked were they to do
have done so. It then moves to explore whether this is the case: are market participants in the UK actually using the Model Articles in practice or not?
To test this, it
adopts a leximetric methodology18 to code the articles of association of a sample of
companies incorporated since the Model Articles replaced Table A. This methodology has been historically used to judge whether laws are friendly towards a certain
group or not, including over time, and more recently to establish compliance with
law. This article is the frst article to apply this methodology to convergence between
market activity and default rules. It is also the frst to holistically review a sample of
articles of association under the new regime to establish whether the Model Articles
are, ultimately, correct. It is therefore novel in both its methodology and the subject
matter of its study. Each of these have important implications:
the former means that
this methodology can be exported to establish whether other default rules, across a
myriad of subjects, are actually used or not—a new method of examining the content of default rules; the latter enables us to explore the previously-ignored subject
of whether the statutory default rules are followed in practice or not.
The results of this novel methodology show that the majority of variables are
not frequently deviated from. 11 of the 12 variables selected show high levels of
convergence to the default rules. However, the majority of companies did provide
