What Is an Organization?
The articles of association are much more complicated and technical.
They relate to such matters as the number of directors, how directors are ap-
pointed and removed, what their powers are, what happens when new
shares are to be issued, what process is required in order to modify the
articles, and so on. In order to simplify the setting up of companies, the
Companies Act 1948 included a specimen set of articles of association, which
have been regularly updated; these are known as Table A. Most companies
now adopt Table A as the basis of their articles of association and specify only
the way in which their articles differ from Table A.
Once a company has been registered, the memorandum of agreement and
the articles of association are deposited at Companies House and are public
documents, in the sense that anyone may visit Companies House and
inspect them. It often happens in private companies that the shareholders
wish to conclude a further agreement among themselves. Such an agree-
ment is called a shareholders’ agreement
. Unlike the memorandum and the
articles, this is not a public document.
DIRECTORS
In small companies, it may well be that the shareholders run the company
directly but this is not feasible if there are more than a handful of share-
holders; in any case, some shareholders may not wish to be involved directly
in the day-to-day operations of the business. The law requires that the share-
holders appoint directors to take responsibility for running the company on
their behalf.
In small companies, the shareholders may actually be directors or at least
be in regular contact with them. In large public companies, however, the
shareholders have very little opportunity to influence the directors. To com-
pensate for this, the law makes directors subject to certain obligations.
Directors must have regard to the interests of both the company’s em-
ployees and its shareholders. Until the Companies Act 1985, directors were
only required to act in the best interests of the shareholders, and theoretically
at least, could have been sued if they took into account the interests of the
employees to the detriment of the shareholders.
Directors must act in good faith and for the benefit of the company.
Suppose, for example, that you are a director of a small company that writes
software and that someone approaches you to have some software written. If
you decided that you could do this yourself in your spare time rather than
having it written by the company, you would not be considered to have acted
in good faith for the benefit of the company and you could be required to pay
the company compensation for the loss of the contract.
Directors must exercise the skill and care in carrying out their duties that
might be expected from someone of their qualifications and experience. This
means, for example, that a director with long experience of purchasing com-
puters who signed a contract to buy a computer system that was not suitable
45

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