“The constitution of your company is the legal operating system you can’t delete - it governs every decision you make, whether you read it or not.”

Matt Glynn - Director, GLS Group

Too many founders treat their company’s constitutional documents like a phone’s terms and conditions - click “accept” and never think about it again. But unlike your phone, the consequences of ignoring these documents can destroy your company from the inside out.

Your company’s constitutional documents - often a blend of the Articles of Association and, in some cases, a Memorandum of Association - are legally binding. They define your powers, your limitations, and your corporate governance from day one.

Legal issues like this are easy to overlook. Most founders are laser-focused on pitching, product, and launch - and constitutional housekeeping gets dumped into the “admin” pile. But get this wrong, and you’ll run straight into conflicts with co-founders, shareholders, or even the courts.

In this “start up stage review”, we’re going to flag up some considerations to help you better prepare to tackle this part of your start up journey - before it tackles you.

“If you don’t know your own company’s rules, you’re not in control - you’re just guessing.”

The Companies Constitutional Documents stage is an important stage of the start-up journey because: 

◼️Governing Framework: it sets out how your company operates at the most fundamental level

◼️Director Powers: it defines what directors can (and cannot) do - legally and practically

◼️Shareholder Rights: it clarifies the rights of shareholders, including voting and dividend entitlements

◼️Decision-Making Process: it governs how board and shareholder decisions are made and recorded

◼️Transfer Restrictions: it may restrict or control how shares can be sold or transferred

◼️Dispute Prevention: it can pre-empt and manage internal conflicts through defined processes

◼️Investor Confidence: it signals to investors that your house is in order and legally sound

◼️Customisation Opportunity: it allows tailoring to meet the specific needs of your business and founders

◼️Override Risk: it can override shareholder agreements if not carefully drafted

◼️Regulatory Compliance: it ensures alignment with statutory requirements under the Companies Act 2006 (UK)

The consequences of not attending to this issue may include the following:

Legal Implications

◼️Ultra Vires Acts: directors may unknowingly act outside their powers, making decisions challengeable

◼️Conflicting Provisions: badly drafted or boilerplate articles may clash with the Shareholders Agreement

◼️Breach of Statutory Duties: failure to comply with Companies Act requirements can trigger regulatory or civil penalties

Founder Relationship Issues

◼️Power Imbalance: default rules may favour one founder over another without realising it

◼️Governance Confusion: lack of understanding of director/shareholder rights can lead to misaligned expectations

◼️Deadlocks: no casting vote mechanism or tie-breakers can freeze operations during disputes

Commercial Implications

◼️Investor Friction: sophisticated investors may reject funding rounds due to weak or generic articles

◼️Deal Blockages: share transfers or buyouts may be frustrated if not allowed under the articles

◼️Board Dysfunction: no clear rules = power struggles that paralyse the business

Operational Implications

◼️Administrative Errors: procedural missteps (e.g. invalid director appointments or resolutions) can void decisions

◼️Company Secretarial Risks: filings based on incorrect governance can lead to fines or record corrections

◼️Delays in Scaling: lack of clarity around authority and decision-making slows hiring, contracting, and growth

Biz Valuation Issues

◼️Buyer Caution: M&A buyers scrutinise constitutional documents for traps and legacy risks

◼️Due Diligence Failures: inconsistencies between public filings, internal governance, and the SHA scare off investors

◼️Devaluation: confusion or legal uncertainty around corporate powers = value discount

The above lists are indicative issues – the relevance of which will depend on your circumstances, including the nature of business undertaken by your start up.

“Your company’s rules are not a formality - they’re the playbook for everything that happens next.”

We’ve identified quite a number of potential issues that the start-up needs to consider and below are some examples of the types of steps you might want to consider taking to address these issues considered above. 

Review and Customise Your Articles of Association

◼️Do not rely on generic or default articles - tailor them to your business needs

◼️ Include key features such as drag/tag rights, pre-emption rights, director authority, and voting thresholds

Understand How the Constitution Interacts with the Shareholders Agreement

◼️Ensure your SHA does not contradict the Articles - the Articles usually take precedence under English law

◼️Use consistent language and mechanisms across both documents

Incorporate Key Operational Procedures

◼️Set out how directors are appointed/removed, how meetings are called, and how resolutions are passed

◼️Include quorum rules and special resolution requirements

Include Share Transfer Restrictions Where Needed

◼️Protect control by limiting who can become a shareholder and under what conditions

◼️Define “permitted transfers” clearly to avoid ambiguity

Make Sure It Aligns with Your Growth Plan

◼️If you’re expecting VC investment, align constitutional mechanics with common investor protections

◼️Allow flexibility to create different classes of shares or issue options

Conduct Periodic Legal Reviews

◼️Review constitutional documents at key business milestones or funding rounds

◼️Update them to reflect new rights, share classes, or governance shifts

The above suggestions are just a few of the steps you can consider taking.
There are many more things that need to be done to ensure the associated risks are effectively and pragmatically dealt with.

We’re not trying to be alarmists and go so far as to say that some of the legal risks we have flagged may never materialise for your business  – but others can hit like a freight train.

The key point is awareness – just have a think about the issue – know that it exists and decide for yourself what you want to do.

Yes, we know you're juggling limited time, money, and human bandwidth. Sometimes ignoring a legal risk might even make sense – providing doing so is not illegal.

However, “Knowledge” has always been your greatest asset and know you have the GLS Knowledge Centre to help fill in details about the start up journey.

Let’s look at how things can go sideways:

Case Study 1: “The Frozen Boardroom”
A startup failed to include deadlock provisions or define quorum requirements. A board dispute between two 50/50 founders halted operations for 6 months. Investors walked.

Case Study 2: “The Investor Walkaway”
An angel investor pulled out during due diligence after discovering the startup’s Articles conflicted with its SHA. It was unclear who had the right to approve new share issues – and the risk was too high.

Case Study 3: “The Surprise Shareholder”
A founder gave shares to a friend without realising the default articles allowed it. The new shareholder later demanded voting rights, access to financials, and a seat at board meetings.

As a start-up operator you may not be familiar with legal jargon. As you navigate this stage of your start-up journey – you might encounter the following legal definitions:

◼️Articles of Association: A legally binding document that sets out the internal rules of a company, including how it is managed and the rights of its shareholders.

◼️Memorandum of Association: A now largely historic document (post-2006 UK Companies Act) that confirmed subscribers' intent to form a company – still a formality at incorporation.

◼️Ultra Vires: Latin for “beyond the powers” – referring to actions taken by a company or its directors that fall outside the scope of its governing documents.

Watch out for the legal jargon and refer to the knowledge hub for more detailed explanations and resources.

If your startup is a ship, your constitutional documents are the blueprint for how it's built, sailed, and governed. Ignore them, and you might find yourself adrift – or worse, mutinied.

These documents aren’t just a formality. They shape how you run your business, deal with conflict, protect shareholder rights, and attract capital.

GLS can help you ensure your corporate governance is rock-solid, scalable, and aligned to English common law best practice. Don’t leave it to luck.