Articles of Association under Companies Law

Articles of Association

The Articles of Association or AOA are the legal document that along with the memorandum of association serves as the constitution of the company. It is comprised of rules and regulations that govern the company’s internal affairs.

The articles of association are concerned with the internal management of the company and aims at carrying out the objectives as mentioned in the memorandum. These define the company’s purpose and lay out the guidelines of how the task is to be carried out within the organization. The articles of association cover the information related to the board of directors, general meetings, voting rights, board proceedings, etc.

The articles of association are the contracts between the shareholders and the organization and among the shareholder themselves. This document often defines the manner in which the shares are to be issued, dividend to be paid, the financial records to be audited and the power to be given to the shareholders with the voting rights.

The articles of association can be considered as the user manual for the organization that comprises of the methodology that can be used to accomplish the company’s day to day operations. This document is a binding on the shareholders and the organization and has nothing to do with the outsiders. Thus, the company is not accountable for any claims made by any external party.

Following are the provisions of Articles of Association

• Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of shares, share warrant, surrender of shares, etc.
• Directors, their qualifications, appointment, remuneration, powers, and proceedings of the board of directors meetings.
• Voting rights of shareholders, by poll or proxies and proceeding of shareholders general meetings.
• Dividends and reserves, accounts and audits, borrowing powers and winding up.

It is mandatory for the following types of companies to have their own articles:

1. Unlimited Companies: The article must state the number of members with which the company is to be registered along with the amount of share capital, if any.
2. Companies Limited by Guarantee: The article must define the number of members with which the company is to be registered.
3. Private Companies Limited by Shares: The private company having the share capital, then the article must contain the provision that, restricts the right to transfer shares, limit the number of members to 50, prohibits the invitation to the public for the further subscription of shares in the form of shares or debentures.

Note: In the case of a public company limited by shares, the articles may be framed by the company itself or in case company does not register articles then it might adopt all of any of the regulations as contained in Table A in the Companies Act.

Article of Association v. Shareholders Agreement

The rights and obligations of investors against other shareholders and/or the company may range from rights with regard to the transfer of shares to the inter-se governance matters relating to the ownership of shares – such as affirmative votes, pre-emption rights, and call/put option rights. Our focus here is India’s position, as of October 2020, on the enforceability of additional, non-conflicting rights in the shareholders agreements vis-à-vis the articles of association. What prompts our concern is that investors need to be aware that while the Shareholders Agreement provisions keep changing to keep abreast of change in shareholdings or shareholders, the said changes are not always reflected in the Articles of Association, which may cloud their better judgment and be to their detriment. 

While Indian jurisprudence recognizes the right to transfer shares as being inherent in the ownership of shares (limited by reasonable restrictions)¹, absolute restriction on Share Transfer Rights is not valid and binding. Judgments such as Mafatlal Industries² and V.B. Rangaraj³, under the erstwhile regime of the Companies Act, 1956, have held that Share Transfer Rights should be included in the Articles of Association to have the sanctity of enforceability of the provisions. In the V.B. Rangaraj judgment, dating back to 1992, the parties incorporated certain share transfer restrictions in the Shareholders Agreement that required them to offer shares to the other party before offering it to an outsider. However, as the pre-emption clause was not incorporated in the Articles of Association, the parties eventually reached a juncture where the applicability of the share transfer restriction was questioned.

his binding restriction in the erstwhile regime has been modified, to some extent, by the proviso to Section 58(2) of the Companies Act 2013 that recognizes that “any contract or arrangement between two or more persons in respect to transfer of securities shall be enforceable as a contract”. However, this position, which upholds the provisions of the Shareholders Agreement in the event the Articles of Association is silent in the matter, is applicable only to public companies, not private companies. Which begs the question as to why the same yardstick is not applicable to private companies. If a public company, instituted on the basis of free transferability of shares, has the right to incorporate (limited and not absolute) share transfer restrictions, by that logic, shares of a private company that feature the spirit of restrictive transfers should also be allowed to restrict transferability by entering into private contracts. If private companies are denied contractual transferability restrictions, then they should at least be allowed Inter-se Governance Rights that are not incorporated in the Articles of Association.

This flexible position was recognized in 2012, under the Companies Act, 1956 purview, by the Supreme Court in the Vodafone⁴ judgment. The court therein held that the Shareholders Agreement is essentially a contract between some or all other shareholders in a company, the purpose of which is to confer rights, and impose obligations, over and above those provided by the Companies Act. In holding so, the court stated that the Shareholders Agreement is a private document that binds parties thereof, but not the other remaining shareholders or the company, giving greater flexibility to make provisions for the resolution of any dispute among the shareholders and also the modus operandi of future capital contributions. 

In essence, the Vodafone judgment disagreed only with the V.B. Rangaraj holding without expressly overruling it. As evident from the above extract, the Supreme Court merely expanded the partisan view taken in V.B. Rangaraj by holding that if the provisions of the SHA conflict with the provisions of the Articles of Association, in that event the provisions of the Articles of Association would prevail and not the provisions made in the Shareholders Agreement.

As the holding was not overruled in express terms,  the Delhi High Court, in March 2013, while overruling the holding of the Company Law Board in the case of World Phone India⁵,held that as the existence of an affirmative vote cannot be found in the Articles of Association, the right of the parties remained unenforceable. In August 2013, in HTA Ltd. And Ors⁶, wherein the shareholding was not maintained as per the pre-agreed ratios between the management and the non-management staff union, the Delhi High Court held that as the terms of the Articles of Association were amended, the claims of such breach cannot be upheld. It is therefore evident that the cases adjudicated by the Delhi High Court have chosen to ignore the Vodafone ruling, creating ambiguity in the legal jurisprudence in respect of the enforceability of provisions.

Such confusion calls for a conjoint reading in the interests of maintaining harmony. A logical conclusion suggests either (i) overruling the stance adopted by the Delhi High Court (non-harmonious); or (ii) consideration of the non-enforceability of the Shareholders Agreement provisions valid under company law but as a breach under contract law, thereby allowing for relief under the Indian Contract Act, 1872 (for instance, damages or injunction). The latter, however, will dilute the essence of Shareholders Agreements.

Future decision-making depends on whether a larger bench of the Delhi High Court, or the Supreme Court, overrules the position adopted by World Phone and the HTA Ltd. judgment. However, the lesson from previous experience dictates that – until further clarity on enforceability of Inter-se Governance Rights, provisions in the Shareholders Agreement in respect of transfer of securities should be incorporated in the Articles of Association to avoid any impediment in enforcing the terms of the Shareholders Agreement.

COMPONENTS

The articles of association will usually specify the way a company issues stocks, distributes dividends, and performs financial records. The document is focused on giving the reader information about the methods a company uses to achieve its daily, monthly, and yearly goals.

The articles of association are relatively similar in any part of the world, even though the exact terms and items vary across jurisdictions. In general, it includes the following:

• Provisions on the company name
• Purpose of the company
• Share capital
• Organization of the company
• Provisions on shareholder meetings

Company Name

A company must adopt an official name as a legal entity. It must be present in the articles of association. Usually, the following suffixes “Inc” or “Ltd” are used to show that an entity is a company. Please note that jurisdictions vary from country to country, and thus, there are various rules regarding company names.

The words “government” or “church” cannot be used as a name because it might confuse the public. Also, words that are offensive and vulgar are also prohibited.

Purpose of the Company

Companies are incorporated for a specific reason. Primarily, it is a for-profit reason to pursue a certain goal by delivering value to society. The reason or purpose of the organization must be clearly stated in the articles of association.

Some jurisdictions allow for very broad purpose statements, such as “management,” while others require a more detailed purpose of an enterprise, i.e., “the operation and growth of a restaurant chain.”

Share Capital

The articles of association will state the number and type of shares comprising a company’s capital. Typically, there is always at least one form of common shares that makes up its capital. Additionally, one can also see several types of preferred stock.

If information about stocks is found in the articles of association, it means they can be issued by the company when there is a need for funding.

Organization of the Company

The document includes legal information about the company, including the registration address, the number of directors and employees, and the identity of the founders and original shareholders.

Legal advisors and auditors may also appear here, depending on the type of business and a country’s jurisdiction.

Shareholder Meetings

The first general shareholder meeting provisions are listed in the shareholder meetings section. Notices, resolutions, and votes are detailed as well in the section, governing subsequent annual shareholder meetings.

Alterations Of Articles Of Association

The alteration of the Articles should not sanction anything illegal. They should be for the benefit of the company. They should not lead to breach of contract with the third parties. The following are the regulations regarding alteration of articles:

A company may alter its Articles with a special resolution. Due importance and care should be given to ensure that the alteration of AoA does not conflict with the provisions of the Memorandum of Association or the Companies Act. A copy of every special resolution altering the Articles must be filed with the Registrar within 30 days of its passing.

1. The proposed alteration should not contravene the provisions of the Companies Act.

2. The proposed alteration should not contravene the provisions of the Memorandum of Association.

3. The alteration should not propose anything that is illegal.

4. The alteration should be bonafide for the benefit of the company.

5. The proposed alteration should in no way increase the liability of existing members.

6. Alteration can be made only by a special resolution.

7. Alteration can be done with retrospective effect.

8. The Court does not have any power to order alteration of the Articles of Association.

Highlight Of Articles Of Association

• Alteration in Articles of Association is to be noted in every copy – Any kind of alteration in the Articles of Association of a company must be noted in every copy of the Articles of Association. These copies on request by a member need to be sent to them within seven days of the request.
• If the company makes any default in complying with the provisions, the company and every officer of the company who is in default shall be liable for the default. The penalty includes one thousand rupees for each day during which such default continues or one lakh rupees whatever be the case.

Procedure of alternation of Article of Association

Convene a Board meeting – Firstly, hold a Board meeting and find that particular article that needs alteration. The alteration does not mean only altering the existing articles. It may also include the addition or deletion of any articles. After that, a formal resolution is passed for this.

Any changes in the Articles of the Articles of Association need to comply with the provisions of Companies Act, and the conditions contained in the Memorandum of Association of the Company.

You need to check that any such changes do not increase the liability or expulsion of any member after the alteration.

A time, date, and venue are fixed for the general meeting to fix the resolution.

Thereafter, if the shares of your Company are enlisted with any recognized stock exchange, then forward copies of all notices to the shareholders about the changes in the Articles of Association to the Sock exchange.

Form MGT-14 is filed with the ROC (Registrar of Companies).

At last, you can make necessary changes in all the copies of the Articles of Association.

Conclusion

The articles of association can be found in every company and it is a document containing the rules, regulations and bye-laws for the efficient and hustle free administration of the company. The articles of association are compulsory for a few classes of the company such as an unlimited company, a company whose shares are limited by guarantee and a private company. The articles of association have all the important subjects which are required for the management and administration of the companies. It can even be altered or amended when required by following the procedures laid down in the Companies Act, 2013.

The provisions regarding the article of association were different in many aspects under the Companies Act,1956 but after the 2013 Act, many provisions were amended. Like earlier the amendment could not lead to the conversion of the company to public to private and private to the public but after the Act of 2013, it is possible. Similarly, there was also no provision of retrenchment, but after the 2013 Act the provision of entrenchment was also introduced. The article of association holds a very important position in any company and all the major aspects of a company’s management are dealt with the articles of association.

Footntotes 

1 Section 58, Companies Act 2013

2 Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. And Ors. (1999) 97 Comp Cas 301

3 V.B. Rangaraj v. V.B. Gopalakrishnan And Others (1992) Comp LJ 11 (SC)

4 Vodafone International Holdings BV v. Union of India(2012) 6 SCC 613

5 World Phone India Pvt. Ltd. & Ors. v. Wpi Group Inc.(2013) 178 Comp Cas 173 (Del)

6 HTA Employees Union (Regd.) vs Hindustan Thompson Associates CO. A (SB) No. 102 of 2012

7 section 28

8 section 38

9 Malleson v. National Insurance Co.

10 Wikipedia

Author Details: Harshvi Sakdecha [Student, MKES College of Law]