What is an Article of Association?
Article of association is a legal document that specifies the regulations to govern an entity’s operations, such as the appointment of the board of directors, manner of conduct of all meetings, remuneration, appointment & removal of auditors of the company & many more. It borders every regulation within the layout of the company’s main objectives.
Key Takeaways
- Articles of association is a legal document that specifies the regulations to govern an entity’s operations.
- It borders every regulation within the layout of the company’s main objectives.
- These are bylaws or rules of the company. The company prepares these to set regulations for the company.
- Byelaws are required for the administration & management of the entity in a legal manner within set parameters.
- The directors, officials, and shareholders gain the power to act only if provided by the articles.
- Alteration of the articles is possible by passing a special resolution.
- Consulting a law firm ensures compliance with these regulations and aids in properly drafting and amending the articles.
Objectives of Article of Association
- To keep it simple, “these are bylaws or rules of the company.” The company prepares these to set regulations for the company. On the other hand, laws prepared by the government, such as the Companies Act of 2006, are corporate laws that govern all entities. A third party (i.e., an auditor) must ensure compliance with such laws.
- However, articles serve as self-made laws within the Company. Moreover, these regulations are obligatory for formulation by each Company, given that a company operates as a distinct legal entity. Therefore, it’s evident that byelaws are essential for the administration and management of the entity, ensuring compliance within defined parameters of legal services.
- The directors, officials, and shareholders gain the power to act only if provided by the articles. In the case of private limited companies, they are not allowed to obtain money from public shareholders. Also, there are various restrictions that a private limited company cannot do as a Company. These are specified by law & thus, regulations of private limited are required to specify such restrictions.
- In case of dispute with respect to any action by the Company, the lawyers and auditors would first refer to whether articles give the power. In case of legal disputes, companies can also seek guidance from experienced criminal lawyers or labor lawyers to ensure that the articles of association provide the necessary authority to the company. Similarly, it’s advisable to consult with an attorney after an accident to understand any potential legal implications and to ensure that the company’s articles of association cover such situations adequately.
- Articles of association help to create rules & regulations for various matters, including the following:
- Appointment of Key Managerial Persons (KMP) for the execution of the Company’s management function.
- Terms for appointment, removal, resignation, and remuneration of directors.
- Manner of conduct of board meetings, annual general meetings, general meetings, extraordinary meetings, or any other meeting during the tenure of the Company.
- Terms of the appointment, removal, rotation, and remuneration of the auditors of the Company.
- Requirement for the formation of any special committee for the company.
- Terms in case the Company needs to wind up.
- Limit the borrowing power of the Company.
- The articles grant voting and other rights to shareholders
- The power is given to the shareholders to decide in each situation in case any provision is missing in the articles.
Example of Article of Association
Every company will have articles of association in place and filled with the registrar. Public limited companies are required to submit the articles to the Securities and Exchange Commission (SEC).
We take the example of Delphi Automotive PLC, a public limited Company. The articles of the said company can be accessed through the following link:
https://www.sec.gov/Archives/edgar/data/1521332/000119312511287112/d191007dex31.htm
Components of Article of Association
Once we know the objectives of the article of association, we can understand the broad contents of the articles. Following are the general contents for any articles:
|
Sr. No. |
Particulars |
| 1 | Interpretation |
| 2 | Share Capital |
| 3 | Share Premium Account |
| 4 | Alteration of Share Capital |
| 5 | Variation of Rights |
| 6 | Register of Members |
| 7 | Share Certificates |
| 8 | Lien |
| 9 | Calls on Shares |
| 10 | Forfeiture of Shares |
| 11 | Transfer of Shares |
| 12 | Transmission of Shares |
| 13 | General Meetings |
| 14 | Class Meetings |
| 15 | Notice of General Meetings |
| 16 | Proceedings at General Meetings |
| 17 | Votes of Members |
| 18 | Corporate Members |
| 19 | Directors |
| 20 | Alternate Directors |
| 21 | Powers of Directors |
| 22 | Delegation of Directors’ Powers |
| 23 | Appointment of Directors |
| 24 | Resignation, Disqualification, and Removal of Directors |
| 25 | Remuneration and Expenses of Directors |
| 26 | Executive Directors |
| 27 | Directors’ Interests |
| 28 | Proceedings of Directors |
| 29 | Minute Book |
| 30 | Secretary |
| 31 | The Seal |
| 32 | Authentication of Documents |
| 33 | Dividends |
| 34 | Capitalisation of Profits |
| 35 | Accounts and Audit |
| 36 | Notices |
| 37 | Winding Up |
| 38 | Indemnity |
| 39 | Fixing Record Date |
| 40 | Non-Application of Standard Table |
These are just illustrative lists of contents. Companies can add or remove any provision suitable for their entity.
Alteration of Article of Association
- Alteration means “to change.” Therefore, every law needs amendments per the changing situations and circumstances. Laws cannot be rigid at all points in time. Thus, even articles of association can be amended as per the need of time.
- However, any change should not sanction any provision prohibited under corporate laws. For example, articles of a private limited company cannot be altered to give power to the company to accept public deposits. Also, any change in provision should not be made to breach any contract terms with third parties.
- Further, care needs to be taken so that alteration does not lead to contravention of the Memorandum of Association. The pIn addition, the proposed change should not increase the liability of the company members since the liabilities are limited to the extent of share capital.
- However, alteration may be done with a retrospective effect.
- Once the article is altered, the changed articles of association must be filled with the Registrar of the Companies within a specific time limit (normally 30 days of such alteration).
- Alteration of articles is not a small change and thus requires special resolution.
How Can a Company’s Article of Association be Changed?
- Articles may be required to be changed for many reasons, such as a change in objects of the Company, change in law, change in the manner the company needs to be administered, compliance with the orders passed by any court, etc.
- The Board of Directors (BOD) will first conduct a board meeting whenever a need arises to alter the articles. Such a board meeting would resolve to convene a general meeting of the shareholders. Such a general meeting would specify the agenda of the meeting called by the BOD.
- The general meeting is a meeting of the shareholders of the Company. A special resolution is a business decision approved by at least 75% of the shareholders in that meeting and voting for the resolution. Alteration requires a special resolution passed by the Company at its general meeting.
- After such alteration, the changed articles of association need to be sent to the registrar for updating the records.
Conclusion
Articles are the layout within which the company is administered. Every company needs a law to bind its operations in a strategic framework. The non-availability of such provisions would limit the directors’ power to run the operations like a proprietary entity. Thus, articles are the ones that govern the legal application of the corporate entity principle. It respects the separate legal entity status of a Company.
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