What are Articles of Association?
Article of association is a legal document that specifies the regulations to govern operations of an entity such as the appointment of the board of directors, manner of conduct of all meetings, remuneration, appointment & removal auditors of the company & many more; and it borders every regulation within the layout of the company’s main objectives.
Objectives of Article of Association
- To keep it simple, “these are basically 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, 2006, are overall corporate laws that govern all entities. A third party (i.e., auditor) is required to ensure compliance with such laws.
- However, articles are self-made laws within the Company. Moreover, such regulations are mandatory for preparation by each company since a company is a separate legal entity. Hence, the fact is clear that byelaws are required for the administration & management of the entity in a legal manner within set parameters.
- The directors, officials, 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 of any action by the Company, the lawyers and auditors would first refer to whether articles give the power.
- 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 management function of the Company.
- 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 on the borrowing power of the Company.
- The articles grant voting and other rights of shareholders
- The power is given to the shareholders to decide at 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 an example of the Delphi Automotive PLC, a public limited Company.
The articles of the said company can be accessed through the following link:
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:
|3||Share Premium Account|
|4||Alteration of Share Capital|
|5||Variation of Rights|
|6||Register of Members|
|9||Calls on Shares|
|10||Forfeiture of Shares|
|11||Transfer of Shares|
|12||Transmission of Shares|
|15||Notice of General Meetings|
|16||Proceedings at General Meetings|
|17||Votes of Members|
|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|
|28||Proceedings of Directors|
|32||Authentication of Documents|
|34||Capitalisation of Profits|
|35||Accounts and Audit|
|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 basically means “to change.” Therefore, every law needs amendments as per the changing situations and changing circumstances. Laws cannot be rigid at all points of time. Thus, even articles of association can be amended as per the need of time.
- However, any change should not sanction any provision which is not allowed 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 terms of a contract 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 members of the company since the liabilities are limited to the extent of share capital.
- However, alteration may be done with retrospective effect.
- Once the article is altered, the changed articles of association need to 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, to comply with the orders passed by any court, etc.
- Whenever a need arises to alter the articles, the Board of Directors (BOD) will first conduct a board meeting. 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 which is approved by at least 75% of the shareholders present 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.
Key Takeaways for Articles of Association
- Articles of association is a legal document that specifies the regulations to govern the operations of an entity.
- It borders every regulation within the layout of the company’s main objectives.
- These are basically byelaws 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, shareholders gain the power to act only if provided by the articles.
- Alteration of the articles is possible through passing a special resolution.
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.
This is a guide to Article of Association. Here we also discuss the introduction and objectives of articles of association along with examples and components. You may also have a look at the following articles to learn more –