Articles Of Association

A company is an artificial person in the eyes of law. Just like an individual takes birth according to the laws of nature, an artificial person is created according to the laws of the land. The constitution of a company is verily contained in its Articles of Association along with the Memorandum of Association. By definition, it is a document that contains the internal regulations of a company. The Articles of Association requires to be compulsorily registered in India. It is also known as the Articles of Incorporation in certain countries.

The Articles of Association enumerates the functions of the directors, defines the nature of the business, and establishes the relationship between the shareholders, the company and its directors along with the extent of control exercised by them. The procedure of appointment of directors is also detailed along with the procedure of maintaining financial records.

Primary Contents Of An Articles Of Association

An Articles of Association describes the manner in which a company issues shares, pays dividends, audit financial records and highlights the voting rights. It begins with the complete and unique registered name of the Company followed by the Act under which it was incorporated. In India, it is the Companies Act of 1956 under which, companies are registered.

The Articles of Association document further includes the following details:

Definitions

All important words used in the Articles are defined initially in order to avoid any ambiguity in interpretation. This is an important clause. Here is an example.
Directors: “Directors” means the Directors for the time being of the Company and includes persons occupying the position of directors by whatever name called or as the case may be, Directors assembled at a Board Meeting.

Share Capital

The total capital of the company needs to be clearly shown in the Share Capital clause. The break-up of the capital into individual shares is mentioned. This clause is of vital importance to the governmental authorities, existing shareholders and potential investors.

Type Of Company

The company shall be either a private of a public limited company, which shall be mentioned along with appropriate details. In case of a private limited company, it shall be mentioned that:

1. The company shall not invite the public to subscribe to its shares capital or debenture, if any.
2. The number of members shall not exceed 50 excluding the employees of the company while joint holders shall be considered as one member.
3. The right to transfer shall be subject to restrictions as provided in the Articles.

Similarly, in a public limited company, the corresponding details shall be mentioned. There are no restrictions on the number of members in such companies. They are also allowed to raise capital from the public by issuing shares and debentures.

Agreement

If the Memorandum of Association of the company mentions any agreement of any nature that needs to be completed, it needs to be mentioned that the Directors shall give effect to such agreements as soon as possible after the registration of the company.

Shares

All the details as to the control of the shares and the power to allocate shall be described. In a private limited company, the shares shall be under the control of the directors who shall allocate the same to the members according to prior decided times and manner.

Transfer and Transmission of Shares

All details as to the transferability of shares are described in the Articles of Association.

The directors of a private limited company shall be allowed to transfer their shares to their legal heirs. The shares shall be deemed to remain with the transferor until the name of the transferee is entered in the register as the holder of the shares.

Any transfer by a shareholder to a person other than the legal heir shall be effected only after providing sufficient notice to the directors of the company giving the name, address and description of the proposed transferee. Such proposal shall be considered by the directors only after convening a meeting. The directors have the liberty whether or not to accept such transferees as members or not.

Sale Notice

It needs to be mentioned that if members wish to sell their shares, they need to give a notice in writing to the directors. This shall be applicable on sale to members or to any outsider nominated by the directors.

When a sale notice is received by the directors, it should be offered by the directors at their fair value. If they are not subscribed by any members at such a value within a prescribed time, they are to be declared as declined. If they are accepted by more than one members, such shares shall be divided among the applicants in the same proportions as their existing shares in the company.

All other details as to the transferability of shares needs to be specified in the Articles of Association including nomination to outsiders in the event of the shares not being subscribed to by the members at fair value. Other details may include mentioning of sale at ‘best value’ instead of ‘fair value’ in the event of absence of purchasers.

Ultimately, it shall be the discretion of the vendor of the shares whether to sell at best value to a nominated person or to sell to any other person provided he is getting a higher price. The method by which ‘fair value’ is arrived at shall also be mentioned.

Other prominent clauses for private limited companies include

1. The number of Directors of the company
2. Qualifications to be a Director
3. Names of the first directors
4. Appointment of additional Directors
5. Details as to who shall be responsible for the management of the business of the company.
6. Appointment of the Managing Director
7. Rotation of Directors
8. Reasons for disqualification of Directors
9. Intervals and particulars of meeting of the Board of Directors
10. Methods of serving notice
11. Details about Annual General Meeting of the Company
12. Notice method for Annual General Meeting
13. Quorum required for Annual General Meeting
14. Voting method at such meeting
15. Accounting practices to be followed in the company
16. Details as to where shall the books of accounts be maintained.
17. Preparation of the Profit and loss accounts and balance sheet before general meetings
18. Auditing  methods and intervals

An Articles of Association concludes with the declaration by the directors that they are desirous of being formed into an Articles of Association and that they agree to take the respective number of shares in the share capital of the company as set opposite to their respective names in the said document.

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