Articles of association
|European Union / EEA|
|UK / Ireland / Commonwealth|
In corporate governance, a company's articles of association (called articles of incorporation in some jurisdictions) is a document which, along with the memorandum of association (in cases where the memorandum exists) form the company's constitution, defines the responsibilities of the directors, the kind of business to be undertaken, and the means by which the shareholders exert control over the board of directors.
A company is an incorporated body so there should be some rules and regulations formed for the management of its internal affairs and conduct of its business as well as the relation between the members and the company. Moreover, the rights and duties of its members and the company are to be recorded. This is why Articles of Association are necessary. The Articles of Association is a document that contains the purpose of the company as well as the duties and responsibilities of its members defined and recorded clearly. It is an important document which needs to be filed with the Registrar of Companies.
The Article of Association contains the following details:
- The powers of directors, officers and the shareholders as to voting etc.,
- The mode and form in which the business of the company is to be carried out.
- The mode and form in which the changes in the internal regulations can be made.
- The rights, duties and powers of the company as well as the members who are included in the Articles of Association.
The article is binding not only to the existing members, but also to the future members who may join in the future. The hires of members, successors and legal representatives are also bound by whatever is contained in the Article. The Articles bind the company and its members as soon as they sign the document. It is a contract between the company and its members. Members have certain rights and duties towards the company and the company have certain obligations towards its members. At the same time the company also expects some duties and obligations which the member has to fulfil for the smooth functioning of the company.
The term articles of association of a company, or articles of incorporation, of an American or Canadian Company, are often simply referred to as articles (and are often capitalized as an abbreviation for the full term). The Articles are a requirement for the establishment of a company under the law of India, the United Kingdom, Pakistan and many other countries. Together with the memorandum of association, they are the constitution of a company. The equivalent term for LLC is Articles of Organization. Roughly equivalent terms operate in other countries, such as Gesellschaftsvertrag in Germany, statuts in France, statut in Poland, статут (Latin: statut) in Ukraine, Jeong-gwan in South Korea.
In South Africa, from the new Companies Act 2008 which commenced in 2011, articles and memoranda of association have been replaced by a "memorandum of incorporation" or "MOI". The MOI gives considerable more scope to vary how to the company is governed than the previous arrangement.
The following is largely based on British Company Law, references which are made at the end of this Article.
The Articles can cover a medley of topics, not all of which is required in a country's law. Although all terms are not discussed, they may cover:
- the issuing of shares (also called stock), different voting rights attached to different classes of shares
- valuation of intellectual rights, say, the valuations of the IPR of one partner and, in a similar way as how we value real estate of another partner
- the appointments of directors - which shows whether a shareholder dominates or shares equality with all contributors
- directors meetings - the quorum and percentage of vote
- management decisions - whether the board manages or a founder
- transferability of shares - assignment rights of the founders or other members of the company do
- special voting rights of a Chairman, and his/her mode of election
- the dividend policy - a percentage of profits to be declared when there is profit or otherwise
- winding up - the conditions, notice to members
- confidentiality of know-how and the founders' agreement and penalties for disclosure
- first right of refusal - purchase rights and counter-bid by a founder
A Company is essentially run by the shareholders, but for convenience, and day-to-day working, by the elected Directors. Usually, the shareholders elect a Board of Directors (BOD) at the Annual General Meeting (AGM), which may be statutory (e.g. India).
The number of Directors depends on the size of the Company and statutory requirements. The Chairperson is generally a well-known outsider but he /she may be a working Executive of the company, typically of an American Company. The Directors may, or may not, be employees of the Company.
In the emerging countries there are usually some major shareholders who come together to form the company. Each usually has the right to nominate, without objection of the other, a certain number of Directors who become nominees for the election by the shareholder body at the AGM. The Treasurer and Chairperson is usually the privilege of one of the JV partners (which nomination can be shared). Shareholders may also elect Independent Directors (from the public). The Chair would be a person not associated with the promoters of the company, a person is generally a well-known outsider. Once elected, the BOD manages the Company. The shareholders play no part till the next AGM/EGM.
Memorandum of association
The Objectives and the purpose of the Company are determined in advance by the shareholders and the Memorandum of Association (MOA), if separate, which denotes the name of the Company, its Head- Office, street address, and (founding)Directors and the main purposes of the Company - for public access. It cannot be changed except at an AGM or Extraordinary General Meeting (EGM) and statutory allowance. The MOA is generally filed with a Registrar of Companies who is an appointee of the Government of the country. For their assurance, the shareholders are permitted to elect an Auditor at each AGM. There can be Internal Auditors (employees)as well as an External Auditor.
The Board meets several times each year. At each meeting there is an 'agenda' before it. A minimum number of Directors (a quorum) is required to meet. This is either determined by the 'by-laws' or is a statutory requirement. It is presided over by the Chairperson, or in his absence, by the Vice-Chair. The Directors survey their area of responsibility. They may determine to make a 'Resolution' at the next AGM or if it is an urgent matter, at an EGM. The Directors who are the electives of one major shareholder, may present his/her view but this is not necessarily so - they may have to view the Objectives of the Company and competitive position. The Chair may have to break the vote if there is a tie. At the AGM, the various Resolutions are put to vote.
Annual General Meeting
The AGM is called with a notice sent to all shareholders with a clear interval. A certain quorum of shareholders is required to meet. If the quorum requirement is not met, it is canceled and another Meeting called. If it at that too a quorum is not met, a Third Meeting may be called and the members present, unlimited by the quorum, take all decisions. There are variations to this among companies and countries.
Decisions are taken by a show of hands; the Chair is always present. Where decisions are made by a show of hands is challenged, it is met by a count of votes. Voting can be taken in person or by marking the paper sent by the Company. A person who is not a shareholder of the Company can vote if he/she has the 'proxy', an authorization from the shareholder. Each share carries the number of votes attached to it. Some votes maybe for the decision, others not.
A Special Resolution can be tabled at a Director's Meeting. The Ordinary Resolution requires the endorsement by a majority vote, sometimes easily met by partners' vote. The Special Resolution requires a 60,70 or 80% of the vote as stipulated by the constitution of the Company. Shareholders other than partners may vote. The matters which require the Ordinary and Special Resolution to be passed are enumerated in Company or Corporate Law. Special Resolutions covering some topics may be a statutory requirement.
Model articles of association
In the United Kingdom, model articles of association, known as Table A have been published since 1865. The articles of association of most companies incorporated prior to 1 October 2009 – particularly small companies – are Table A, or closely derived from it. However, a company is free to incorporate under different articles of association, or to amend its articles of association at any time by a special resolution of its shareholders, provided that they meet the requirements and restrictions of the Companies Acts. Such requirements tend to be more onerous for public companies than for private ones.
Companies Act 2006
The Companies Act 2006 received Royal Assent on 8 November 2006 and was fully implemented on 1 October 2009. It provides a new form of Model Articles for companies incorporated in the United Kingdom. Under the new legislation, the articles of association will become the single constitutional document for a UK company, and will subsume the majority of the role previously filled by the separate memorandum of association.
- Articles of Agreement Law & Legal Definition
- Delport, Piet "The New Companies Act Manual" (Lexis Nexis)
- Joint Stock Companies Act 1856 - Table B
- Under the law prior to the 2006 Act, in the event of any inconsistency between the memorandum and the articles, the memorandum usually prevailed: see Ashbury v Watson (1885) 30 Ch D 376.