Articles of Association (AOA) and Shareholders Agreement (SHA)
What is an Articles of Association (AOA)
In corporate governance, a company's articles of association (AOA) (called articles of incorporation in some jurisdictions) is a document which, along with the memorandum of association (in cases where the memorandum exists), forms the company's constitution.
AOA defines the responsibilities of the directors, the kind of business to be undertaken, and how the shareholders exert control over the Board of directors. In contrast to the memorandum, which declares the business objectives and manners of external affairs, the articles of association define the business's internal affairs and manner of achieving the business objective.
Articles of the association form a document that specifies the regulations for a company's operations and defines the company's purpose. The document lays out how tasks are to be accomplished within the organization, including appointing directors and the handling of financial records. Articles of association can be considered a user's manual for a company, defining its purpose and outlining the methodology for accomplishing necessary day-to-day tasks. The content and terms of the "articles" may vary by jurisdiction but typically include provisions on the company name, its purpose, the share structure, its organization, and provisions concerning shareholder meetings.
Articles of association often identify how a company will issue shares, pay dividends, audit financial records, and provide voting rights. This set of rules can be considered a user's manual for the company because it outlines the methodology for accomplishing the day-to-day tasks that must be completed. While the content of the articles of association and the exact terms used vary from jurisdiction to jurisdiction, the document is quite similar throughout the world. Generally, it contains provisions on the company name, the company's purpose, the share capital, the company's organization, and provisions regarding shareholder meetings.
If there is a Shareholder Agreement between different classes of shareholders or promotors and investors, clauses of SHA can be added to AOA, subjected to certain conditions.
Different Forms of the Article of Association (AOA)
The Companies Act of 2013 specifies the different forms of AOA. The company can adopt any one of the following Tables as their AOA
Table F: a company limited by shares
Table G: a company limited by guarantee and having a share capital
Table H: a company limited by guarantee and not having a share capital
Table I: unlimited company and having a share capital
Table J: unlimited company and not having a share capital
Contents of Articles of Association
Generally, the contents of AOA are as follows:
· Private Company
· Share Capital and Variation Of Rights
· Preference Shares
· Alteration to Memorandum
· Control of Shares
· Shares held Jointly
· Increase of Capital
· Lien on Shares
· Calls on Shares And Transfer Of Shares
· Transmission of Shares
· Forfeiture of Shares
· Alteration of Capital
· Capitalization of Profits
· Buy-Back of Shares
· Issue of Shares In-Kind
· General Meetings
· Proceedings at General Meetings
· Voting Rights and Proxy
· Proceedings of The Board
· Chief Executive Officer, Manager, Company Secretary, or Chief Financial Officer.
· Common Seal
· Borrowing Powers
· Operation of Bank Accounts
· Dividends and Reserve
· Winding Up
· Execution Clause
Detailed contents of an AOA:
As a legal entity, the company must have a name found in the articles of association. All jurisdictions will have rules concerning company names. Usually, a suffix such as "Inc." or "Ltd." must be used to show that the entity is a company. Also, some words that could confuse the public, such as "government" or "church," cannot be used or must be used only for specific types of entities. Words that are offensive or heinous are also usually prohibited.
Purpose of the Company
The reason for the creation of the company must also be stated in the articles of association. Some jurisdictions accept extensive purposes—"management"—while others require greater detail—"the operation of a wholesale bakery," for example.
The number and type of shares that comprise a company's capital are listed in the articles of association. There will always be at least one form of common share that makes up a company's capital. In addition, there may be several types of preferred shares. The company may or may not issue the shares, but if they are found in the articles of association, they can be issued if and when the need presents itself.
A company may or may not issue shares, but if they are listed in the articles of association, shares can be issued if and when needed.
Organization of the Company
The company's legal organization, including its address, the number of directors and officers, and the identity of the founders and original shareholders, are found in this section. Depending on the jurisdiction and type of business, the auditors and legal advisors of the company may also be in this section.
The provisions for the first general meeting of shareholders and the rules that will govern subsequent annual shareholder meetings—such as notices, resolutions, and votes—are laid out in detail in this section.
Small Business Example of Articles of Association
A person, or group of people, starting a business will typically refer to a lawyer, accountant, or both for advice when setting up a company.
The company will choose a name and define its purpose. The company is then registered at the state/province or federal level. Note that trademarking a name is a different process.
A company may issue shares to divide up the company if it wishes, but it doesn't need to. The articles will lay out how this can be done. The lawyer or accountant will typically work with the company's directors, asking them questions to help figure out how they wish to grow and how the company may end up being structured in the future.
Company directors are listed, along with their personal information. A business address is also provided. Changes can be made to the articles of association with director(s) approval.
Amendments to AOA
Ministry of Corporate Affairs has found that some companies are still using the older formats of MOA and AOA to register their companies and are getting rejected by the Registrar Office. Some amendments have been made to schedule 1 of the Companies Act, 2013, regarding the format for MOA and AOA.
Amendments in Schedule 1 to Companies Act, 2013 (MOA/ AOA) notified by MCA.
The MCA has notified specific 'alterations/ amendments in Schedule 1 to Companies Act, 2013 'relating to prescribed formats of Memorandum/ Articles of Association (MOA/ AOA), given amended procedure relating to the issuance of share certificates notified under the Companies (Share Capital and Debentures) Amendment Rules, as under:
Amendments in Schedule 1 to Companies Act, 2013 (MOA/ AOA): MCA Notification dt. 10 April 2018 GSR. _ (E).
In exercise of the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013 (18 of 2013), the Central Government, as a result of this, makes the following alteration to the Schedule I of the said Act, namely:-
In the Companies Act, 2013, in Schedule I, –
(i) in Table F, in paragraph II, –
(a) in subparagraph (2), for an item (ii), the following item shall be substituted, namely:-
"Every certificate shall specify the shares to which it relates and the amount paid-up thereon and shall be signed by two directors or by a director and the company secretary, wherever the company has appointed a company secretary:
Provided that the company has a common seal, it shall be affixed in the presence of the persons required to sign the certificate.
Explanation.- For this item, it is at this moment clarified that in the case of a One Person Company, it shall be sufficient if the certificate is signed by a director and the company secretary, wherever the company has appointed a company secretary or any other person authorized by the Board for the purpose.";
(b) in subparagraph (79), after the item (ii), the following Explanation shall be inserted, namely:-
"Explanation.-: For the purposes of this subparagraph it is hereby clarified that on and from the commencement of the Companies (Amendment) Act, 2015 (21 of 2015), i.e. with effect from the 29 May, 2015, company may not be required to have the seal by virtue of registration under the Act and if a company does not have the seal, the provisions of this subparagraph shall not be applicable."
(ii) in Table H, in paragraph II, in subparagraph (30), after the item (ii) but before the 'Note', the following Explanation shall be inserted, namely:-
"Explanation.- For the purposes of this subparagraph it is hereby clarified that on and from the commencement of the Companies (Amendment) Act, 2015 (21 of 2015), i.e. with effect from the 29 May, 2015, company may not be required to have the seal by virtue of registration under the Act and if a company does not have the seal, the provisions of this subparagraph shall not be applicable.".
Confusion in the process of preparing an AOA and registering a company?
Many first-time entrepreneurs may face confusion regarding the preparation of an AOA, contents included, information to be added in the contents, registration offices in the localities, etc.
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