What is Articles of Association?
The articles of association are a legal document which prescribes rules and by-laws for the company and acts as a document that defines the responsibilities of directors, the kind of business to undertake, rules for issuing shares, etc.
In simple words, the Articles of Association sets out the rules which the company needs to follow to accomplish its day to day business activities. It provides the manner in which the tasks are to be performed. The exact wordings of the articles may vary from company to company but general-purpose remains the same.
Contents of Articles of Association
It act as a rule book and guide the company about various day to day business activities, therefore it is important to know and understand the content mentioned in the articles. Following are the general content that articles of most of the company possess,
#1 – Directors
Articles guides regarding the appointment of directors, names of the first directors of the company, the number of directors, their qualification, their remuneration after appointment, and the powers of the board of directors.
#2 – Share Capital
Articles define various aspects to manage the share capital of companies like alteration of share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side., calls on shares, voting rights, rights of shareholders, issue of preference shares, etc.
#3 – General Meetings
Articles define the basic framework for the general meetings like the quorum for the meeting, the appointment of the chairperson, adjournment of the meeting, voting rights at the meeting, the appointment of a proxy to attend the meeting, etc.
#4 – Lien of Shares
Articles empower the company to retain the shares of any member of the company if they fail to pay the debt to the company. The member will not be allowed to transfer the shares unless they pay the debt
#5 – Transfer and Transmission of Shares
Articles provide the procedure of shares between the shareholders and transmission of shares in case of Death, insolvencyInsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow., marriage, etc.
#6 – Forfeiture and Surrender of Shares
Articles provide the rule for forfeiture of shares if the member is not able to pay the call money or meet any other purchase requirement. Shareholders may also choose to surrender the shares voluntarily as per the guidelines in articles of association.
#7 – Conversion of Shares into Stock
Company may pass an ordinary resolution in general meeting to convert shares into stock and these should be done in accordance with guidelines mentioned in articles of association.
#8 – Auditing of a Company
The article provides the provision with regards to the audit of companies’ financial statements.
#9 – Voting Rights
Articles dictate the voting rights of the member on a certain issue and the way members can vote.
#10 – Winding up of the Company
Articles also provide the provisions and procedures related to the winding up of the company.
Above are a few examples of clauses that can be found in articles of the company, all the clauses should be read and understood before finalization, as to alter the articles 3/4th of the majority is required i.e. a special resolution is to be passed in the general meeting.
The Articles of association is to be submitted to the Ministry of Corporate Affairs (MCA) at the time of the incorporation of the company and a revised copy is also to be submitted whenever any alteration is made by passing a special shareholder resolution in the general meeting.
- Articles of association and Memorandum of the association are together considered as the bylaws which the company is expected to follow while conducting its day to day business activities.
- Articles lay down important information like the voting rights of shareholders, the amount of share capital that can be raised, manner of distribution of dividend, right issues, etc. all such are vital information for all the stakeholders of the company.
- Public listed companies have very strict regulations, so it is always advisable to draft well-approved articles of association. It is really beneficial for the company as well as employees connected to the company; directly or indirectly.
Articles of association act as a vital document for the company as it provides the roles and responsibility of directors and every member of the company. As articles make the roles of every member clear it helps to conduct the business of the company in an effective manner.
This has been a guide to what is articles of association and its meaning. Here we discuss the contents and importance of the articles of association along with its difference with a memorandum association. You can learn more about financing from the following articles –