what is article of association

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) form the company’s constitution, and 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.

 

Contents that are included in the AoA of the company are

Directors

A company is run by the directors, who are appointed by the shareholders. Usually, the shareholders elect a Board of Directors (BOD) at the Annual General Meeting (AGM), which may be statutory (e.g. India and the UK).

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.

Shareholders

In emerging countries, there are usually a few 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. 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 permit of the Memorandum of Association. Any matter in the Articles of Association not within the scope of the Memorandum of Association of the company is void.

Board meetings

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 her/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 their 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 may be for the decision, others not.

Resolutions

There are two types of resolutions, known as an Ordinary Resolution and a Special Resolution.

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 the company or Corporate Law. Special Resolutions covering some topics may be a statutory requirement.

 

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