The articles of association will usually specify the way a company issues stocks, distributes dividends, and performs financial records. The document is focused on giving the reader information about the methods a company uses to achieve its daily, monthly, and yearly goals.

The articles of association are relatively similar in any part of the world, even though the exact terms and items vary across jurisdictions. In general, it includes the following:

• Provisions on the company name
  
• Purpose of the company
  
• Share Capital
  
• Organization of the company
• Provisions on shareholder meetings

A company must adopt an official name as a legal entity. It must be present in the articles of association. Usually, the following suffixes “Inc” or “Ltd” are used to show that an entity is a company. Please note that jurisdictions vary from country to country, and thus, there are various rules regarding company names.

The words “government” or “church” cannot be used as a name because it might confuse the public. Also, words that are offensive and vulgar are also prohibited.

Companies are incorporated for a specific reason. Primarily, it is a for-profit reason to pursue a certain goal by delivering value to society. The reason or purpose of the organization must be clearly stated in the articles of association.

Some jurisdictions allow for very broad purpose statements, such as “management,” while others require a more detailed purpose of an enterprise, i.e., “the operation and growth of a restaurant chain.”

The articles of association will state the number and type of shares comprising a company’s capital. Typically, there is always at least one form of common shares that makes up its capital. Additionally, one can also see several types of preferred stock.

If information about stocks is found in the articles of association, it means they can be issued by the company when there is a need for funding.

The document includes legal information about the company, including the registration address, the number of directors and employees, and the identity of the founders and original shareholders. Legal advisors and auditors may also appear here, depending on the type of business and a country’s jurisdiction.

The Companies (Incorporation) Rules, 2014 prescribes that both the Memorandum and the Articles of a company are to be signed in a specific manner.

• Memorandum and Articles of a company, are both required to be signed by all subscribers, who are further required to add their names, addresses and occupation, in the presence of at least one witness, who must attest the signatures with his own signature and details.
• Where a subscriber is illiterate, he must affix a thumb impression in place of his signature, and appoint a person to authenticate the impression with his signature and details. This appointed person should also read out the content of the documents to the illiterate subscriber for his understanding.
• Where a subscriber is a body corporate, the memorandum and articles must be signed by any director of the body corporate who is duly authorised to sign on behalf of the body corporate, by a passing a resolution of the board of directors of the body corporate.
• Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly authorised to sign on the behalf of the LLP by a resolution of all the partners shall sign.

Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the conditions contained in the memorandum of association, by passing a special resolution. This power is extremely important for the functioning of the company. The company may alter its articles to the effect that would turn:

A Public Company into a Private Company

For a company wanting to convert itself from public to a private company simply passing a special resolution is not enough. The company will have to acquire the consent and approval of the Tribunal. Further, a copy of the special resolution must be filed with the Registrar of Companies within 30 days of passing it. Further, a company must then file a copy of the altered, new articles of association, as well as the approval order of the Tribunal with the Registrar of Companies within 15 days of the order being received.

A Private Company into a Public Company

For a company wanting to convert from its private status to public, it may do so by removing/omitting the three clauses as per section 2(68) which defines the requisites of a private company. Similar to the conversion of the public to a private company, a copy of the resolution and the altered articles are to be filed with the Registrar within the stipulated period of time.

Limitations on Power to Alter Articles

• The alteration must not contravene provisions of the memorandum, since the memorandum supersedes the articles, and the memorandum will prevail in the event of a conflict.
• The alteration cannot contravene the provisions of the Companies Act, or any other company law since it supersedes both the memorandum and the articles of the company.
• Cannot contravene the rules, alterations or suggestions of the Tribunal.
• The alteration cannot be illegal or in contravention with public policy. Further, it must be for the bona fide benefit and interest of the company. The alterations cannot be an effort to constitute a fraud on the minority and must be for the benefit of the company as a whole.
• Any alteration made to convert a public company into a private company, cannot be made until the requisite approval is obtained from the Tribunal.
• A company may not use the alteration to cover up or rectify a breach of contract with third parties or use it to escape contractual liability.
• A company cannot alter its articles for the purpose of expelling a member of the board of directors is against company jurisprudence and hence cannot occur.

The company is naturally completely bound to its members to adhere to the articles. Where the company commits or is in a place to commit a breach of the articles, such as making ultra vires  or otherwise illegal transaction, members can restrain the company from doing so, by way of an injunction. Members are also empowered to sue the company for the purpose of enforcement of their own personal rights provided under the Articles, for instance, the right to receive their share of declared divided.

It should be noted, however, that only a shareholder/member, and only in his capacity as a member, can enforce the provisions contained in the Articles. For instance, in the case of Wood v. Odessa Waterworks Co., the articles of Waterworks Co. provided that the directors can declare a dividend to be paid to the members, with the sanction of the company at a general meeting. However, instead of paying the dividend to the shareholders in cash a resolution was passed to give them debenture bonds. It was finally held by the court, that the word “payment” referred to payment in cash, and the directors were thus restrained from acting on the resolution so passed.

When the Memorandum and Articles of Association of any company, are registered with the Registrar of Companies they become “public documents” as per section 399 of the Act. This implies that any member of the general public may view and inspect these documents at a prescribed fee. A member of the public may make a request to a specific company, and the company, in turn, must, within seven days send that person a copy of the memorandum, the articles and all agreements and resolutions that are mentioned in section 117(1) of the Act.

If the company or its officers or both, fail to provide the copies of the requisite documents, every defaulting officer will be liable to a fine of Rs. 1000, for every day, until the default continues, or Rs. 1,00,000 whichever is less.

Therefore, it is the duty of every person that deals with the company to inspect these public documents and ensure in his own capacity that the workings of the company are in conformity with the documents. Irrespective of whether a person has actually read the documents or not, it is assumed that he familiar with the contents of these documents, and that he has understood them in their proper meaning. The memorandum and articles of association are thus deemed as notices to the public, hence a ‘constructive notice’.

Illustration: If the articles of Company A, provided that any bill of exchange must be signed by a minimum of two directors, and the payee receives a bill of exchange signed only by one, he will not have the right to claim the amount.

Therefore, it is to be understood that in the sphere of corporate governance, the articles of a  company is a crucial document which, along with the memorandum from the company’s core constitution and rule book, and hence defines the responsibilities of its directors,  kinds of business es to be undertaken by the company, and the various means by which the shareholders may exert their control over the directors, and the company itself. While the memorandum lays down the objectives of the company, the articles lay down the rules by which these objectives are to be achieved.  In cases of conflict, the Memorandum supersedes the Articles and the Companies Act further, supersedes both Memorandum and Articles.

These articles may be altered as per Section 14 of the Companies Act, 2013. The entrenchment provisions in the Articles of a company protect the interests of all the minority shareholders by ensuring that amendment in the article can only occur after obtaining the requisite prior approval of the shareholders. The Articles of a company bind the company to its members and bind the members to the company and further also bind the members to each other, they constitute a contract amongst themselves and therefore, its members with respect to their rights and liabilities as members of the company.