The Articles of Association are the operating rules of the company. They deal with the working relationship between the company, its members and its officers and provide the procedure for taking corporate decisions and actions. They should reflect how decisions are actually intended to be taken and how the rights of members are to be exercised. Standard model articles may be sufficient for a small company but companies with multiple promoters, investors or different classes of shares usually require attention to detail.

Section 5 of the Companies Act, 2013 (“Act”) requires the articles to contain the regulations for management of the company. A company may also include additional provisions which it considers necessary for its management, provided those provisions are consistent with the Act and the memorandum of the company.

What the Articles of Association (AOA) includes

The articles ordinarily deal with matters such as share capital, issue and transfer of shares, calls on shares, variation of class rights, meetings of members, voting, appointment and powers of directors, board proceedings, dividends, reserves, accounts and indemnity of officers.

The contents will depend on the nature and ownership structure of the company. A closely held private company may include detailed restrictions on transfer of shares, pre-emptive rights, nomination rights or reserved matters. A public company will require provisions suited to a large body of shareholders and the statutory framework applicable to public companies.

The articles cannot override the Companies Act. Section 6 makes any provision in the articles which is contrary to the Act void to the extent of the inconsistency. The articles must also remain within the conditions contained in the memorandum.

Forms prescribed in Schedule I

Section 5(6) refers to the model articles contained in Schedule I to the Act. The applicable forms are:

Table F: company limited by shares
Table G: company limited by guarantee and having a share capital
Table H: company limited by guarantee and not having a share capital
Table I: unlimited company having a share capital
Table J: unlimited company not having a share capital

A company may adopt the applicable model articles wholly or modify them to meet its requirements. For a company registered after commencement of the 2013 Act, the model regulations apply to the extent that its registered articles do not exclude or modify them.

Binding effect of the articles

Once registered, the memorandum and articles bind the company and its members as if each of them had signed the documents and agreed to observe their provisions. This effect arises under Section 10 of the Act.

The articles therefore operate as a statutory contract between the company and its members in their capacity as members. They are not merely an internal guidance document. Board and shareholder actions should be checked against the articles in addition to the Companies Act.

Alteration of Articles of Association

Section 14 permits a company to alter its articles by passing a special resolution, subject to the Act and the conditions contained in its memorandum. The power includes an alteration having the effect of converting a private company into a public company or a public company into a private company.

Where a public company is converted into a private company, the alteration is not valid unless it is approved by an order of the Central Government in the prescribed manner. Alterations and the required documents must be filed with the Registrar. Once registered, the alteration is valid as if it had originally formed part of the articles.

Every copy of the articles issued after an alteration should contain the alteration. Failure to incorporate the change in copies can attract the penalty provided under Section 15.

Entrenchment of Articles

Entrenchment means placing a higher threshold for altering a specified provision of the articles. Under Section 5(3), the articles may provide that a particular clause can be altered only after complying with conditions or procedures which are more restrictive than those applicable to a special resolution.

A special resolution generally requires the votes cast in favour to be at least three times the votes cast against it. An entrenched clause may go further. It may require consent of all members, consent of a named class of shareholders, or fulfilment of another stated condition before that clause can be changed.

Entrenchment does not make a provision permanently unalterable. It changes the procedure or approval threshold for its alteration. It also cannot protect a clause which is contrary to the Companies Act, because the Act continues to override the articles.

When entrenchment can be introduced

Entrenchment may be included at the time of incorporation. It may also be introduced later by amending the articles, but Section 5(4) prescribes different approval requirements:

in a private company, the amendment must be agreed to by all members; and
in a public company, the amendment must be approved by a special resolution.

Where the articles contain an entrenchment provision, notice must be given to the Registrar in the prescribed form and manner. For an existing company introducing entrenchment by amendment, the prescribed filing is made through Form MGT-14 within the applicable period, together with the altered articles and supporting resolution or consent documents. Entrenchment provides an additional layer of protection for selected provisions by requiring a higher standard than a special resolution. It should be used for clearly identified matters and supported by precise drafting and proper filing with the Registrar.

Where entrenchment may be useful

Entrenchment is generally used where the shareholders want certain fundamental arrangements to remain protected from change by the usual special resolution majority. Depending on the company and the agreement among its members, it may be considered for provisions dealing with:

rights attached to a class of shares;
nomination or representation rights on the board;
restrictions on transfer of shares or pre-emptive rights;
reserved matters requiring consent of specified shareholders; or
protection of the company’s principal objects or ownership arrangement.

These are illustrative uses. The clause should identify the provision being entrenched and state the additional approval or procedure clearly. A general statement that the articles are “entrenched” without identifying the protected provisions and the higher requirement can create uncertainty.

Entrenchment and shareholders’ agreements

Important investor or promoter rights are often recorded in a shareholders’ agreement. If those rights are intended to regulate the company’s internal management, the corresponding provisions should also be considered for inclusion in the articles. A contractual right in a shareholders’ agreement and a provision in the articles do not operate in exactly the same manner.

Entrenchment can strengthen protection within the articles, but it should be drafted carefully. An excessive or unclear threshold may make future investment, restructuring or routine corporate changes difficult. The clause should protect the intended right without blocking the company from functioning. They deal with the working relationship between the company, its members and its officers, and provide the procedure for taking corporate decisions.

Points to check while drafting or reviewing articles

Confirm that the articles are consistent with the Companies Act, the memorandum and the applicable rules.
Use the correct Schedule I table as the starting point for the class of company.
For a private company, ensure that the statutory restrictions required for a private company are included and OPC clauses are unchecked in e-AoA.
Align share-transfer, board nomination, reserved matter and class right provisions with the agreed ownership structure.
Identify any entrenched clause precisely and state the higher approval requirement in workable terms.
Complete the required Registrar filings after any alteration or introduction of entrenchment.
Keep every circulated or certified copy of the articles updated after registration of an alteration.

Articles of Association: The Company’s Rulebook and Entrenchment