CHARTER DOCUMENTS FOR A CORPORATE ENTITY

CHARTER DOCUMENTS FOR A CORPORATE ENTITY

COMPANY SECRETARIAL SERVICES IN NEW DELHI

A Corporate entity is incorporated under the Companies Act, 1956 (Act) and is governed by the provisions of the Act. Notwithstanding the binding force of the Act, every corporate entity being a private limited company, public limited company or the recently introduced Limited Liability Partnership (LLP), its business, management, shareholder rights etc. are governed by specific Memorandum and Articles of Association which are the Charter Documents of the corporate entity.

A. Memorandum of Association:

The Memorandum of Association of a corporate entity provides the entire business structure for the corporate entity as relating to the scope of business activities, the related activities that can be undertaken by the corporate entity to achieve its core business and the maximum amount the corporate entity can raise by way of share capital. The Memorandum of Association of a corporate entity is divided into sections detailing in each section the name of the corporate entity, the location of the registered office, the main business objects to be pursued by the corporate entity on incorporation, the ancillary objects of the corporate entity to attain the main objects, the other objects enabling the corporate entity to undertake any other business other than its core business and the authorized share capital of the corporate entity.

B. Articles of Association:

While the Memorandum of Association provides the business structure for the corporate entity, the Articles of Association provides for the management and terms and conditions of shareholding in the corporate entity. In other words the Articles of Association of a corporate entity generally incorporates the provisions for transfer of shares, composition of the Board of Directors, management of the corporate entity, the powers of the Board of Directors etc. amongst others. The Articles of Association of a corporate entity is the basis for the functioning of the corporate entity including the terms of shareholding and therefore becomes a binding contract between the members/shareholders and the corporate entity. A member being a shareholder of a corporate entity can enforce the Articles against the corporate entity and vice versa. The contractual force of the Articles is however limited to matters arising out of the relationship of the members with the corporate entity and vice versa and does not extend beyond the membership in the corporate entity. The Memorandum and Articles of Association when registered binds the corporate entity and its members to the same extent as if they respectively had been signed by each member and the corporate entity (Section 36 of the Act).

C. Shareholders’ Agreement:

In the absence of any shareholders agreement especially with regard to private limited companies the provisions relating to shares, transfer of shares, shareholding rights and obligations of shareholders etc. as contained in the Articles of Association would be binding and enforceable. It is to be further borne in mind that all relevant provisions of any Shareholders Agreement must be incorporated in the Articles of Association failing which the enforceability of the provisions can be questioned and the same cannot be effected. The Supreme Court in V.B.Rangarajvs R.Gopalakrishna (1991-6CLA 211) has held that it is a general principle that effect cannot be given to any Shareholders Agreement unless the agreement has been incorporated in the company’s Articles of Association. It is precisely for the above mentioned reason the drafting of the Memorandum and Articles of Association of a corporate entity becomes a crucial exercise to be undertaken. A detailed discussion with the subscribers to the Memorandum and Articles of Association, the parties forming the corporate entity should be had to finalise the terms and conditions of the association to be reflected in the Articles of Association of the corporate entity. In the event of any existing Shareholders Agreement the same must be examined carefully for the purpose of incorporating the relevant provisions in the Articles of Association to ensure enforceability of the agreement.

There have been cases where the shareholders agreement has been nullified only on the ground that the Articles of Association did not provide the terms of the agreement or was diagonally opposite of the agreed terms between the parties suiting one of the parties better. In any conflict between the provisions of the Articles of Association and a Shareholders Agreement, the provisions of the Articles of Association would prevail. Therefore it is advisable not to blindly follow/copy the Articles of Association of another corporate entity merely for purposes of incorporating the corporate entity. A careful drafting of the Memorandum and Articles of Association of a corporate entity shall ensure proper governance and management of the corporate entity without conflicts between the shareholders and the management of the corporate entity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances; Hope the information will assist you in your Professional endeavors. For query or help, contact: info@caindelhiindia.com or call at 011-23343333.

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