Documentation of the Article of Association (AoA) and the Memorandum of Association (MoA) is one of the most important steps in the formation of a Company. Whether it may be a Private Limited Company or a Public Limited Company, the initial formation starts with the making of the AoA & MoA. Though the registration of the company is another part of the formation of the company but the constitution of the company solely depends on the AoA & MoA.
Corporate Governance and the regulation of the listed Public Limited Company is more stringent than that of the Private limited company & other unlisted Public Limited Companies. Hence, it is required to constitute a better AoA for the benefit of the company and for the employees associated with it.
A normal article of association includes only the basic requirements through clauses which a company should have. But certain clauses which are not introduced in an article of association which are more relevant are given below.
Protection from Shareholders interest: Shareholders are the investors of the company and said to be the owners of the company and in comparison to it their participation is very less than that of the management. Some of them only attend certain shareholder meetings, and the rest do not do so. Thus, this clause helps to understand the requirement of all the shareholders (minority shareholders) in the decision-making process when they find that the managers (including majority shareholders who participate in the company affairs) of the company are not performing their parts and doing something which is not beneficial for the shareholders. Thus, shareholders are the ones who can take appropriate decisions to make the steps clear. Thus, the protection of the legitimate interest of the minority shareholders is necessary.
Protection of employees and protection from the employees: This clause is also required for the protection of the employees and protection from the employees who are not performing their part in a proper manner. There are employees from the top management to the lower management in a company and the decision-making process always flows from the top. Thus, certain decisions which violate corporate governance should be avoided, and thus the employees who are taking the decision and performing the job should also make a note that the work which they are performing is correct or not. Sometimes it may happen that the work which is assigned may not be correct from a Corporate Governance point of view and thus should be avoided.
Protection of outsiders who enter into contracts with company & consumers: This clause would help the company to avoid such contracts which would lead to violations. The management has the right to enter into contracts on behalf of the company, and such rights should be taken care of. The Management should not misuse such rights, such that if they misuse such rights and enter into contracts, this would lead to the violation as per Corporate Governance Statutes. A Company who enters into a contract with an outsider and defaults the payments wherein such defaults may result in endangering the company’s goodwill in the market. The company should not produce such products which are hazardous to the consumers. The Management of the company should also keep in mind about safety standards. A company specifically engaged in manufacturing consumer goods should adhere to the safety standards of the products which are produced by the company and which are made for the consumers for their consumption.
Protection of the public at large: A Company should always try to make products which are not hazardous in nature. The safety of the environment should be a must, as environmental degradation would lead to a problem for the company. A Company should take safety measures so as not to harm the public at large in the surroundings. Thus, companies who are engaged in several hazardous products, research and development, laboratories, etc., should always make a note that such production or operations should be smooth with the adoption of safety measures, and steps should be taken to safeguard the Environment. The release of hazardous gasses would create problems for the people in the nearby vicinity. Thus, it’s the responsibility of the company to take safety measures in such areas of operation.
To promote profitability: The main motto of the company is to generate profits and not only to generate it but also to utilize it for the expansion of the company. Thus, it is the duty of the managers of the company to run the business in a manner where profits are generated out of the business. Hence, profitability matters the most for any company especially for a public company as most of the investors depend on the performance of the company, i.e., profits of the company.
To promote decisiveness and efficiency of the business organization: The mangers should take appropriate measures to be firm in the business of the company. The managers of the company should try to increase the growth of the company and should make a note that the businesses of the company are not affected in any manner. This would lead to the stability of the company, and the operation would be smooth. Any violation would lead to several proceedings which would make the company suffer and sometimes may also lead to the closure of the company. Thus, the managers should not only focus on that part but also should try to increase the productivity of the company.
Minority Shareholders rights on important decisions of the company: Several shareholders buy shares of the company. These shareholders are also called the investors and owners of the company. Some of them hold significant shares of the company and some minor. One of the major concerns is that the minor shareholders are not given much participation and rights in the company affairs, and therefore their interests are not of major concern in the interest of the company. Thus to provide such interest to the minority shareholders this clause is necessary for the articles of association as it gives the rights to the minority shareholders to participate in the affairs of the company. When taking small or big decisions if the minority shareholders feel that these decisions are important then they can step in and make the decision. Minority shareholders should be given rights to take important decisions along with the managers of the company. They should also be given active participation in the benefits of the company and should not be left ignored from the matters of the company.
Rights to appoint Directors and receive information: The shareholders should be given rights to appoint Directors (Managers) and receive information wherever they feel is important and such information should be provided by the managers of the company from time to time as per the requirement for the benefit of the company. The shareholders have the right to get the information about the company affairs and other matters which they feel are important which may be carried out by the managers of the company.
Prescribe powers of the Directors: The Directors are also called the managers of the company who look after the affairs of the company and thus they have several powers to perform the business of the company and make important decisions on behalf of the company. Sometimes these powers can be misused for personal gains and interest. To avoid such circumstances, it is required to implement this clause in the articles of association so that the powers of the Director would be restricted, both in the cases of directors with additional powers and directors who only have general powers in the operations of the company. The powers should be prescribed, and certain powers should be provided in certain cases to one director and not to all the directors.
Issuance of ESOPs: Some of the companies issue ESOPs to the employees. But it would not have been possible for the company to issue ESOPs unless it is specified in the articles of association and thus this forms a significant clause in the articles of association. The company can only issue ESOPs to the employee as per the guidelines given by The Companies Act, 2013. This clause should be mentioned in the articles of association. The structures for the issuance of the ESOPs are decided by the Directors of the company in a meeting.
All the above clauses form significant clauses wherein a company should adopt an appropriate measure of Corporate Governance as the rules have become more stringent in cases of listed public limited companies than that of other public & private limited companies. To have smooth operations in the competitive market, the clauses described in this article is required for the company to avoid loopholes in their corporate governance structure.