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This article is written by Amritha Priya, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

A company is composed of members though it has its own legal entity. On a common note, the members/ shareholders of the company are the persons who for the time being constitute the company as a corporate entity. A member is not necessarily a shareholder, though these two terms can be interchangeable. In case of a company limited by shares, the members are also the shareholders of the company; but a company limited by guarantee or an unlimited company may exist without share capital and therefore, may not have shareholders. Conversely, the bearer of a share warrant is only a shareholder and not a member of the company as his name is struck off from the register of members. Again, a member may be a holder of shares by transfer but not become a member until the transfer is registered in the books of the company and his name is entered in the register of members. 

Modes of Acquiring Membership

There are two important elements which must be present before a person acquires membership of a company, as per section 2(55) of Companies Act, 2013:

  1. Agreement in writing to become a member; and
  2. Entry of the name of the person agreeing, in the register of a member of the company.

In, Ram Kishan v Kanwar Paper Ltd, the name of the petitioner was asked to be removed from the register of members because there was no agreement in writing to this effect. 

Apart from this a person can acquire the membership of a company in the following ways: 

  1. By subscribing to the Memorandum.
  2. Qualification shares- shares that would be allotted to any person for service, qualification etc.
  3. By application and allotment.
  4. By transfer of shares.
  5. By transmission of shares.
  6. By acquiring or estoppel.

In Official Liquidator v Suleman Bhai, the High Court of Madhya Bharat observed that a subscriber of memorandum acquires membership of the company as soon as the company is incorporated and it is immaterial whether his name is entered in the register of members or he has taken the qualification shares or not. In this case, only S had subscribed to the memorandum of a company for 200 shares but he actually took only 20 shares. The company was duly incorporated. In the event of its winding up, S was held to pay for all 200 shares although they were in fact never allotted to him.

In Indian Chemical Products Ltd v State of Orissa, the State of Orissa claimed transmission of shares of an erstwhile ruler by devolution but the company refused to register the State’s representative as a shareholder in place of the deceased ruler. The Supreme Court however, ruled that the state became entitled to the shares by operation of law, this being a case of transmission of shares. 

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What is (AOA) Articles of Association

They are the by-laws of the company; these are the internal regulations which govern the management of the internal affairs of the company. As against the AOA the MOA contains the fundamental conditions for guidance and benefit of the creditors and outside public as also shareholders who are desirous of dealing with the company. Section 2(5) of Companies Act 2013 defines AOA as ‘Articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act’. 

How to alter AOA of Company

The procedure to be followed by a company for altering its articles under section 241 and section 242 of the Companies Act, 2013 may be briefly described as:

  1. Firstly, the proposal has to be approved by the BOD and the board shall decide the date and time of the general meeting and the Secretary will be authorised to convene the meeting. The board will also approve the draft of notice, special resolution and explanatory statement. If the alteration requires taking or subscribing more shares by the members than already held by them, prior consent of the member in writing shall be necessary before passing the special resolution to this effect. 
  2. The special resolution should be passed in the general meeting held on the appointed date.
  3. Within 30 days of the passing of the resolution the company has to file FORM NO23, of the Companies (Central Government) General Rules and Forms, 1956 duly filled in, with the registrar of companies along with the requisite fee as per Schedule X to the Act along with a certified copy.
  4. In case the alteration of articles related to conversion of a public company into a private company the company should make an application in writing in FORM 1-B to the Regional Director concerned for his approval within 3 months of the date on which special resolution for alteration was passed. 
  5. After the approval printed copies of the articles as altered should be filed by the company with the registrar of companies within 15 days of the date of the receipt of approval order.
  6. In case the shares of the company are listed on a stock exchange as per standard listing agreement, the company must forward to the exchange the copies of all notices sent to its shareholders and also file with the exchange 6 copies of such amendment, one of which should be a certified copy. 

Limitations on Power to alter AOA

A company can alter its articles by a special resolution in the general meeting. This statutory power of the company is however subject to the following restrictions or limitations: 

  1. The alteration must not exceed the powers conferred by the MOA or contravene any of its provisions.
  2. It must not be inconsistent to the companies act 2013.
  3. The alteration must be Bona-fide and must benefit the company as a whole.
  4. It must not contain anything illegal or against public policy.
  5. Any alteration in the AOA which tends to increase the liability of a member to contribute more than his shareholding is not binding on him, unless he consents to it in writing. 
  6. A company cannot justify a breach of contract with other parties by altering its articles. It shall remain liable for damages of such breach.
  7. A reserved liability once created cannot be converted into an unreserved liability by altering the articles but it may be cancelled on a reduction of capital.
  8. The alteration must not be inconsistent with the order of the National Company Law Tribunal.
  9. An alteration must not constitute a fraud on the minority nor should it cause any hardship on the minority without any corresponding benefit of the company as a whole. 

In Madhav R Kamath v Canara Banking Corporation Ltd, the company altered its Articles by special resolution for expulsion of a member and authorising the directors to register the transfer of his shares without a transfer deed. The alteration was struck down by the court being contrary to the provisions of the Company law. 

In Menier v Hooper’s Telegraph Works, a company altered its articles in a manner that some other company was benefitted thereby but the alteration was not beneficial to the company itself. The court held that the minority shareholders of the company could challenge the alteration on the ground that it was a fraud on them by the majority shareholders.

As per section 14 the Companies Act, 2013 provides that subject to the provisions of the Act and to the conditions contained in its memorandum a company may by special resolution alter its articles. Alteration includes additions and omissions. However, the only restriction on this unfettered power granted under section 14 is that a public company cannot convert itself into a private company by carrying out alterations in its AOA. The right to alter the articles being unfettered by the company cannot in any matter either by express provisions in the articles or memorandum or by independent contract deprive itself of the power to alter its articles. However, the alteration should have been made bona fide for the benefit of the company as a whole, and the power to alter must not have been exceeded. 

In Allen v Gold Reefs West Africa Ltd, the articles of the company gave the company lien over all “not fully paid” shares for calls due to the company. ‘A’ was the only shareholder who held fully paid shares, he also owed money to the company for calls due on other shares. ‘A’ died. The company altered its articles by striking out the words “not fully paid up” and thus gave itself the power to exercise lien on all of A shares. The court held that alteration was valid as it was bona fide made for the benefit of the company. The articles must be altered in good faith and not so as to give unfair advantage to the majority of shareholders. 

What are the Contents of Shareholder Agreement?

A shareholder agreement is an agreement between the shareholders of the company. The main objective of this agreement is to lay down guidance on the management of day to day affairs of the company and to govern the shareholder investment. The Shareholder Agreement contains the rights and obligations of shareholders; pre-emptive rights; capitalization table; number of shares owned by a person; cost of shares; shareholders percentage of ownership in the company; how shares can be transferred; quorum; procedure as to how a company shall run; liabilities of shareholders; protection of minority shareholders; appointment of directors; financial needs of company; etc. 

Contents of AOA

The AOA shall contain details of directors; general meeting details; accounts details; audit and tax; shareholder; constitution of company; share capital; kinds of share capital; certificate of shares; redemption of preference shares; issues of securities on a premium; power to borrow; call on shares; transmission of shares; joint holders; buy-back of shares; general meetings and proceedings in general meetings; adjournment of meetings; notice; proxy; BOD (Board of Directors); powers of board; seal; registers; indemnity; insurance; lien of shares; transfer of shares; surrender and forfeiture of shares; issuance of share warrant; change of capital; voting rights; dividends; winding up; share capital and issuance of new shares; unanimous approvals; proceedings of the board; ESOP (Employee Stock Ownership Plan); deadlock between promoters; etc. 

Aspects of Shareholder Agreement

When such an amendment is made, one must keep in mind the above discussed procedure as well as the extent of power. In AOA the contents which are in respect to shareholders are: shareholders rights, their voting power, issuance of new shares, call on share capital; quorum of meetings; profit sharing; voting rights; transfer of shares; return of shares; forfeiture of shares; cap table; lien; buy-back; So these aspects in AOA can be amended, by the procedure established by law. 

Those other aspects which are not relating to the shareholders shall be excluded in such amendments like: constitution of company; powers of board; number of meetings; etc. But one important aspect is when making such an amendment, if the amendment intends to increase the liability of shareholders towards the company then approval of them is required, before making such changes. 

While amending the AOA with regard to Shareholder Agreement these points must be kept in mind. Arbitrary amendment can be challenged and resorted by court. 


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