In this article, Ram Maroo pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, elaborates on Ten must-have clauses in Articles of Association that are not prescribed by default under Companies Act.
The Articles Of Association of a Company is a very important document that provides certain regulations that helps in the management of the company. It helps in the operation of the company which includes the name of the company, appointment of directors and handling of records for the purpose of the company. In other words, the Articles of Association is a set of rules that acts as a user manual for the company that helps the company to manage its day-to-day activities.
Following are the clauses which although are not prescribed by default under the companies act but must find its place in Articles of Association of every company.
Protection from Shareholder’s Interest
Shareholders are investors who has a holding in the company and the management is entitled to provide them with a value. This value is also known as the shareholder value. Many shareholders do not participate actively in the day-to-day activities of the Company and most of them also fail to attend meetings. Some of the shareholders have minority rights and the rights of these minority shareholders shall be protected regardless of anything.
Protection of Employees and Protection from Employees
The Company often faces problems with the employees who is not participating or completing the work assigned to them in an adequate manner and therefore such a clause is deemed to be a necessity in the Articles of Association of a Company. The Companies Act does not provide us with such a relief. A company usually has a lot of employees working under a same roof and the management of the company usually flows from the topmost level, delegating work to the employees working under them. In between the process, a lot of chaos may take place that may violate the corporate governance of the company. In order to avoid this such a clause is necessary.
Protection of outsiders entering into contracts with the company
Every such right shall be protected that gives the management the authority to enter into contract on behalf of the Company. Such rights cannot be violated in law. Alongside, even the Management does not have the power to misuse the rights given to them as a part of the Corporate Governance Structure. If a Company manufactures a product or enters into a contract with that of an outsider or a consumer wherein the goodwill of the company is at stake such type of contracts are not valid. The company shall follow a detailed guideline to maintain their standards when they manufacture or produce a good or a service because it is not only the company but also the consumers who would be relying on the product and would be consuming them too. If the safety standards are not met with proper and due care then the company fails to deal with the guidelines in a proper manner. Such inappropriate behaviour shall not be accepted by law.
Protection of the Public
A company shall always make products that are made with due care and caution. The products made by the Companies shall not be of hazardous nature both to the environment and to the public in general. If a Company is engaged into making such products then a proper care shall be taken by implementing certain safety guidelines and taking certain steps that would help the surroundings to be a safer place to live around. Every Company is ought to takecare of the people who are working for them and at the same time of the consumers who is willing to consume the product. Therefore, it is the responsibility of the Company to operate in a manner that does not harm the public and the surroundings.
To make Profits
It goes without saying that every company works for profit maximization. Making profits is the ultimate aim of all the companies in our surroundings. Many Companies use these profits for expanding their business, buying of raw materials for the company and paying wages to the workers or laborers. It has all been this way and the top managers of the Company work in a manner so that they are able to achieve maximum profits with minimum input. Profit maximization is a clause that has never been prescribed by the Companies Act but it has always been in the Articles of Association that sets out the rules for the Company as an individual. 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 Decision Making and Efficiency
Every Manager is said to make appropriate decisions for the smooth and efficient functioning of the Company at large. The main aim of a Manager tends to be an efficient administrator and a very good decision maker that would help the company to grow and create a brand name for the company at the same time. If the Company survives and creates a good will for its own then the Company is said to be stable. Stability is again an important aspect that is looked upon by every manager. In case a manager fails to perform his tasks in an appropriate manner and starts working for his personal gains then it leads to violation of the Corporate structure and would also call upon several proceedings which would not only make the company suffer but also would harm the reputation of the company.
Minority Shareholders rights on important decisions of the Company
The Shareholders who have a stake on the company are known as investors of the company. Many of them hold significant shares of the company and others at the same time hold minority shares. The minority shareholders must be protected at any cost. The minority shareholders shall also be given the rights that is deserved by them and shall also be involve in the active participation of the company’s day-to-day activities. If a minority shareholder feels that a particular decision is not appropriate for the company then they can step into the shoes and make the decision for and on behalf of the company. 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. The decision of the minority shareholder in consultation with the manager of the Company shall be duly respected and adhered to. They shall also be able to reap the benefits of the company and shall not be left out.
Rights to Appoint Directors and receive Information
The shareholders must have the right to appoint the directors of the Company. If a shareholder asks for any information which is important for the Company then the manager is liable to pass on such information to the shareholders for the benefit of the Company.
Prescribe Powers of the Directors
The Directors are also known as the managers of the company who looks after the working of the company. They hold a lot of power and position. At times they mis-utilize their power and starts working for personal gains. Such a clause shall be added to the Articles of Association in order to avoid such confusion and by doing so, the power of a director restricts down to general powers, which helps in the day-to-day workings and 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
ESOPs can only to issues to the employees when and only when it has been provided In the Article of Association of a Company. It tends to be the most significant clause in the Articles of Association of a company. 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 by way of a meeting.
The clauses given above are significant clauses that hold utmost importance in the working of a Company. It also helps to build the Corporate Governance of a Company. To have a smooth and an efficient working of a company such clauses are of importance and shall be added in a manner most appropriate for the Company. 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. 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.