“Articles of Association vs.

Agreement of
Shareholders”

WHICH ONE PREVAILS?

(FINAL-TERM PAPER)

Course: Legal Drafting-II

Submitted to: Ma’am Hina Qayyum

Submitted by: Mahnoor Tariq (2016-LLB-007)

(Word Count: 2800)

Semester: LLB-XIII (2016-2021) Spring 2020

Date of Submission: August 10, 2020

Department of Law

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 Fatima Jinnah Women University, Rawalpindi

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 RESEARCH METHODOLOGY

Method of Research
The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the available resources at library of the Chanakya National Law University and
also the internet sources.

Aims and Objectives

The aim of the project is to present an overview of various aspects relating to ‘Articles of
Association and Share Holding Agreements.’ through cases, decisions and Under Companies
Act, 2017 and different writings and articles.

Scope and Limitations

Though the study of the this topic is an immense project and pages can be written over the topic
but due to certain restrictions and limitations the researcher has not been able to deal with the
topic in great detail.

Sources of Data:
The following secondary sources of data have been used in the project: Cases, Books, Journals,
Articles, etc.

Method of Writing:
The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation
The researcher has followed the bluebook method of citation throughout the course of this
research paper.

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Contents
1. INTRODUCTION...............................................................................................................................5

2. What Is a Company?.........................................................................................................................6

3. ARTICLES OF ASSOCIATION UNDER ENGLISH LAW..............................................................6

4. ARTICLES OF ASSOCIATION UNDER PAKISTAN LAW................................................7

 Private
Company…………………………………………………………………………………….8
 Public Company……………………………………………………………………………………..8
5. Articles of Association Under Companies Act,2017…………………..………………........8
5.1. Is Article of Association Legal
Binding?..........................................................................8
5.2. Registration of Articles (Sec-36)
………………………………………………………...8
5.3. Articles to be printed, signed and dated (sec-37)
………………………………………...8
5.4. Alteration of Articles (sec-38)………………………………… ………………..
……….9
5.5. Copies of Memorandum and articles to be given to members (sec-39)
………………….9
5.6. Articles of Memorandum of Articles to be notes in every copy (Sec-40)
………………..9
5.7. Case
Law………………………………………………………………………………..10
6. Shareholder’s agreement…………………………………………………………………….10
7. AOA Vs. Shareholder’s agreement under Companies Act,2017……………………………11
7.1. Case Law……………….
……………………………………………………………….13
8. AOA Vs. Shareholder’s agreement. Which one prevails?......................................................13
9. Conclusion…………………………………………………………………………………...13

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List of Acronyms:
AOA Articles of Association

SHA Shareholder’s Agreement

Sec Section

Sub-sec Sub-section

Act Companies Act 2017

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 1. INTRODUCTION

To obtain the registration of a company an application has to be filed with the Registrar of
Companies. The application must be accompanied by Memorandum of Association, Articles of
Association, if necessary and the agreement, if any, which the company proposes to enter into
with any individual for his appointment as its managing or whole-time director or manager.

The articles of association of a company are its by-laws or rules and regulations which govern
the management of its internal affairs and the conduct of its business. They are framed with the
object of carrying out the aims and objects as set out in the Memorandum of Association.
According to Section 3 of the Companies Act, 2017 ‘articles’ means the articles of association
of a company as originally framed or as altered from time to time in pursuance of any previous
companies laws or of the present Act, i.e. the Act of 2017.

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 2. What Is a Company?

A company is a legal entity formed by a group of individuals to engage in and operate a business
commercial or industrial enterprise. A company may be organized in various ways for tax and
financial liability purposes depending on the corporate law of its jurisdiction.1

3. ARTICLES OF ASSOCIATION UNDER ENGLISH LAW

The articles of association (often just called 'articles') of a UK company contain the rules for its
internal regulation and management. The articles deal with such things as meeting procedure,
powers of directors, members' rights, procedure for paying dividends, winding up etc. The
articles can often be quite lengthy (for example they could typically comprise over 100
numbered paragraphs spanning, say 30 pages). However, the UK Companies Act 1985 contains a
mechanism intended to simplify the task of preparing articles of association - various standard
articles of association documents have been enacted. These are contained in regulations made
under the Act - The Companies (Tables A to F) Regulations 1985. The most commonly used of
these standard articles of association documents is known as 'Table A' (which is intended for use

1
https://www.investopedia.com/terms/c/company.asp

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in the case of companies limited by shares). Table A may, if desired by the person(s) forming the
company, be incorporated by reference (in whole or in part) into the company's own articles,
thereby reducing the length of the document to be prepared.2

4. ARTICLES OF ASSOCIATION UNDER PAKISTAN LAW

Definition of Company under Companies Act, 2017:

Sec 2 (17) of Companies Act 2017:

‘’Company means a company formed and registered under this Act or the company law”. 3

 Public Company:

Any three or more persons associated for any lawful purpose may, by subscribing their names to
a memorandum of association and complying with the requirements of Companies Act 2017, in
respect of registration, form a public company

 Private Company:

Any one or more persons so associated may, in like manner, form a private company. 4

5. Articles of Association (AOA) under Companies Act 2017:

Generally, AOA can be considered as a contract between company and its members. The
objective of these articles is to bind the present as well as the future members of the company. It
contains internal detailed governing aspects of the company’s organization.5

5.1. Is Article of Association Legally Binding?

2
Ramaiya A., Guide to the Companies Act, Ed. 16th, 2008, Vol. 1;2;3, Lexis Nexis Butterworth Wadhwa, Nagpur,
pg-297.
3
The Companies Act 2017, Act XIX of 2017 (May. 30, 2017)
4
Company Registration, (June. 18, 2015)
5
LTD HOPKINS HOLLIS AND CO, MEMORANDUM AND ARTICLES OF ASSOCIATION HARDCOVER
(Palala Press, 2015) (eBook)

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 AOA are the rules governing internal affairs of a company. All registered companies must have
articles of association. Every company is required to have articles by law and the articles are
legally binding on the company and all of its members.6

5.2. Registration of Articles (Sec 36):

Every company, whether a company limited by guarantee, limited by share or an unlimited

company, should be registered with the registrar of companies along with the memorandum
according to Sec 36 of the Act. AOA of a company limited by shares may adopt all or any of the
regulations contained in Table A in the First Schedule to this Act. If a company limited by
shares does not have any articles of association, then the table A of the schedule of the
Companies Act will be applied by default, until and unless it is modified.

According to Sub-sec 6 of sec 36, this article must explicitly enumerate the voting and other
rights attached to the different classes of shares and other securities, if any, issued or to be issued
by it.

Liability: If a company contravenes the provisions of its articles of association, the company
and every officer of the company shall be liable to a penalty not exceeding of level 1 on the
standard scale.7

5.3. Articles to be Printed, Signed and Dated (Sec 37):

The section defines that this Article shall be printed in acceptable manner. It must be divided
into paragraphs numbered consecutively. It must be signed by each subscriber with complete
details like his full name, father name, marital status, occupation, nationality and address. All
the process must be done in presence of the witness who shall attest the signature and shall
likewise add his particulars.8

5.4. Alteration of Articles (Sec 38):

Alteration literally means ‘’changes’’. Here it means ‘’changing or modification in the article
of association.’’ This section defines that a company is allowed to alter its articles but by
6
Shipra Sayal, Articles of Association (2019)
7
The Companies Act 2017, Act XIX of 2017, Section 36 (May. 30, 2017)
8
The Companies Act 2017, Act XIX of 2017, Section 37 (May. 30, 2017)

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 passing a special resolution. Then it shall consider a valid alteration. A copy of altered
articles within thirty days of its passing resolution shall submit to the registrar and he shall
register the same and thenceforth the articles so filed shall be the articles of the company.
Exception: Where such alteration affects the substantive rights or liabilities of members or of
a class of members, it shall be carried out only if a majority of at least three fourth of the 15
members or of the class of members affected by such alteration, as the case may be, exercise
the option through vote personally or through proxy vote for such alteration.9

5.5. Copies of Memorandum and Articles to be given to Members

(Sec 39):

In Sub-sec (1) of Sec 39, it is defined that it is the duty of company that if any of the
member requests for the copy of the memorandum or articles with on payment of such sum,
as the company may fix.

Liability: If a company makes default in complying with the requirements of Sub-sec (1), it
shall be liable to a penalty not exceeding of level 1 on the standard scale.10

5.6. Alteration of Memorandum or Articles to be noted in every

Copy (Sec 40):

As per this section it is necessary that where an alteration is made in the memorandum or articles
of a company, every copy of the memorandum or articles issued after the date of the alteration
shall conform to the memorandum or articles as so altered. Liability: In case of default of Sub-
section 1 company shall be liable to a penalty not exceeding of level 1 on the standard scale.11

5.7. CASE LAW

Naresh Chandra Sanyal vs Calcutta Stock exchange association Ltd12

9
The Companies Act 2017, Act XIX of 2017, Section 38 (May. 30, 2017)
10
The Companies Act 2017, Act XIX of 2017, Section 39 (May. 30, 2017)
11
The Companies Act 2017, Act XIX of 2017, section 40 (May. 30, 2017)
12
Goss, David, Principles Of Human Resource Management, (1994), Routledge, Pp 1-2.

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In this case, the SC said that the articles of association also establish a contract between the
company and the members and between the members inter se. This contract governs the ordinary
rights and obligations incidental to membership in the company.

6. SHARE HOLDERS AGREEMENT:

The share holders agreement is a Contract between the owners (shareholders) of a company,
defining their mutual obligations, privileges, protections, and rights, and usually comprising the
firm's articles of association or bylaws. Although a properly constituted shareholders' agreement
protects all signatories, its provisions typically are more important to minority shareholders
(holding less than 50 percent of the voting shares).13

A shareholders’ agreement can be between all or, in some cases, only some of the shareholders
(like, for instance, the holders of a particular class of share). Its purpose is to protect the
shareholders’ investment in the company, to establish a fair relationship between the
shareholders and govern how the company is run.

Shareholders' agreements are enforceable against the company subject to applicable laws. Any
provision, contained in Shareholder’s agreement, if, seems to be in contravention with the
provisions of Companies Act, 2017, shall be void. Moreover, if Shareholder agreement are
against the provisions of company’s law, due to which any conflict is arising, those agreements
shall be unenforceable. This was illustrated in a recent judicial pronouncement where the
shareholders' agreement displayed a lack of awareness to the principle of the company being a
legal entity in its own right separate and distinct from its shareholders.14

7. ARTICLE OF ASSOCIATION Vs. SHAREHOLDER’S AGREEMENT

UNDER COMPANIES ACT, 2017

13
https://practiceguides.chambers.com/practice-guides/shareholders-rights-shareholder-activism-2019/pakistan

14
Shareholders' Rights & Shareholder Activism 2019

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AOA and Shareholder’s agreement are somehow co-related.15 All companies have Articles of
Association but companies are not legally required to have a Shareholder’s Agreement. A
contract containing rules for running and owning the company which is between you and your
fellow share holder is “Shareholder’s Agreement”. The Shareholders’ Agreement is not a
public document but is private document.

On the other hand, when the company is first formed and they set out the administrative and
company law procedures affecting your company, Articles of Association are filed at Companies
House. Some issues that can be dealt with in a Shareholders’ Agreement could instead be
included in the Articles of Association and vice versa.

Common characteristics of Shareholders' agreements and AOA obviously vary enormously

between different countries and different commercial fields. However, in a characteristic joint
venture or business startup, a shareholders' agreement would normally be expected to regulate
the following matters:

CHARACTERISTICS

AOA16 SHARE HOLDER’S AGREEMENT17

1. Values of shares and their rights. Directors imposing super-majority voting
requirements for "reserved matters" which are
of key importance to the parties imposing
requirements to provide shareholders with
accounts or other information that they might
not otherwise be entitled to by law making
provision for the resolution of any future
disputes between shareholders, including

15
https://www.mckenzielaw.co.uk/business-services/companies-shareholders agreements
16
The Companies Act 2017, Act XIX of 2017, (May. 30, 2017)
17
https://www.kingsleynapley.co.uk/insights/blogs/corporate-and-commercial-law-blog/articles-of-association-
shareholders-agreements-and-investors-agreements-whats-the-difference

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 deadlock provisions .

Transfer and conversion of shares, Regulation of ownership and voting rights of

alteration of capital and forfeiture. the shares in the company including restrictions
2
on transferring of shares over shares pre-
2. emption rights.

3. Appointment of directors along with their "tag-along" and "drag-along" rights, minority
powers and duties. protection provisions, control and management
of the company giving share holders a power to
designate an individual for election of board of
directors.

4. Audit and accounts. shareholders agreements will often make

provision for the - the nature and amount of
initial contribution (whether capital contribution
or other) to the company.

5. Minutes of meeting, etc.

6 Auditor’s remuneration and their

appointments.

7. Winding up procedure.

8. Reserves and dividends.

OBJECTIVES

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 1. Directors and auditors appointment. The shareholders’ agreement give specific,
important and practical rules relating to the
company and the relationship between the
shareholders. This can be beneficial both to
minority and majority shareholders.

2. Shareholders rights. Sets out Shareholders rights and obligations.

3. Transferring shares. Regulate company’s shares sale.

4. Decisions of management. Describes the procedure to run the company.

5. Borrowing power. Protects the minority shareholders and the

company by providing element of protection.

6. Capital’s alteration. define how to make an important decision

7.1. CASE LAW

V.B. Rangaraj v. V.B. Gopalakrishnan and others

In this case, the question that fell for consideration before the Hon'ble Supreme Court of India
("SC") was whether the shareholders of a company can enter into an agreement that is contrary
to or inconsistent with the AoA of the company?

SC held that the SHA restrictions which are contrary to the provisions of the AoA would not be
binding on either the shareholder or the company.18

8. Articles of Association vs. Agreement of Shareholders

Which one prevails?

18
AIR 1992 SC 453

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From all the discussion above and from case law it is clear that the AOA is given priority over
the SHA and that the SHA cannot go beyond the AOA. It is thus crucial to duly incorporate the
relevant provisions of the Transaction Documents in the AOA and make them an integral part of
the company's charter document so that they have the legal sanctity for enforcement in case of
inter-se disputes.

AOA is prevailing because it is defined and procedure is elaborated in Companies Act, 2017. It
is actually a public document which is accessible to public at large and it is registered under
SECP. Whereas, shareholders agreement is between share holders by their consent and it is a
private document. Share holders do agreement to transfer shares and they check if there is any
liability among each other.

9. CONCLUSION

The Articles of Association may be changed by the shareholders passing a special resolution in a
general meeting or by written resolution. A copy of the resolution and the new articles of
association must be sent to Companies House within 15 days. The changes to the Articles of
Association cannot be made in breach of other company law rules and there are protections
against such changes where they increase the liability of individual shareholders, vary the rights
of any class of shareholders or otherwise prejudice minority shareholders.

Any alteration must be made in good faith for the benefit of the company as a whole. This means
the company as an entity, or as the interest of ‘an individual hypothetical member'. It is for the
shareholders to determine whether or not the alteration is for the benefit of the company. The
alteration may affect the rights of a member as between himself and the company by
retrospective operation, since the shares are held subject to the statutory power of altering the
articles. If a contract whether with a member or an outsider is so drawn as by its terms or
implication to prohibit the company from altering its articles to the prejudice of the other
contracting party, then, although the company cannot be precluded from altering its articles,
thereby giving itself power to act upon the provisions of the altered articles, so to act may
nevertheless be a breach of the contract.

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