ARTICLES OF ASSOCIATION 1
- INTRODUCTION
- OBJECTIVES
- MAIN CONTENT
- CONCLUSION
- SUMMARY
- TUTOR MARKED ASSIGNMENT
- REFERENCE/FURTHER READING
INTRODUCTION:
The article of association are a set of rules governing the running of the company or rules framed by the members themselves regulating the way business of the company as defined in the memorandum of association shall be managed. The article of association must be read in conjunction with the memorandum so as to clear any ambiguity in the memorandum, promoters are free to decide the nature of the article the company shall adopt provided they did not include anything contrary to the general laws and the articles comply with the requirements of section 33 and 34 of the Act. In this unit we shall examine the position of the law on the effect of articles of association, the inter-relationship between the members and the company under the law.
OBJECTIVES
At the end of this unit the student will be ask to explain the effect of the articles of association.
MAIN CONTENT
A complete article of association of a public company must include the following:-
- The way shares are to be issued and transferred
- The way shares are to be forfeited
- The way company meetings shall be conducted
- Deal with appointments, power, and duty of directors and other officers
- Declaration of dividends, accounts, and winding up
A form of articles of association is in the first schedule, Table A, part I of CAMA. Like the current position in UK, where there are separate form of articles for private and public company. In Nigeria there is a format for articles of association of both private and public companies (part I and part II).
Those setting up the company are free to draft their own set of rules but if they do not provide such a set; then the model articles will apply. In practice the model articles are generally adopted with some slight amendments. As a result, even though Table A is only a default set of rules its almost universal adoption has meant that it forms the core of organizational structure of Nigerian companies.
The most important function of the articles of association is to allocate the power of the company between the board and the general meeting. Historically this made the old Table A at 70 (1968 Act) the most important article as it provided that , subject to the provisions of the Act, the memorandum and the articles and to any directives given by special resolution,
the business of the company shall be managed by the directors who may exercise all powers of the company.
This delegation of power is now found in section 63 of the CAMA.
The Effect Of Articles Of Association
Section 16 of the 1968 Companies Act, provided that, subject to the provisions of this Act, the memorandum and article shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contain covenants on the part of each member to observe all the provisions of the memorandum and of the articles.
The section 16 has now been replaced by section 41(1) which now provides as follows:
“Subject to the provisions of this Act, the memorandum and articles, when registered, shall have the effect of a contract under seal between the company and its members and officers and between the members and officers themselves whereby they agree to observe and perform the provisions of the memorandum and articles, as altered from time to time in so far as they relate to the company, members or officers as such.”
It follows that the article and the memorandum when registered becomes a contractual document that is binding between the members and the company. It also follows, that the business of the company must be conducted in conformity with the articles of association.
See Hicknan v kent or Romney MarshSsheep Breeders Association (1915) 1 Ch.881
The contract of membership
An important effect of the registered article is that if binds the members of the company and the company, and also created a contractual relationship between the members themselves and between each member and the company. The first point to note here is that the contract may be altered or amended by special resolution at any time by the members. It follows that, new members are immediately bond by the articles once they join the company. Since they can be altered at anytime by special resolution, they may not be in control of the articles of association. The articles therefore bind those people who are not privy to it, as it binds future shareholders. The reason for this unusual contract was that the law tried to bridge the change over between the deed of settlement companies and the new registered company formed under the joint stock companies Act 1844. The practical problem for the legislature at the time was that, while the old Deed of Settlement company created a contractual relationship between the members who sealed it; the new constitutional default documents would not. The answer was to create an artificial contract which would automatically bind all the members of the company. The section, apart from binding the members and the company together allows shares to be freely transferable by avoiding the need for each member to formally agree to be bound by the constitution each time shares are traded. This avoids the difficulties of having to renegotiate the contract each time shares charge hands.
A Contract Between The Company And The Members.
The history of the effect of article has remained unchanged from the Act of 1844 to section 16 if the companies Act 1948 which is in parimateria with the S16 of the companies Act (U.K) which is almost uncharged in terms and its effect in the S33 of the companies Act 2006 (U.K). The Nigerian provision is section 41 of the companies and Allied Matter Act 1990 which has introduced some innovations into the law, which we will examine later. The original section did not take cognizance of the fact that the company is an entity when it provided that the article forms a contractual document between the company and the members of the company. The courts have interpreted the section in series of cases that the company is a party to the contract. The classic case on this point is Hickman v Kent or Romney Marsh Sheep Breeders Association (supra)in thecase, by the article of association of the company, any dispute between the members of the company must be referred to arbitration in the first instance. Dispute arose and he commenced an action in court.
The company applied to the court for a stay on the grand that they were both bound to refer the matter to arbitration in the first instance. The court ordered a stay. That the true interpretation of the apparently conflicting decisions and dicta on the section are that “though the article of association can neither constitute a contract between a company and an outsider nor give any individual member special contractual rights beyond those of the members generally they in fact constitute a contract between a company and its members in respect of their ordinary rights.” The article was therefore, contractually binding between the members and the company.
CONCLUSION
The contract in the articles of association is binding on the company and the members of the company. While it may be understandable as between the current members or subscribers who actually signed the memorandum and articles of association it may be difficult to understand why it should bind those who are not originally privy to the contract. The article is enforceable by the member against the company, and the company on the other hand can insist on it being obeyed by the members, even if it was not directly signed and sealed by them.
SUMMARY
The article of association is a document regulating the way the company is managed. It contains provisions on issues like shares, voting, meetings, appointment and reveal of directors, powers of the directors, etc. the article is drafted by the promoters and may adopt the model article in part A of the schedule to the Act. The article represents a contract between the company and the shareholders and is enforceable by either of them to ensure that the provisions of the article must be complied with.
TUTOR MARKED ASSIGNMENT
Critically examine the effect of the article of association as between the company and the members.