Here is a detailed guide to know about how the shareholder contract differs from the articles of association. For more information visit our website.
Difference Between Shareholder Contract & Articles of Association: The Article of Association (AoA) and the Shareholders’ Contract (SHC) of a corporation are two separate but related legal documents that should be understood separately by anyone contemplating the formation of a company or who is already a shareholder in an existing business.
Articles are required for any business to be formed. The Articles are essentially rule books for the corporation, as they detail its organisational structure and the rules it must abide by. To protect your investment, it is in your best interest as a shareholder to ensure the Articles are suitable for the business.
The Articles of Association must be filed with according to the Companies Act, 2013 in India, and made available to the general public. Shareholders’ Contract, on the other hand, are confidential. It acts as a private contract between the company’s shareholders, outlining their rights and duties. As such, it is neither a public record nor a legal requirement.
In contrast to the Articles, no stipulations are required for SHAs. Therefore, it can legitimately include whatever the shareholders choose. A Shareholders’ Contract is a legal contract between business owners that sets down the rights and obligations of each shareholder from the outset and specifies the actions to be taken by the company in the event of certain events (particularly where a source of disagreement would otherwise be likely).
This article examines the pros and cons of having a Shareholders’ Contract and describes the significance of having well-written Articles.
What exactly is an Article of Association (AoA) ?
The Articles of Association of a corporation serve as its constitution or set of bylaws. Detailed information about the company’s internal operations and management structure is provided.
The bylaws outline the scope of operations that must be pursued by the firm, member and director responsibilities, shareholder rights, and the mechanisms through which those rights can be exercised over the Board of Directors. This sets forth a rule of thumb for what it can and cannot do.
Articles mean the Articles of Association of a company as formed initially or as amended from time to time or applied according to any earlier company law or of this Act, as provided for in Section 2(5) of the Companies Act, 2013. All firms incorporated in India must have an AOA, as the Companies Act requires; without one, a business can’t be established under the law.
What is Shareholder’s Contract?
A Shareholders Contract is a private contract between business owners outlining each party’s responsibilities and rights as shareholders. It also contains provisions about the company’s administration and authority. Shares can be sold or transferred; veto rights can be sold or assigned; board members can be elected, etc., are all topics covered.
Those who own less than 50% of a company’s equity shares are Shareholder agreement. So, the primary reason for having a shareholders contract is to safeguard the interests of the shareholders. The corporation must be by its Articles of Association before it may be held liable for the provisions of the shareholder’s contract.
The articles of association of a business need only include the information required by law, such as the firm’s name, registration office, and purposes. In the absence of more specific provisions in the articles of formation, a private or public limited company must follow the general principles established by law.
Additional provisions are frequently added to the articles of association of a firm. For instance, shareholders of private limited companies have to give their fellow shareholders the opportunity to buy their shares before they can sell them (the “pre-emptive rights provision”).
Additional restrictions in this regard, such as those governing the pricing of shares, the appointment of experts, and possible exceptions to the provision of the pre-emptive right, can be found in the articles of association of private limited companies. Shareholders of a private company may be required to “lock up” their shares, meaning they cannot sell or otherwise transfer them for a set period after the company was formed.
Which one to Opt: A Shareholders’ Contract Or Articles of Association?
It can be tricky to decide whether a specific provision is better suited for inclusion in the company’s articles of association or a shareholders’ contract. Many provisions lend themselves to being included in both the articles of association and Issues Covered Under a Shareholders Agreement.
Generally, it is impossible to say whether a provision in the articles of organisation or a contractual arrangement is better. Consider the following considerations when deciding whether to incorporate a provision in the articles of association or in a shareholders’ contract.
- The text of a shareholders’ contract is generally not disclosable to third parties. At the same time, the Articles of Association are published in the commercial register of the Indian Chamber of Commerce and are, therefore, public
- Articles of Association typically have a binding effect on third parties, whereas a shareholders’ contract binds the parties to it. However, a corporation may enforce the terms of a shareholders’ contract if it is reasonable and fair
- Unlike a Shareholders’ contract, provisions in the Articles of Association apply to new shareholders as soon as they become a part of the company. All potential stockholders must affirmatively acknowledge that they intend to be bound by the terms of the shareholders’ contract
- A decision of the general meeting may alter the Articles of Association, but a Shareholders’ Contract may only be amended with the permission of all parties
- A notarial deed is needed to change the articles of the organisation, while a Shareholders’ Contract can be changed simply by a majority vote of the company’s shareholders
- Noncompliance with responsibilities under the articles of association can result in corporate sanctions such as the suspension of voting and dividend rights. These contractually enforced sanctions are theoretically impossible under the rules of company law.
Conclusion – Difference Between Shareholder Contract & Articles of Association
If you want your firm to be taken seriously and last, you must ensure you have all the proper paperwork. The difference between shareholder contract & articles of association is essential to know. Knowing which legal documents are most relevant to your business is crucial to its security and peace of mind.
To know about the Shareholders’ Contract and how it differs from the Article of Association, or if you wish to create one for your organization, get in touch with the professionals at Vakilsearch today.
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