Class Notes on Company Law – Unit II
1. Articles of Association (AOA)
Definition:
- Articles of Association (AOA): A document that outlines the internal rules and regulations governing the management of a company. It complements the Memorandum of Association (MOA).
Key Features:
- Internal Regulations: Defines the company’s internal management structure, including the powers and duties of directors, appointment and removal of officers, and procedures for meetings.
- Default Provisions: In the absence of specific provisions, the AOA can incorporate the default rules provided by the Companies Act.
Contents:
- Share Capital: Details regarding the issuance, transfer, and rights attached to shares.
- Management: Rules concerning the appointment, powers, and duties of directors and officers.
- Meetings: Procedures for conducting annual general meetings (AGMs) and extraordinary general meetings (EGMs).
- Accounts: Regulations on the company’s financial statements and auditing.
Modification:
- The AOA can be altered by passing a special resolution at a general meeting, subject to compliance with the Companies Act and approval from the Registrar of Companies (RoC).
Case Example: Ashbury Railway Carriage and Iron Co. v. Riche [1875] LR 7 HL 653 – The case discussed the scope and limits of the object clause in the AOA.
2. Prospectus
Definition:
- Prospectus: A formal document issued by a company to potential investors inviting them to purchase shares or debentures. It provides details about the company and its securities.
Types:
- Red Herring Prospectus: Preliminary prospectus issued before the company is formally listed. It contains most of the information found in the final prospectus except for the price and number of securities offered.
- Shelf Prospectus: Issued for a period to cover multiple issues of securities over time.
Contents:
- Company Information: Details about the company’s business, history, and operations.
- Financial Information: Audited financial statements and projections.
- Terms of Issue: Price of shares, number of shares, and rights attached to them.
- Risk Factors: Disclosures about potential risks associated with investing in the company.
Legal Requirements:
- Must be filed with the Registrar of Companies (RoC) and comply with regulations set by the Securities and Exchange Board of India (SEBI).
- Any misstatement or omission can lead to legal liabilities for the company and its directors.
Case Example: Securities and Exchange Board of India v. Shriram Mutual Fund [2006] 5 SCC 361 – The case highlights the regulatory framework for prospectuses and the disclosure obligations of companies.
3. Directors
Definition:
- Directors: Individuals appointed to manage the company’s affairs and make decisions on its behalf. They are responsible for the overall governance and strategic direction of the company.
Types of Directors:
- Executive Directors: Involved in the day-to-day operations of the company.
- Non-Executive Directors: Not involved in daily operations but provide strategic oversight.
- Independent Directors: Have no direct or indirect relationship with the company and help ensure objectivity in decision-making.
Duties and Responsibilities:
- Fiduciary Duty: Must act in good faith and in the best interest of the company.
- Duty of Care: Exercise reasonable care, skill, and diligence in performing their role.
- Disclosure: Disclose any personal interest in transactions involving the company.
Appointment and Removal:
- Appointment: Typically by the shareholders at the annual general meeting (AGM).
- Removal: Can be removed by an ordinary resolution at a general meeting, subject to compliance with the Companies Act.
Case Example: Hely-Hutchinson v. Brayhead Ltd [1968] 1 QB 549 – Discussed the powers and responsibilities of directors in terms of fiduciary duty.
4. Meetings
Types of Meetings:
- Annual General Meeting (AGM):
- Purpose: To review the company’s performance, approve financial statements, and appoint auditors.
- Frequency: Must be held annually, within six months from the end of the financial year.
- Extraordinary General Meeting (EGM):
- Purpose: To discuss urgent matters requiring shareholder approval that cannot wait until the next AGM.
- Calling: Can be called by the board of directors or requisitioned by shareholders.
- Board Meetings:
- Purpose: To discuss and decide on the company’s business operations and policies.
- Frequency: Held as needed by the board of directors.
Procedures:
- Notice: Proper notice must be given to all members of the meeting, detailing the agenda and date.
- Quorum: Minimum number of members required to conduct business.
- Resolutions: Decisions made during meetings are recorded in resolutions (ordinary or special).
Case Example: Re: A Company [1985] BCLC 333 – Examined the procedural aspects of company meetings and the requirement for proper notice and quorum.
5. Role of Company Secretary
Definition:
- Company Secretary: A key officer responsible for ensuring that the company complies with legal and regulatory requirements, and for managing corporate governance.
Responsibilities:
- Compliance: Ensures adherence to statutory requirements, including filing returns and maintaining statutory registers.
- Board Support: Assists the board of directors in organizing meetings and maintaining minutes.
- Communication: Acts as a liaison between the company and its shareholders, regulators, and other stakeholders.
- Advice: Provides legal and administrative advice on company matters.
Qualifications:
- Must be a member of a recognized professional body, such as the Institute of Company Secretaries of India (ICSI).
Case Example: Vineet Kumar v. Union of India [2002] 1 SCC 622 – Discussed the role and responsibilities of company secretaries in ensuring legal compliance.
6. Dividends
Definition:
- Dividends: Payments made by a company to its shareholders from its profits.
Types:
- Interim Dividend: Paid before the company’s annual accounts are finalized, based on the company’s profits up to the date of payment.
- Final Dividend: Declared at the AGM based on the company’s annual accounts.
Declaration and Payment:
- Declaration: Requires a resolution by the board of directors or shareholders, depending on the type of dividend.
- Payment: Must be paid to all shareholders proportionately based on their shareholding.
Legal Restrictions:
- Profit: Dividends can only be paid out of profits after providing for all reserves and liabilities.
- Compliance: Must comply with the Companies Act provisions regarding the declaration and payment of dividends.
Case Example: Furness Withy & Co. Ltd v. Walker [1956] 2 All ER 96 – Examined the conditions under which dividends can be declared and paid.
7. Brief Analysis of Corporate Ethics
Definition:
- Corporate Ethics: Refers to the principles and standards that guide the behavior and decision-making processes within a corporation.
Key Areas:
- Integrity and Transparency: Ensuring honesty in financial reporting and transparency in business practices.
- Responsibility: Adherence to laws and regulations, and consideration of the impact of business decisions on stakeholders and society.
- Accountability: Mechanisms for holding individuals and the company accountable for their actions and decisions.
Importance:
- Reputation: Ethical behavior enhances the company’s reputation and builds trust with stakeholders.
- Compliance: Helps in avoiding legal issues and regulatory penalties.
- Sustainability: Promotes long-term success by fostering a positive work environment and societal impact.
Case Example: Enron Scandal: Highlighted the importance of corporate ethics and the consequences of unethical practices in financial reporting.
