IN WHAT CASE the Article of Association of the Company are required to be entrenched. Please draft a resolution for entrenchment of Articles of Association of the Company.
Entrenchment of Article of Association is required in case where we want to specifically enforce the applicability of certain actions, which cannot be overridden until and unless supported by super majority or a referendum or in order to protect the interest of minority shareholders, where the consent of minority party is required to override the same.
The term entrenchment has not been defined in the Companies Act, 2013. The dictionary meaning is as follows:
(1) The process by which ideas become fixed and cannot be changed.
(2) basic law or constitution is a provision which makes certain amendments either more difficult or impossible
Therefore, it can be concluded that the entrenchment of provisions makes the current level of provisions more stringent/difficult to follow for coming period.
Entrenchment of provisions of Articles of Association is covered under sub section (3),(4) and (5) of Section 5 of the Companies Act, 2013 read with Rule 10 of the Companies (Incorporation) Rules, 2014, which is new provision introduced under the act and the same are summarised as follows:
i. For PART I Company (i.e. Company authorized to register under this Act under Section 366) and Company with more than Seven Subscribers specify entrenched articles in Form NO. INC 7 during Incorporation.
ii. All other companies specify entrenched articles in Form INC 32 (Spice )or INC 2 or INC 7 as the case may be during incorporation
i. “Private Company” AOA provisions shall be entrenched by all the members of Company, by passing Board Resolution.
ii. In case of “Public Company:, AOA provisions shall be entrenched by all the members of Company, by passing Special Resolution.
i. Resolution agreed by all the members/ Special resolution
ii. Notice & explanatory statement.
iii. Copy of altered AOA
a) By adoption of new set of articles;
b) By addition/insertion of a new Clause/s;
c) By deletion of a Clause/s;
d) By amendment of a specific Clause/s;
e) By substitution of a specific Clause/s.
The Companies Act, 1956 did not have an explicit provision on entrenchment, but the concept of additional legal safeguards, checks and controls was recognized only through judicial decisions. Therefore, it is of utmost importance to ensure compliance with the Act at the time of drafting etc., such as including the entrenchment provisions in the AOA and giving notice to Registrar of Companies.
Only this will make such entrenchment provisions enforceable.
Hope this is article simplifies the conceptuality.
Specimen of resolution for entrenchment of Articles of Association of the Company:
(consider entrenchment in regards to Shareholder agreement)
CERTIFIED TRUE COPY OF SPECIAL RESOLUTION PASSED AT EXTRA ORDINARY GENERAL
MEETING OF THE MEMBERS OF THE “XYZ COMPANY” AT THE REGISTERED OFFICE OF
THE COMPANY ON 10TH JULY 2017, MONDAY AT 11:30 AM.
ITEM 1: ADOPTING OF ENTRENCHMENT OF PROVISIONS ARTICLE OF ASSOCIATION.
To pass with or without modification following resolution as unanimous resolution all the members of the company
The chairman informed the members that pursuant to the execution of shareholder agreement dated______________ and section 5 of the Companies Act, 2013, the Company would require incorporating the provisions of the shareholder agreement in the provisions of Article of Association; hence the following resolution is passed:
“RESOLVED THAT pursuant to Section 5 and other applicable provisions of the Companies Act, 2013, the article of Association (“article”) be and is hereby amended to incorporate the following entrenchment provision.
“Alteration of Article and Memorandum of Association; Any amendment in this entrenched article will require prior written consent of supreme majority, a referendum or consent of minority as the case may be.”
“RESOLVED FURTHER THAT Mr_____________________, Director/ authorized representative (as the case may be), be and is hereby authorized to file the copy of Entrenched Articles of the Company and file such other documents, including necessary forms, as required to be filed with the Registrar of Companies and do all such other acts, deeds, matter or things as may be necessary, appropriate, expedient or desirable to give effect to this resolution”
None of the directors, Key Managerial Personnel or their relatives are interested in the said resolution.
CERTIFIED TRUE COPY
FOR AND ON THE BEHALF OF THE BOARD OF DIRECTORS OF “XYZ COMPANY”
(MR._______________) (MR. ______________)
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Hope my article helps you all for conceptual and procedural clarity. Any other suggestions /opinions are welcomed. Free to contact me for specific formats
(Author-CS Anjali Gorsia, Company Secretary In Practice from Nagpur (Maharashtra) and can be contacted at firstname.lastname@example.org)