What is entrenchment of Articles of Association
Articles of Association contains regulations for management of a company. Company can adopt all or any of the regulations contained in the model articles prescribed in Table F, G, H, I & J of schedule 1 of Companies Act, 2013. Further companies can include additional matters in its articles which are necessary for its management.
In order to alter any regulations contained in the articles of association, special resolution should be passed in a general meeting. ( a special resolution means a resolution which requires at lease 3 times the number of votes, if any, cast against the resolution by members)
for example :- Assume 10 members(having 1 share each) were present in a general meeting of company in which a special resolution is to considered for alteration of a clause in the articles of association. If 2 out of 10 members had cast their votes against the resolution, then at least 6 members (3 times of votes cast against the resolution i.e. 3 X 2) shall cast their vote in favor of the resolution to consider it to be duly passed.
However sections 5(3) of the Companies Act, 2013 provides that the articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.
for example :- Clause 21 can be altered only if the votes cast in favor of the resolution is at least 5 times the number of votes, if any cast against the resolution by members present and vote at the meeting
Clause 21 can be altered only if all the members of the company had cast their votes in favor of the resolution, whether on a show of hands or electronically or on a poll, as the case may be, by members who, being entitled so to do, vote in person or by proxy or by postal ballot.
Thus, company may either at the time of incorporation or at any time after incorporation, at their discretion add entrenchment provisions in the articles of association. If provisions for entrenchment is proposed to be added after incorporation of a company then consent of the members is required based on following
- Private Company – consent of all members
- Public Company – special resolution
In case articles of association is entrenched at the time of incorporation itself, then it should be mentioned as ‘yes’ to the question ‘whether articles of association is entrenched’ in e-form inc-2/inc-7/inc-32 as applicable
if articles of association is entrenched after incorporation of the company, then unanimous resolution in the case of private company or special resolution in the case of public company shall be filed with Registrar of Companies in e-form MGT-14 along with amended articles of association, notice of general meeting and explanatory statement of notice.
Frequently Asked Questions
Whether entrenchment of articles of association is mandatory?
No, section 5(3) of the act states that ‘the articles may contain…….’ Since the word ‘may‘ is used in the provision, it gives an option for companies to consider it
What will be the requirement to amend the entrenchment provision in the articles of association/ will special resolution will be sufficient to alter the entrenchment provision?
In order to alter/remove the entrenchment provision in the articles, it should meet the requirement, which is more restrictive than the special resolution, specified in the entrenchment provision itself
Articles of association contain regulations other than those contained the model articles, will it be considered as entrenched?
No, companies are at freedom to add any regulations other than those contained in model articles which are considered necessary for its management. It will not amount to entrenchment.