ARTICLES OF ASSOCIATION: CONSTITUTION FOR A REGISTERED COMPANY LIMITED BY SHARES OR BY GUARANTEE
It has always been the norm for a new country to agree on certain terms that would constitute a guiding principle for all citizens. In most situations, such guiding principles are collated and compiled into a document mostly referred to as the constitution which regulates other laws.
On the other hand, an article of association in a registered company plays the same role a constitution assumes in a sovereign nation. It then becomes a huge responsibility for the subscribers (First owners on the company listed in the memorandum and articles of association) to ensure that the article captures the right, duties, and responsibilities every member of the board must assume in order to ensure effective disposition of work.
The right and responsibilities of the owners (shareholders) must be differentiated from those conferred on the Directors in order to avoid a power clash which will not be good for the business of the company. Owners of the company must reserve certain powers for themselves which would enable them to make major decisions that will enhance the smooth running of the company. There are certain decisions that ordinarily fall on the feet of the owners of the company. Issues pertaining to the change of name of the
company must not be left to the Directors. Also investing or engaging in another business must be the sole decision of the majority of members of the company. Resolving to merge with another company must be decided by the owners (shareholders).
The Article must be used as a tool to maintain order in a company. Its democratic nature can be used by the majority of the shareholders to call an erring director whose action is contrary to the common good of the company, and it would be realized once at least 2/3 (two-third) majority of members of the company are of the same opinion. Effective corporate control is maintained when an amendment to the Article of Association is brought into being to curb certain excesses such as excessive remuneration of directors at the expense of the shareholders, manipulation of the ordinary shares which normally occurs in a situation whereby shares owned by shareholders are sold to the public at a rate higher than the unit price specified on a form CAC 2A.
The good side of the manipulation is that it affords only the informed investor to know how best to buy into a dream company. The odd side is that the country losses money from incomes that would have been taxed by the federal government of Nigeria. Some of these excesses has made it necessary for subscribers to live up to their duty of ensuring that order is maintained. And for that to be achieved,
the Article must be phrased in such a manner that will delineate duties to all stakeholders without conflict of power.
They are certain norms that must be captured in the articles of association which is the grand-norm of a limited liability company.
Firstly, the responsibilities of the board members must be spelled out without any ambiguity. Responsibilities such as strategic business planning, ensuring that the best-qualified directors succeed as the chairman board of directors of the company, means by which the directors must relate key business information to the owners of the company (shareholders), also every necessary step must be employed to ensure that the finances of the company are intact to avoid being caught by a vigilant external auditor from various government regulatory agencies. Generally, the strength of the Articles of Association of the company must portray the fact that obedience to the most recent laws on corporate governance is its centre policy.
The responsibilities to be borne by the non-executive Directors must not be taken for granted. Certain directors should be made non-executive directors in order to save costs. The amount paid to very experienced persons to man the position of a Director is huge. Thus based on the fact that non-executive directors do not have contracts of employment and do not draw salaries, fewer amounts can be negotiated with experienced persons that possess a high level of integrity and cannot compromise the
the business interest of the company by any means possible.
It is germane to state that the Articles must ensure that excess power is not conferred on a particular office within the board of the company. It is important to note that an executive director is a person who devotes their entire time to the running and management of the company, then it will be unwise to lump the powers of the chairman of the board and that of the chief executive officer. The best way to ensure best corporate governance is to enthrone separation of power by allowing a specific board member to
be the chairman who is solely responsible for the welfare of the board and company in general and then confer the chief executive officer (CEO) with the primary responsibility of ensuring that other executive Directors effectively discharge their duties to the company.
In as much as the board must be given a free hand to manage the affairs of the company, they must be compelled to invite members of the company to their meetings, In that case, members will have an ample opportunity to understand the choices and motives of the Directors.
Barrister Chinedu Okpi is a legal practitioner in Abuja with several years of post-call experience in Corporate and Commercial Law Practice. He can be reached via phone: 07069279374 or send an e-mail to him via info@ibechidoassociates.com.