Dissecting Articles of Association
Discover the vital role of "Articles of Association" for Kenyan businesses. Learn how this mandated document defines roles, responsibilities, and rights, shaping daily operations. Explore key features like company purpose, director and shareholder dynamics, share capital, and decision-making.
Are you a business owner in Kenya looking to register your Company? The secret to your success may lie within a powerful but often overlooked document, the "Articles of Association” which provides the Company’s structure and its functions. Join in as we discuss the role that Articles of Association “Articles” play in your business.
The Articles define the roles, responsibilities, and rights of shareholders and Directors in a bid to regulate the day to day running of the Company.
Pursuant to section 13 of the Companies Act, Articles are required when registering a Company. A Company may elect to draft its own articles of association or adopt model articles of association provided in the Company Act.
The following are the features of the Articles of Association:
1. Purpose of the Company
The articles provide the scope of the activities carried out by the Company e.g., “construction of residential apartments", “provision of financial services”. Including the scope of the business in the Articles is essential for clarity thus providing a clear direction for the Company and a guide for strategic decisions.
2. Roles and responsibilities of Director’s
This provision outlines the Directors’ powers, responsibilities, and duties including their authority to make decisions on behalf of the company. Directors have a duty to promote the success of the Company, exercise care, diligence and skill.
3. Roles and responsibilities of Shareholder’s
The articles provide for the various roles of the Shareholders including the power to appoint directors, approving financial statements, making corporate decisions and capital contribution. Shareholders may also receive a portion of the company's profits as dividends (if the Company declares dividends) and can transfer their shares to others, following prescribed procedures and any restrictions provided in the Articles.
4. Share capital
Share capital is the amount of money the Owners of a company have invested in the business. The articles provide for increase and decrease of share capital.
5. Meetings and resolutions
Company decisions are made through meetings and resolutions and it is paramount for the articles to provide for the threshold for resolutions. Ordinary resolutions are passed by a simple majority while special resolutions are passed by 75% of the members. The articles specify the minimum notice period for convening a meeting, the quorum required, and the voting procedures. It may also describe different voting rights, such as the right to vote in person or by proxy, and the requirements for passing resolutions. (Look out for our article on meetings and resolutions.)
Can a Company amend its Articles of Association
Pursuant to section 22 of the Companies Act, a Company may amend its articles through a special resolution.
Upon amendment, the Company is mandated to lodge a copy of the amended articles with the Registrar. Failure to lodge the amendment is an offence and the Company shall be liable to a fine of up to two hundred thousand shillings and on each day on which the failure continues each Officer is liable to a fine of up to twenty thousand shillings.
It is therefore paramount for the Company to lodge amended articles to avoid penalties that will be costly to the business.
Articles of Association vs. Shareholders Agreement
A shareholder’s agreement is a contract regulating the relationship between the shareholders and the Company. It provides the roles and responsibilities of Company Officers, voting procedures, capital contribution, payment of dividends, Director’s compensation, buying or selling company shares, appointment of Company officers, rights of minority shareholders and dispute resolution procedures. The main purpose is to protect the shareholders’ investment in the company, and to govern the running of the company.
The shareholder’s agreement is a private document and unlike the articles of association, is not lodged at the Company Registrar and can be stored confidentially, as it may contain sensitive commercial details.
Articles of Association vs. Memorandum of Association
A Memorandum of Association is a document that outlines the foundation of the Company and provides the Shareholders/Guarantor’s identification details, number of shares, class of shares and the value of shares.
Articles of association on the other hand provide regulations concerning the day to day running of a company while the memorandum of association outlines the foundation of the Company, i.e the shareholding details.
How we can help
At CM SME Club, we provide valuable legal advice and guide businesses on the incorporation of Companies including advising on the documentation required to protect the interests of the Company. Contact law@cmsmeclub.com for assistance.
Published on Aug. 22, 2024, 1:10 p.m.