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Standardized Articles
- 1. June, 2013
LP
GENERAL COUNSEL
Corporate Services & Tax Group© Aina Blankson, LP, 2013
Introduction
As an incorporated entity, a company is guided by
certain rules and regulations aimed at governing the
relationship between the members and the
company, managing its internal affairs and the
conduct of its business. These rules and regulations,
otherwise known as the constitution of the company
are universally regarded the Articles of Association
(the “Articles”).
As the legal foundation for the operation of
companies in Nigeria, the Companies and Allied
1
Matters Act (“CAMA” or the “Act”) provides as
follows:
“There shall be registered with the
memorandum of association,
articles of association signed by the
subscribers to the memorandum of
association, and prescribing the
2
regulations for the company. ”
Consequently, for companies under Part A of the Act,
incorporation is incomplete without the filing of the
Articles alongside the Memorandum, clearly
defining the company's purpose, operations, the
STANDARDIZED ARTICLES OF ASSOCIATION:
A CORPORATE INNOVATION?
1
Companies and Allied Matters Act 1990, Cap C20, LFN 2004
2
Section 34, ibid
- 2. duties and responsibilities of its members, conduct
of shareholders' and directors' meetings and voting
rights of shareholders, amongst others.
In like manner, and for the purpose of prescribing
the forms and other information required under the
3
Act , the Corporate Affairs Commission (“CAC” or
the “Commission”) published the 2012 Companies
Regulation, which has seen the revision of the form
and content of the traditional Articles as known in
corporate law. The 2012 Regulation provides that:
“the Memorandum and Articles of
Association of a company to be
registered under the Act shall be in
form provided in Schedule 3 to [the]
4
Regulation ”.
A cursory look at the form prescribed by the
Regulation reveals a number of check boxes which
invites the applicant to tick the applicable form of
the company being incorporated, implying the form
and content of the Articles would be in accordance
with the type of company chosen. While no cohesive
explanation is offered by the CAC in the Regulations
as to what informed the standardized articles, the
general consensus is that the deviation from the
norm is to serve as a deterrence for extraneous
matters that are articulated in the Articles which
render them cumbersome to digest and also throws
up a host of time management issues for the
Commission, whose duty it is to sift through all
statutory corporate documents.
The Relevance of the Articles of Association
under CAMA
Articles serve as a contract between the members
and the company, binding the members to the
company. Section 41 (1) of CAMA provides that:
Subject to the provisions of this
Act, the memorandum and
articles, when registered, shall
have the effect of a contract under
seal between the company and its
members and officers and
between the members and officers
themselves whereby they agree to
observe and perform the
provisions of the memorandum
and articles, as altered from time
to time in so far as they relate to
the company, members, or officers
of such.
From the foregoing, although there is no contract in
terms between each individual member, the Articles
5
regulate their rights one to another inter se . The
Articles are binding on all members until its
provisions are altered in the manner provided by
CAMA i.e. by a meeting duly called to pass a special
6
resolution for altering same .
Aside from its role as a contract between the
shareholders and the company, the importance of
the Articles as a business document cannot be over
emphasized. A cross-section of significant corporate
decisions are entrusted to the discretion of a
company's directors through the instrumentality of
the Articles of Association. A key example of one
such corporate matter is the nature of shares and
shareholding in a company. The provisions of CAMA
devolve the bulk of rights and liability with respect to
7 8
shareholding and manner of transfer of shares to
the oversight of the Articles of Association. Further,
LP
© Aina Blankson, LP, 2013
3
Section 609 (a), ibid
4
Section 18, Companies Regulation, 2012
5
See Ladejobi v. Odutola Limited [2002] 3 NWLR 121 at 152-153
6
per Aderemi, JCA
Corporate Services & Tax Group
- 3. LP
CAMA avails companies with opportunities to
specify their own terms on several issues, merely
offering recommendations in the instance where
those terms are not expressly specified by the
9
Articles , which is an indication of the intent of the
draftsmen of the legislation to minimize any
imposition on the will of a company as it is
recognized that the Articles of Association is not
simply a legal document but a business document
regulating the conduct of business, the effect of
which may have far reaching economic
consequences.
In extolling the relevance of the Articles of
Association, cognisance must also be had of
corporate events that are extraneous to the
provisions of CAMA that tend to fall under the sole
purview of the Articles. An instance of the foregoing
is CAMA's inadvertent silence on the topic of the
borrowing powers of a company. Such a salient
economic decision cannot be adequately provided
for by CAMA as it would vary from one company to
the other.
The Conundrum
While it may be implied that the templates provided
10
under Schedule I of CAMA , which are referenced
by the Regulation, are adequate for verbatim
adoption by newly incorporated entities, the
absence of clearly stated terms and conditions of
membership and internal regulatory rules for
companies, is bound to open the floodgates to a
myriad of business and regulatory challenges.
This 'one size fits all' approach negates the potency
of the Articles by completely eliminating the element
of individuality common to contracts of this nature
and neglecting issues, which are deemed to be under
the sole purview of the company. Where Articles
have, in the past, served as tools for dispute
resolution with guidance emanating from reference
to the principles contained in the Articles, generic
Articles as contemplated by the new Regulations,
would be unable to provide the requisite direction
required of the Articles of a company. It is interesting
to note that courts have been consistent in
upholding the value of Articles and ignoring
extraneous documents, if the latter conflicts with the
11
Articles . It is deemed that Articles contain the will
of the company and they are accorded that regard by
the courts. This position is compromised where the
courts are unable to resolve disputes arising from the
provisions of the Articles by reference to specific
provisions that are peculiar to the company as
provided by its Articles.
Further, it could be reasoned that the failure to
register a document containing express regulations
of a company and serving as its Articles of
Association to the CAC, as contemplated by CAMA,
would be at variance with Section 35 of CAMA, which
provides that
(1) As from the commencement of this Act, a
company shall be formed in the manner set
out in this section.
(2) There shall be delivered to the Commission-
(a) the memorandum of association and
articles of association complying with the
provisions of this Part of this Act;
© Aina Blankson, LP, 2013
7
Section 48, ibid
8
Section 114 (a), CAMA
9
Section 115, ibid
See for example, Section 232 and 264 on Quorum, Section 249
(3) on conditions for increase of Directors in a company and
Section 251 on shareholding qualifications of Directors, to
name a few.
10
Alluded to under Sections 33 and 34 of CAMA
11
Russell v. Northern Bank Development Corp. Ltd. [1992]
Corporate Services & Tax Group
- 4. LP
A combined reading of this provision and Section
634 of CAMA which states that:
Any person may, on payment of
the fees prescribed in Part III of
Schedule 17 to this Act inspect
documents or obtain certificates of
incorporation or copies of or
extracts from documents held by
the Commission for the purposes of
this Act
reveals the intent of the draftsmen to ensure that
documents such as the Articles are public
documents for the exercise of regulatory oversight
on corporate entities and to also provide information
to the general public when required.
The non-compliance of companies therefore with
these provisions is a direct violation of the Act.
Regrettably, the CAC, by its Regulation, fails to take
cognisance of this provision and has neglected to
provide an alternative to the physical Articles as
required by CAMA to satisfy this regulatory
requirement.
Future Challenges with the Standardized Articles
In essentially recommending that Articles would be
assumed for each type of company format in the
form provided under Schedule I of CAMA and
essentially adopting generic articles for companies,
CAC has failed to take into consideration the
contractual importance of the Articles, which
document requires that members take an active part
in its creation as a binding corporate instrument.
As a reference document, assumed generic articles
will create more problems than it resolves as its
provisions, which are simultaneously blanket and
non-existent, will not serve any specific purpose in
the provision of regulations to guide a company. The
fall out of this would then result in the most trivial of
issues being brought before an overburdened
justice system for resolution or determination.
Comparative Analysis: United Kingdom
12
The Companies (Model Articles) Regulation was
enacted in 2008 pursuant to Section 19 of the
Companies Act of 2006. The effect of the
promulgation of this Regulation was twofold:
i. It abolished the use of the memorandum of
association for all companies incorporated
on or after October 1, 2009, eliminating the
need for a statement of objects and
indication of authorised share capital and
subsuming any other constitutional
requirement therein, under the articles of
association; and
ii. It created a set of standardized articles of
association christened 'Model Articles' for
various types of companies registered on or
after October 1, 2009.
The Model Articles, as the sole constitutional
document of a newly incorporated entity, provides
an itemised list of matters to be attended by the
Articles of Association of any type of corporate
entity to be registered. The particulars of the
prescribed items are subsequently left to the
internal decision making mechanism of the
company.
Though there is a clear deviation from the norm as
evidenced by the abolition of the memorandum and
the provision of strict guidelines for the document to
be registered as the Model Article, the importance of
the Articles as the specific bye-laws of a company,
© Aina Blankson, LP, 2013
B.C.L.C. 1016
12
http://www.legislation.gov.uk/uksi/2008/3229/contents/made
Corporate Services & Tax Group
- 5. LP
are preserved while streamlining the contents
therein to provide a more focused document.
The Nigerian equivalent of an effort to revamp
corporate statutory documents is the reverse of what
presently obtains in the United Kingdom, as Articles
are essentially done away with, while the
Memorandum and Statement of Objects are
maintained.
Instead of a regimented guideline geared towards
ensuring that companies attend to certain pertinent
issues, thus empowering and bettering the decision
making process, what exists is at best an attempt to
restrict the powers exercised by companies in the
running of their affairs through the imposition of a
standardized document or at worse, an agency that
has lost touch with the reality of the individuality of
companies and their peculiar challenges.
The Place of the Shareholders Agreement
It is tantamount to corporate suicide to encourage a
company to run its operations under ambiguous
circumstances. Where the constitutional document
required to regulate a company's activities is
essentially non-existent, an alternative must be
obtained to ensure the effective administration of
the company's operations and provide much needed
guidance.
A shareholders' Agreement or Members' Agreement
has been defined as“...a contract between the persons
who are parties to it and...enforceable in accordance
13
with normal contractual principles ”. Shareholders'
Agreements may contain terms typically found in
Articles. However, they are intended to be
supplemental to Articles and may often contain
terms that may be extraneous or inappropriate for
the Articles but satisfies the objectives of the
company and its shareholders. This synergy
between the Shareholders' Agreement and Articles
is explained as follows:
The shareholders' agreement is
most commonly used as a means
of implementing an agreed
superstructure to supplement and
prevail over articles, which form
14.
the basic infrastructure
Shareholders' Agreements are seen as an
improvement upon the existing Articles of a
company and are usually crafted around the Articles
to compliment its efforts in galvanising the affairs of
the Company and its members. It is noteworthy that
agreements of this nature are usually binding on the
conduct of members of a company. An attempt to
curb what is deemed as the statutory powers of a
company by way of a Shareholders' Agreement
15
would not be upheld by a court of law .
While the Shareholders' Agreement is not intended
to be a stand-alone document and it is not a legal
requirement under CAMA for companies to execute
such agreements, in light of the new Regulations of
the CAC, it has become expedient for new
companies to adopt the shareholders' agreement as
a business document to ensure clarity and certainty
as to what can or cannot be done in creating an
enabling platform for decisions to be taken by
consensus and discussion. This will, as a result,
reduce the potential for conflict between
shareholders and help the company to be run
smoothly and profitably.
This is not a fool-proof solution as the execution of a
Shareholders' Agreement is plagued with its own
© Aina Blankson, LP, 2013
last checked on May 30, 2013.
13
Cadman, J. Shareholders Agreements (Sweet & Maxwell
th
Limited, London. 4 Edition) p.3, para. 1.2.2
. Cadman, op cit., p. 11, para. 1.2.4
Corporate Services & Tax Group
- 6. LP
pitfalls. Its provisions may be circumvented by the
provisions of the generic Articles to the extent of any
perceived inconsistency between the two
documents. Further, it is a contractual document
and not a statutory document as such, there is no
requirement for the registration of same with CAC. It
therefore, does not form a part of a company's
public documents under Section 634 of CAMA and is
not available for public inspection which may be
detrimental to parties potentially engaging in
business with such a company as the parties are
restricted in their ability conduct the requisite due
diligence on the company.
In spite of the foregoing, the importance of a
Shareholders' Agreement cannot be overstated in
light of the recent development on the standardized
Articles Where CAC has not contemplated a
workable alternative as implemented in the United
Kingdom, such an agreement should be put in place
to forestall any eventualities that may later
constitute a fractious disagreement in respect of the
company.
Conclusion
What is not in doubt is that the concept of
standardized articles is not a new phenomenon. For
over a decade, legislations in various jurisdictions
such as Northern Ireland have recognized and
provided for standardized models of articles of
association. What these legislations and regulators
have done however is not to compel the adoption of
the model forms by companies, such that
companies are by and large given the option to
either register their own drawn up articles or apply
the model articles by default. This is based on the
realization that these model forms are simply meant
to serve as guides, and in some cases, safety net,
especially for small companies that may not be able
to afford the cost of retaining a solicitor.
© Aina Blankson, LP, 2013
Putting it in context, the attempts by the Corporate
Affairs Commission to impose the standardized
articles, conveys an inflexible system capable of
making the operations of new companies
cumbersome. It may be assumed however that the
omission of these provisions by the CAC is in a bid to
avoid a duplication of the provisions of CAMA and
keep the standardized articles as simple as possible.
If that were to be the case, then the Commission
would do well to provide some guidance notes and
create awareness on the essence of the standardized
articles, especially in view of the literacy level in the
country.
The impact and eventual success of the standardized
articles is yet to be felt, but the implementation of the
standardized model lends itself to a long-term view.
That said, it would be the responsibility of the CAC to
ensure a frequent review of the regulations and the
standardized model. As it is, its adoption is
involuntary, so that there is not basis for subsequent
evaluation of its success. Should companies
therefore decide on drafting their own articles as
opposed to adopting the model articles, we could
witness the likelihood of CAC querying applications
or altogether rejecting applications for incorporation
on the ground that the articles do not conform to its
standardized model. In this instance, it would fall on
the CAC to consider revising the standardized
articles and its contents to take into consideration
the personal interests of the companies.
Corporate Services & Tax Group
- 7. LP
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This Newsletter was written by
engaged
in the Corporate Service and Tax Group, Aina
Blankson, LP.
Olaronke
Ladipo-Ajayi and Banji Adenusi both
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© Aina Blankson, LP, 2013 Corporate Services & Tax Group