Entrenchment in Articles of Association (AOA)

Introduction

A company’s articles of association outline the procedures that result in the efficient management of the company. Such procedures include the manner of holding board meetings, the manner of decision-making and any other procedure that helps the company run effectively. Therefore, a company’s articles of association are often known as the company’s constitution. A company in its articles of association may adopt all or any of the rules contained in the model articles prescribed in Tables F, G, H, I and J of Schedule 1 to the Companies Act, 2013. Further companies may include in their articles additional matters which are necessary for their operation.

What is the Entrenchment in Articles of Association?

In the newly incorporated entrenchment provisions in the Companies Act, 2013 the word ‘entrenchment’ is not defined therein. However, according to the Oxford dictionary, the word ‘entrench’ literally means firmly attached, surrounded and an important part of something which may be in a company’s constitutional document such as articles of association. Therefore, ‘Entrenchment’ means the addition of a provision which makes certain amendments more difficult or burdensome in the way of process, scrutiny and security.

An entrenched clause or entrenchment clause of a basic law or constitution is a provision that makes certain amendments more difficult or impossible, i.e., unacceptable. It may require a form of super-majority, a referendum submitted to the people, or the consent of another party. For example, a strategic investor pitches a company to bring in a new technology or investment. Now, such a strategic investor wants to protect his interests in the company. This clause may be an entry for the protection of such interests. This article requires the consent of such investors to pass resolutions.

What are the Types of Accession to Articles of Association (AOA)?

There are two types of Entrenchment in as follows:

1. Absolute Access: Absolute access means that certain provisions are immutable and impossible to change unless ordered by a court/tribunal. The Companies Act, 2013 does not provide for this entry.

2. Conditional accession: This type of accession, on the other hand, implies that certain provisions may be modified, subject to the fulfillment of certain conditions or following certain procedures. (For example, approval by more than 75% of the members instead of the usual special majority of 75%.).

How is the inclusion of entrenchment in AOA clause?

Provisions for the inclusion of entrenchment can only be included in the Articles of Association as follows:

Incorporation of Entrenchment at the time of formation of the company; Or

If the company is already formed, the entry clause can be inserted by all the members by amending the Articles of Association in the case of private companies and by passing a special resolution in the case of a public company, if it is already formed.

What is the Notice to Registrar for Inclusion of Entrenchment Clause?

Once an entrenchment clause is included in the Articles of Association, notice must be given to the Registrar of Companies as follows:

• In the case of a newly formed company, Form No. INC.2 for ‘One Person Company’ (OPC) or Form No. INC. 7 for Non-OPC Companies. Notice shall be given along with the fee mentioned.
• In the case of an already existing company, form no. MGT. 14 The articles of entrenchment have to be filed within 30 days from the date of inclusion in the AOA along with the specified fee.

Which Companies access of entrenchment provisions are useful?

• Closely-held companies intend to restrict the transfer of shares and maintain a “close-held” position.
• Family-owned companies intend to ensure that control and management are retained by a single family.
• Companies in which strategic investments are made by private equity firms/angel investors who wish to exercise greater control over the company’s management and control (shareholding, investment, borrowing, power, etc.).
• Joint venture companies may include provisions restricting the other joint venture party (e.g. shareholding, investment, debt, power etc.) or may include provisions that may require the unanimous approval of both the joint venture partners (e.g. .capital increase, allotment of shares, convention general meetings, etc.).

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Summary

Finally, the term ‘Entrenchment’ and its associated procedure are introduced to the new Act. However, the concept of additional safeguards or additional compliance has always been recognized for amending the Articles which are the constitutional document of the company. It is a shareholders’ document and shareholders are free to agree to its terms.