Introduction
The term entrenchment is not defined in the Companies Act, 2013 (hereinafter, CA 2013). As per Oxford dictionary it means- “the fact of something being strongly established”. In legal parlance, it means a provision which is difficult to be amended.
AOA are defined in Section 5 of the CA, 2013 as the regulations for management of the company. Section 5(3) provides that the articles may contain provisions for entrenchment to the effect that certain provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable to special resolution. Further, Section 5(4) tells that entrenchment is only possible at the time of incorporation of the company (in Form INC-32 SPICe) or by an amendment (in Form MGT-14) in the articles.
In case of an existing private company approval is required from all the members of the company and in case of an existing public company a special resolution is required as mentioned in Section 5(4).
Procedure When Entrenchment Sought at the Time of Incorporating a Company
Company shall give notice to ROC of the provisions to be entrenched in Form INC-32 (SPICe) at the time of incorporation of the company.
Procedure when an existing company amends its AOA for entrenching certain articles
Step 1: Call a Board Meeting
- Hold a board meeting or pass a board resolution to consider and recommend provisions of AOA to be entrenched and authorize a CS/CFO/Director to file a notice with the ROC for entrenchment.
- For public company– fix day, date, time and agenda for the general meeting to pass a special resolution. Have to prepare a draft notice for the general meeting along with an explanatory statement for the purpose of passing the special resolution.
- Authorize a CS or any other person to issue notice of the general meeting under the authority of the board to every concerned member.
- For private company- approve the notice of resolution along with a explanatory statement for obtaining consent of members.
- Authorize a CS or any other person to issue notice of the general meeting under the authority of the board to every concerned member.
- As per Regulations 30 and 46(3) of the SEBI (LODR) Regulations, 2015, a public company has to submit disclosures of outcome of the Board meeting to stock exchanges (when shares are listed) as soon as possible and before 24 hours from the end of meeting. Also post the same on the company website within 2 days.
Step 2: Call a General Meeting
- Public company: Hold general meeting to pass special resolution for alteration of AOA to insert entrenched provisions.
- Private company: obtain consent in writing from all the members.
- As per Regulations 30 and 46(3) of the SEBI (LODR) Regulations, 2015, a public company has to submit disclosures of outcome of the General meeting to stock exchanges (when shares are listed) as soon as possible and before 24 hours from the end of meeting. Also post the same on the company website within 2 days.
- Further, as per Regulation 44 of the SEBI (LODR) Regulations,2015, the listed company has to submit to the stock exchange, within 48 hours of conclusion of its general meeting, details related to the voting results.
- Public company has to file the special resolution and the private company has to filed the resolution agreed to by all the members along with an explanatory statement in Form MGT-14
- To comply with Section 15(1) of CA, 2013, it must be ensured that the alteration made in articles are updated in every copy of AOA.
Conclusion
Entrenchment of provisions of Article of Association is required when the company requires certain provisions to be specifically enforced. Such provisions cannot be overridden until and unless supported by large majority. It is done to ensure the interest of minority shareholders. There is no restriction in entrenchment of AOA provisions but such proposed provisions shouldn’t be contrary to the company’s AOA (VB Rangraj v VB Gopalkrishnan 1991 6 CLA 211 SC).
