Q&A Re: Articles of Association

Definition of Articles of Association

The Articles of Association (abbreviated "AOA") is a basic document formulated by a company in accordance with the law that provides for material matters such as company name, domicile, business scope and operational and management systems. It includes basic principles for the organization and activities of the company. The AOA embodies the will of the shareholders and is jointly signed by all shareholders..

A number of provisions under the Company Law incorporate the exceptional phrase "unless otherwise provided in the Articles of Association". This phrase reflects both the encouragement and protection of company autonomy and the significant role played by the AOA in law and practice. The AOA is to a company as a constitution to a nation, because the AOA serves as the cornerstone for the company and embodies the spirit upon which the company relies for its existence. The AOA, jointly with the Company Law, assumes the heavy burden of regulating the company's activities.

Significance of the Articles of Association

★ The AOA reflects the equity structure and the unique governance of the company, along with company characteristics and culture. In practice, a generic AOA may result in insufficient competitiveness and corporate governance dilemmas. Because of this, the drafting and amendment of an AOA should be tailored to the characteristics of each company. Only in that way can the company exploit its strengths to the utmost and carry out its operations and management with ease and freedom.

Issues to be Noted for the Articles of Association

★ The phrase "voting shall be by consensus of all directors" should be adopted with caution.

Since such a voting formula endows directors representing the interests of different shareholders with equivalent voting power, such a phrase can result in the loss of dominance that certain major shareholders enjoy due to their higher contribution ratio. If it is indeed necessary to adopt such a formula, the matters subject to it should be expressly listed so as to restrict the extensive application of a "one-vote veto" arising from the ambiguous scope of matters subject to a unanimous vote, and to prevent harming the related interests of the company and the shareholders.

★ An emergency plan should be specified in the AOA in advance in case the company's legal representative changes.

In the given example, the sudden death of the legal representative directly accounted for disorder in the company's operations. Furthermore, if the new Chairman of the Board cannot take office on time and cannot perform management duties, a long-term phenomenon of a "sheep without a shepherd" might result in disordered management. Consequently, in order to avoid such embarrassment, the company's shareholders should agree in the AOA on an emergency plan to apply in the absence of the legal representative.

(Abstracted from Safeguard Your Wealth, Major Shareholders Who Paid the Price for Their Nominal Articles of Association, by Lifei Jiang)

华诚律师事务所(Watson&Band)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.