Importance of Memorandum

COMPANY LAW -i

Memorandum of Association & Article of Association GROUP MEMBERS AhSan Shahid Amsa Kamal Mehrunissa Jalil Misba Masood Mustafa Saeed Vakani

2010

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INDEX 1-

Memorandum of Association I. What Do You Know About Memorandum Of Association?

0 II. Importance of Memorandum Clauses of Memorandum The Name Clause Registered Office Clause Object Clause Liability Clause Capital Clause Association Clause Alteration of a Memorandum of Association a. Name clause (Section 25) Registered Office (Section 17) Object Clause (Section 17) Liability clause: Capital Clause:

2- ARTICLE OF ASSOCIATION I.

DEFINITION II. CONTENTS OF ARTICLE OF ASSOCIATION III. Alteration of Articles of Association IV. IMPOTANCE OF ARTICLE OF ASSOCIATION: V. ADVANTAGES OF ARTICLE OF ASSOCIATION VI. PROBLEMS OF ARTICLE OF ASSOCIATION

3- Differences of AOA & MOA

4- Extra Information (sample form)

Memorandum of Association What Do You Know About Memorandum Of Association?

0

It is the most important document of the company. It is the basis on which the super-structure of the company is based. It is also known as the constitution / charter of the company. This document is a sort of contract between the company and its shareholders. It defines the objects and determines the scope of the activities of the company. It sets out the limits outside which the company cannot go. If the company works on a line, which is not given in the memorandum, then it will be considered as illegal. The memorandum should be printed and divided into different paragraphs. It is regarded as unalterable charter of the company as generally it is very difficult to change any clause of this document. This document must be signed by at least seven persons in case of public limited company and two persons in case of private limited company. The memorandum must be prepared very carefully, printed and divided into different paragraphs, each paragraph must be numbered. It should stamp according to the provisions of the companies ordinance and signed by the subscriber in the presence of witness.

Importance of Memorandum Memorandum is the fundamental document of a company which contains conditions upon which the company is incorporated. This document is important for the following reasons. •

Memorandum defines the limitations on the powers of the company established under the Act.

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The whole structure of the company is built upon memorandum.

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It explains the scope of activities of the company. The investment knows where their money will be spent and outsiders also know the nature of activities the company is authorized to take up.

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It is a basic document of the company with regard to its constitution

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It is a charter of the company which sets out its written goals.

Clauses of Memorandum The memorandum of association contains the following clauses:

The Name Clause: A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company and it should not contain the words like king, queen, emperor, government bodies and the names of world bodies like UNO, WHO, World Bank etc. The name should not be objectionable in the opinion of the government. The word ‘limited’ must be used at the end of the name of a Public and ‘Private Limited’ is used by a Private Company. These words are used to ensure that all persons dealing with the company should know that the liability of its members is limited. The name of the company must be painted outside every place where business of the company is carried on.

If the company has a name which is undesirable or resembles the name of any other existing company, this name can be changed by passing an ordinary resolution.

Registered Office Clause: Every company should have a registered office, the address of which should be communicated to the Registrar of Companies. This helps the Registrar to have correspondence with the company. The place of registered office can be intimated to the Registrar within 30 days of incorporation or commencement of business, whichever is earlier. A company can shift its registered office from one play to another n the same town with intimation to the Register. But if the company wants to shift its registered office from one town to another town in the same state, a special resolution is required to be passed. If the office is to be shifted from one state to another state it involves alteration in the memorandum.

Object Clause: This is one of the important clauses of the Memorandum of Association. It determines the rights and powers of the company and also defines its sphere of activities. The object clause should decide carefully because it is difficult to alter this clause later on. No activity can be taken up by the company which is not mentioned in the object clause Moreover, the investors i.e., shareholders will not mentioned in the object clause and will know the sphere of activities which the company can undertake. The choice of the object clause lies with the subscribers to the memorandum. They are free to add anything to it provided it is not contrary to the provisions of the Companies Act and other laws of the land. The Companies (Amendment) Act 1965 requires that in cause of companies formed after this amendment, the memorandum must state separately (a) main objects, and (b) other objects. Main objects will include objects to be pursued by the company on incorporation and objects incidental or ancillary to the attainment of the main objects. Other objects will include all other objects which are not included in the main objects. The object clause offers protection to the shareholders by ensuring that the funds raised for the undertaking are not going to be risked in any other undertaking. The creditors also feel protected by this clause. By confining the activities within a specified field, it serves the public interest also. The object clause can be changed to enable a company to carry on its activities more economically, or by improved means to carry on some business which under existing circumstances may conveniently by combined with the object clause.

Liability Clause: This clause states that the liability of the members is limited to the value of shares held by them. It means that the memes will be liable to pay only the unpaid balance of their shares. The liability of the members may be limited by guarantee. It also states the amount which every member will undertake to contribute to the assets of the company in the event of its winding up.

Capital Clause: The clause states the total capital of the proposed company. The division of capital into equity share capital and preference share capital should also be mentioned. The number of shares in each category and their value should be given. If some special rights and privileges are conferred on any type of shareholders, mention may also be made in the clause to enable the public to know the exact nature of capital structure of the company.

Association Clause:

This clause contains the names of signatories to the memorandum of association. The memorandum must be singed by at least seven persons in the cause of public limited company and by at least two persons in the case of private limited company. Each subscriber must take at least one share in the company. The

subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of subscriber are attested by at least one witness each. The full addresses and occupations of subscribers and the witnesses are also given.

Alteration of a Memorandum of Association Memorandum of Association is a basic document of the company. Any change in various clauses of memorandum may have an adverse effect on any of the parties connected with the company. Company Law has prescribed a particular procedure for making a change in the memorandum. The procedure provided for different clauses varies. The following procedure is followed for carrying out a change in the memorandum:

Name clause (Section 25): A company may change its name by passing a special resolution and with the prior approval of the Central government. If the company is registered with an undesirable name then it can change it with an ordinary resolution with the approval of the Central Government. The Central Government can also direct the company within 12 months of its registration to change its name and this will have to be done within three months. The change in name will be effective when it is resisted with the Registrar.

Registered Office (Section 17): The change in registered office place from one state to another requires a change in memorandum. This change affects the interests of shareholders, investors, creditors, employees etc. This change can be affected only with the approval of Company Law Board. Earlier this power was vested with the court but the Company Law (Amended) Act, 1974 has transferred it to Company Law Board.

Object Clause (Section 17): The object clause is the most important clause in the memorandum; its change may affect the activities of the company. This clause is a limitation on the company beyond which it cannot carry its activities. The object clause can be changed by passing a special resolution and by getting the permission of the Company Law Board. A copy of the resolution should be field with the Registrar within 30 days of passing the resolution. A petition is also made to the Company Law Board for issuing a confirmation. When this change is allowed by the Board, then printed copy of the Memorandum as altered must be field with the Registrar within three months of the order.

The change in situation and objects clause is allowed only under certain situations. It will be allowed when it necessary for any of the following reasons: •

The change is necessary to allow the company to carry on its business more economically or efficiently.

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The company will be able to attain its objectives by new and improved means.

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The company may enlarge the local area of its operations.

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The company is enabled by change to carry on some new business with convenience and advantage.

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To restrict or abandon any of the objects specified in the memorandum.

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To sell whole of part of the company’s property.

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To amalgamate with any other company or body of persons.

Liability clause: If articles so permit, the liability of the Directors Managing Directors or Manager can be made unlimited by passing a special resolution. The officer concerned should also accord his consent for making the liability unlimited.

Capital Clause: A change in capital clause involving an increase in the authorized capital can affected by passing an ordinary resolution in the general Meeting.

ARTICLE OF ASSOCIATION DEFINITION: The Articles of Association of a company are the rules governing the relationship between the directors and shareholders of the company. Together with the Memorandum of Association, the Articles of Association constitute the constitution of a company. The Articles of Association, as per the law requires, provisions on the company name, address and domicile, the purpose of the company, the amount of share capital and the contributions made thereto, the number, the par value and the type of shares, the calling of a general meeting of shareholders and the voting rights of them, the bodies for the administration and the audit, and the form in which the company shall publish notices. The Articles can cover a medley of topics, not all of which is required in a country's law. Although all terms are not discussed, they may cover: • the issuing of shares (also called stock), different voting rights attached to different classes of shares • valuation of intellectual rights, say, the valuations of the IPR of one partner and, for example, the real estate of the other • the appointments of directors - which shows whether a shareholder dominates or shares equality with all contributors • directors meetings - the quorum and percentage of vote • management decisions - whether the board manages or a founder • transferability of shares - assignment rights of the founders or other members of the company do • special voting rights of a Chairman, and his/her mode of election • the dividend policy - a percentage of profits to be declared when there is profit or otherwise • winding up - the conditions, notice to members • confidentiality of know-how and the founders' agreement and penalties for disclosure • First right of refusal - purchase rights and counter-bid by a founder.

CONTENTS OF ARTICLE OF ASSOCIATION 1- Amount of shares, capital, value and types of shares. 23456-

Rights of each class of shareholders regarding voting, dividend, and return of capital. Rules regarding issue of shares and debentures. Procedures as well as regulations in respect of making calls on shares. Manner of transfer of shares. Declaration of dividends

Alteration of Articles of Association •

The articles of association can be altered by assign a special resolution. Certain restrictions are imposed on the nature and extent of the alternation that may be made.

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The change should not be violating the provisions of the Companies Act.

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It should not be contrary to the provisions of the memorandum of association.

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The alteration must not have anything illegal. The alteration should not adversely affect the minority shareholders.

IMPOTANCE OF ARTICLE OF ASSOCIATION: The articles of association are very important for the company. They are important because they are the regulations that govern the relationship between shareholders and directors of the company. They are required for the establishment of a company under the law. They govern the laws of issuing of shares, voting and dividend rights etc.

ADVANTAGES OF ARTICLE OF ASSOCIATION • • • • •

Minimum subscription is not required. Company's can easily raise the sufficient capital through shares. These are appropriate for the business persons who have the limited capital. Even the non resident shareholders are not responsible for the additional tax on dividends. Accounts of any currency can be freely transferable without any exchange control restrictions.

PROBLEMS OF ARTICLE OF ASSOCIATION • • • • • •

The expenses for the company formation are very high. The alteration of memorandum is not so easy. The procedure for the establishment and the legal formalities are very complicated. The administrative costs and the tax payment are very high. In the private company shares cannot be sold to the public. The problem of management occurs when directors are not able to manage the company as the sole traders do.