Unit 2
DETAILED STUDY OF MOA, AOA AND PROSPECTUS
Memorandum of Association is the most important document of a company. It states the objects for which the company is formed. It contains the rights, privileges and powers of the company. Hence it is called a charter of the company. It is treated as the constitution of the company. It determines the relationship between the company and the outsiders.
The whole business of the company is built up according to Memorandum of Association. A company cannot undertake any business or activity not stated in the Memorandum. It can exercise only those powers which are clearly stated in the Memorandum.
Definition of Memorandum of Association
Lord Cairns:
“The memorandum of association of a company is the charter and defines the limitation of the power of the company established under the Act”.
Thus, a Memorandum of Association is a document which sets out the constitution of the company. It clearly displays the company’s relationship with outside world. It also defines the scope of its activities. MoA enables the shareholders, creditors and people who has dealing with the company in one form or another to know the range of activities.
Contents of Memorandum of Association
According to the Companies Act, the Memorandum of Association of a company must contain the following clauses:
1. Name Clause of Memorandum of Association
The name of the company should be stated in this clause. A company is free to select any name it likes. But the name should not be identical or similar to that of a company already registered. It should not also use words like King, Queen, Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank etc. If it is a Public Limited Company, the name of the company should end with the word ‘Limited’ and if it is a Private Limited Company, the name should end with the words ‘Private Limited’.
2. Situation Clause of Memorandum of Association
In this clause, the name of the State where the Company’s registered office is located should be mentioned. Registered office means a place where the common seal, statutory books etc., of the company are kept.The company should intimate the location of registered office to the registrar within thirty days from the date of incorporation or commencement of business.
The registered office of a company can be shifted from one place to another within the town with a simple intimation to the Registrar. But in some situation, the company may want to shift its registered office to another town within the state. Under such circumstance, a special resolution should be passed. Whereas, to shift the registered office to other state, Memorandum should be altered accordingly.
3. Objects Clause of Memorandum of Association
This clause specifies the objects for which the company is formed. It is difficult to alter the objects clause later on. Hence, it is necessary that the promoters should draft this clause carefully. This clause mentions all possible types of business in which a company may engage in future.
The objects clause must contain the important objectives of the company and the other objectives not included above.
4. Liability Clause of Memorandum of Association
This clause states the liability of the members of the company. The liability may be limited by shares or by guarantee. This clause may be omitted in case of unlimited liability.
5. Capital Clause of Memorandum of Association
This clause mentions the maximum amount of capital that can be raised by the company. The division of capital into shares is also mentioned in this clause. The company cannot secure more capital than mentioned in this clause. If some special rights and privileges are conferred on any type of shareholders mention may also be made in this clause.
6. Subscription Clause of Memorandum of Association
It contains the names and addresses of the first subscribers. The subscribers to the Memorandum must take at least one share. The minimum number of members is two in case of a private company and seven in case of a public company.
Thus, the Memorandum of Association of the company is the most important document. It is the foundation of the company.
Key Takeaways:
- Memorandum of Association is the most important document of a company.
- The whole business of the company is built up according to Memorandum of Association.
Articles of Association is an important document of a Joint Stock Company. It contains the rules and regulations or bye-laws of the company. They are related to the internal working or management of the company. It plays a very important role in the affairs of a company. It deals with the rights of the members of the company between themselves.
The contents of articles of association should not contradict with the Companies Act and the MoA. If the document contains anything contrary to the Companies Act or the Memorandum of Association, it will be inoperative. The private concerns that are limited by shares and those limited by guarantee and unlimited companies must have their articles of association. Public companies may not have their articles but may adopt Model articles given in Table A of Schedule I of Companies Act, 1956. If a public company has only some articles of its own, for the rest, articles of Table A will be applicable.
Articles that are profound to be registered should be printed, segmented well and sequenced consecutively. Each subscriber to Memorandum of Association must sign the articles in the presence of at least one witness.
Contents of Articles of Association
The articles generally deal with the following
1. Classes of shares, their values and the rights attached to each of them.
2. Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of capital.
3. Directors, their appointment, powers, duties etc.
4. Meetings and minutes, notices etc.
5. Accounts and Audit
6. Appointment of and remuneration to Auditors.
7. Voting, poll, proxy etc.
8. Dividends and Reserves
9. Procedure for winding up.
10. Borrowing powers of Board of Directors and managers etc.
11. Minimum subscription.
12. Rules regarding use and custody of common seal.
13. Rules and regulations regarding conversion of fully paid shares into stock.
14. Lien on shares.
Alteration of Articles of Association
The alteration of the Articles should not sanction anything illegal. They should be for the benefit of the company. They should not lead to breach of contract with the third parties. The following are the regulations regarding alteration of articles:
A company may alter its Articles with a special resolution. Due importance and care should be given to ensure that the alteration of AoA does not conflict with the provisions of the Memorandum of Association or the Companies Act. A copy of every special resolution altering the Articles must be filed with the Registrar within 30 days of its passing.
1. The proposed alteration should not contravene the provisions of the Companies Act.
2. The proposed alteration should not contravene the provisions of the Memorandum of Association.
3. The alteration should not propose anything that is illegal.
4. The alteration should be bonafide for the benefit of the company.
5. The proposed alteration should in no way increase the liability of existing members.
6. Alteration can be made only by a special resolution.
7. Alteration can be done with retrospective effect.
8. The Court does not have any power to order alteration of the Articles of Association.
Key Takeaways:
- Articles of Association is an important document of a Joint Stock Company.
- The contents of articles of association should not contradict with the Companies Act and the MoA.
Prospectus meaning
- The prospectus is a legal document, which outlines the company’s financial securities for sale to the investors.
- According to the companies act 2013, there are four types of the prospectus, abridged prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.
- The prospectus is a legal document for market participants and investors to pursue, detailing the features, prospects, and promise of a financial product.
- It is mandated by the law to be supplied to prospective customers.
Prospectus Example
- In an IPO, the prospectus tells potential shareholders about the company’s plans and business model.
- For insurance and investment fund customers, a prospectus lists out the objective of the product, inclusions, and exclusions, fees, etc.
- For an ETF, a prospectus informs likely investors of the fund’s goals, history, portfolio, fees and costs, and other financial details.
Importance of Prospectus
The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.
Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.
- To notify the public of the issue
- To put the company on record with regards to the terms of the issue and allotment process
- To establish accountability on the part of the directors and promoters of the company
Types of prospectus
According to Companies Act 2013, there are four types of prospectus.
Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.
Red Herring Prospectus – Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.
Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.
Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.
Contents of Prospectus
The prospectus contents are specified in the Companies Act. The prospectus must touch over the following content points:
- Details of the company, such as name, registered office address, and objects
- Details of signatories to the Memorandum and their shareholding particulars
- Details of the directors
- Details of shares offered and the class of the issue as well as voting rights
- Minimum subscription amount
- The amount payable on application, on allotment, and on further calls
- Underwriters of the issue
- Auditors of the company
- Audited reports regarded profit and losses of the company
Key Takeaways:
- The prospectus is a legal document, which outlines the company’s financial securities for sale to the investors.
- The company provides prospectus with capital raising intention.
References:
- ‘Company Law’ by Brenda Hannigan
- ‘Elements of Company’ Law by N. D. Kapoor
