Legal Aspects of Business | Memorandum
Memorandum of Association
Meaning & Importance
- The Memorandum of Association defines the company's basic rules, objectives, and scope of activities.
- It outlines the company's powers and limits its operations.
- Ensures shareholders and creditors understand the company's scope and risk.
- Allows shareholders to know how their money is used and whether a transaction is within the company's objectives.
Contents
- Name Clause: Specifies the company's name. Must be distinct and not similar to other companies.
- Registered Office Clause: States the state where the company’s office is located.
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Objects Clause: Defines the company's purpose and the range of activities.
- Main objects (core activities).
- Ancillary objects (related activities).
- Any act beyond the objects is void.
- Liability Clause: States whether members' liability is limited (by shares or guarantee).
- Capital Clause: States the share capital and how it is divided (number and value of shares).
- Subscription Clause: Lists the names, addresses, and occupations of initial subscribers, signed in the presence of a witness.
Alteration of Memorandum
- Name: Can be changed with a special resolution and government approval.
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Registered Office:
- Within the same city: Board resolution.
- Between cities within the same state: Special resolution.
- Between states: Special resolution and government confirmation.
- Objects Clause: Can be altered by a special resolution.
- Capital Clause: Can be changed by passing an ordinary resolution.
Articles of Association
Meaning
- Articles of Association are the rules that govern the internal management of the company.
- They establish the relationship between the company and its members and regulate the company’s operations.
Contents
- Share capital management
- Lien on shares
- Share transfer and transmission
- Alteration of capital
- General meetings, directors' roles, remuneration, and meetings
- Dividends and reserves
- Accounts and audits
- Winding-up procedures
Alteration of Articles
- Can be changed by passing a special resolution at a general meeting.
Meaning of Prospectus
Definition
- A prospectus is any document inviting the public to subscribe to shares or debentures or deposit money.
- It is not just an advertisement, but may include circulars or notices.
Contents of Prospectus
- General information about the company.
- Capital structure.
- Terms of the present issue.
- Details about the management and the project.
Abridged Form of Prospectus
- A summary of the prospectus, included with every application for shares/debentures.
- Should follow SEBI guidelines (e.g., printed in at least 7-point font).
Types of Prospectus
- Deemed Prospectus: In case a company indirectly invites public subscriptions without issuing a formal prospectus.
- Shelf Prospectus: Used by financial institutions to issue securities multiple times within a year, without re-issuing a new prospectus each time.
- Information Memorandum: A pre-issue document to gauge demand for securities before filing a formal prospectus.
- Red-Herring Prospectus: A prospectus without full details on pricing or the number of shares.
- Statement in Lieu of Prospectus: Filed when no prospectus is issued or shares have not been allotted.
Mis-statements in Prospectus
- If a statement is misleading or omits material facts, the prospectus is considered untrue.
- Liability for mis-statements includes rescinding contracts or claiming damages.
Kinds of Shares
Types of Shares under Companies Act
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Equity Share Capital:
- Shares with voting rights.
- Shares with differential rights regarding dividend, voting, etc.
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Preference Share Capital:
- Shares with preference over equity in dividend and repayment.
Rules for Issuing Equity Shares with Differential Voting Rights
- Limited to 25% of the total share capital.
- Requires shareholder approval via resolution (postal ballot for listed companies).
- Companies with compliance issues (e.g., unpaid deposits or dividends) cannot issue these shares.
