“The Memorandum is as it were, the area beyond which the actions of the company cannot go; inside the area, shareholders may make such regulations for their own government as they think fit”

“The Memorandum is as it were, the area beyond which the actions of the company cannot go; inside the area, shareholders may make such regulations for their own government as they think fit”

Memorandum:

Memorandum contains the fundamental conditions on which the company is to be incorporated. In fact, this document is of great importance in relation to the affairs of the proposed company. It may rightly be called a ‘charter’ or the ‘construction’ of the company as it regulates the relationship of the company with the outside world. It lays down the power and objective of the company, and the scope of the operations of the company beyond which its actions cannot go. If anything is done beyond these power that will be ultra virus the company and so void. The memorandum serves a two-fold purpose. It enables shareholders, creditors, and all those who deal with the company to know what its powers are and what is the range of its activities. Thus, the intending shareholders can find out the field in, or the purpose for which his money is going to be used by the company and what risk he is talking in making the investment.[1]

Articles of Association:

The Articles detail the internal affairs of a company, including the relationship between its directors and its shareholders. The Articles detail how often a shareholders’ meeting must take place, the voting rights of shareholders, how shares can be transferred, powers of directors, and how dividends are to e calculated. The Articles of Association of the company are the internal rules of the company. If no Articles of Association are filed when the company is incorporated the statutory form articles will apply. In practice the statutory articles are amended to suit a company’s specific requirements. Together with the memorandum of association, they form the constitution of a company. Articles of association typically cover the issuing of shares (also called stock), the different voting and dividend rights attached to different classes of share, restrictions on the transfer of shares, the rules of board meetings and shareholder meetings, and other similar issues.[2]

Relation between Memorandum and Articles of Association:

Similar Relationship

The Memorandum and Articles of Association of a company together act as its “constitution”. The memorandum is the charter of the company with the outside world, in particular the parties with whom the company will transact, either directly or indirectly, in the course of its business. The articles set out a company’s regulations for its internal management, its dealings with its shareholders, and govern the relationship between different groups of shareholders. Both documents are available to the public at Companies House, and any changes to either are subject to shareholder approval by a 75 per cent majority of those voting.

Dissimilar Relationship

For a company, a Memorandum is the constitution of the charter of the company. In other words, a Memorandum defines and confines the power of the company. As for the Articles of Association, they are the by-laws of the company that give an explanation to the Memorandum. While the Memorandum regulates the interaction of the company with the external world, the Articles of Association are responsible for the internal conduct of the company. Also registration of the Memorandum is compulsory for every company. On the other hand, registration of Articles of Association is not compulsory for a company that is limited by shares. Such a company may adopt Table A in place of Articles of Association. In addition to that, a Memorandum is sub-ordinate to only the Company’s ordinance 1984 while the Articles of Association are sub-ordinate to both the Memorandum and the Articles of Association.

Importance of Memorandum of Association:

The Memorandum of Association orders a supreme echelon in the process of establishment and development of a company especially in the regard of the delegation and demarcation of authorities to respective individuals who are connected with the company some way or the other. In other words, it is meant to be a company charter that encloses in itself the essential conditions based on which the company could be conveniently commenced and incorporated. Memorandum of Association lays down the scope of activates of a company.  It describes the objects and powers of the company.  Anything done by a company outside the scope of memorandum will be treated as ultra vires.  Even all the shareholders cannot validate an ultra vires act and make it binding on recopy.  Therefore, all those who want to deal with a company must first ensure that the company’s authorizes to entry into the transactions which it wants to have with them.  Memorandum of associations a public document and anybody can get a copy on payment of a nominal charge.

Rights and Practices of Shareholders:

A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Companies listed at the stock market are expected to strive to enhance shareholder value. Shareholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company’s income, the right to purchase new shares issued by the company, and the right to a company’s assets during a liquidation of the company. However, shareholder’s rights to a company’s assets are subordinate to the rights of the company’s creditors. Even though the board of directors runs the company, the shareholder has some impact on the company’s policy, as the shareholders elect the board of directors. Each shareholder typically has a percentage of votes equal to the percentage of shares he or she owns. So as long as the shareholders agree that the management (agent) is performing poorly they can elect a new board of directors which can then hire a new management team.[3]

How company acts limited by Memorandum:

Memorandum is a document which tells a company what is its limit, how company is to be constituted and what work it shall undertake. It highlights the major elements that constitute the foundation of the company and adumbrates its scope beyond which the company could not go. The first dimension comprises the shareholder where it tells the shareholder the field and scope of the company and with the help of that the shareholder decides the suitability of his investment in the company. The second dimension involves any stakeholder of the company. The Memorandum tells these companies whether the objectives that the respective stakeholder aims to accomplish with the help of the company are within the realm of the company’s objectives or not. A memorandum of association is required to state the name of the company, the type of company (such as public limited company or private company limited by shares), the objectives of the company, its authorized share capital, and the subscribers (the original shareholders of the company). For example, a company authorized share capital is 100 millions taka, but they need additional 10 millions taka in their future development project, and for this amount of money company need to issue new additional shares. But company can’t do this whenever it wants because; a company may alter particular parts of its memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law.

Ultra Vires:

Any action taken by a company outside the scope of its objects clause can be considered ultra vires and therefore void. This is largely made irrelevant by the Companies Act 1989, which states that “the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s Memorandum.” Therefore, a company may not cite ultra vires as a reason in defence of a legal action, nor may a contracting party use it as defense for non-performance. Instead, it is mostly used to govern internal relationships of a company, and in particular the actions of directors with respect to shareholders.[4]

Alternation of Memorandum:

Subject to the provisions of The Company Act.1994, a company may, by special resolution, alter the provisions of its memorandum with respect to the objects of the company, so far as may be required to enable it–

(a) To carry on its business more economically or more efficiently; or

(b) To attain its main purpose by new or improved means; or

(c) To enlarge or change the local area of its operations; or

(d) To carry on some business which, under the existing circumstances. May conveniently or advantageously be combined with the business of the company; or

(e) To restrict or abandon any of the objects specified in the memorandum; or

(f) To sell or dispose of the whole or any part of the undertaking of the company; or

(g) To amalgamate with any other company or body of persons.

The alteration shall not take effect until and except in so far it is confirmed by the Court on petition. Before confirming the alteration, the Court must be satisfied that sufficient notice has been given to every holder of debentures of the company.[5]

Conclusion:

Both Memorandum and Articles of Association are very important documents for a company, because it expresses the nature of the company, what it wants to achieve, and every details of the company. The memorandum and articles of association of a limited company are together its “constitution”. The directors cannot act outside of the powers set there, so it is very important that it reflects what the shareholders (whether directors or not) want from the company.

Bibliography

  1. Sen & Mitra. (2006). (26th ed.) Commercial law and industrial law: Business law, Kolkata, The world press private limited.
  2. Kappoor & Gulsan. (1995). (4th ed.) Business Law: Memorandum and Articles of Association, New Delhi ,New Age International(P) Limited.
  3. Clarkson, Miller, Jentz & Cross. (1992).(5th ed.) West Business Law: Memorandum and Articles of Association. (1992). U.S.A. ,West publishing company.
  4. http://www.blurtit.com/q536578.html
  5. http://www.clickdocs.co.uk/memorandum-of-association.htm
  6. http://en.wikipedia.org/wiki/Memorandum_of_Association
  7. http://www.indexers.org.uk/index.php?id=83
  8. http://www.compactlaw.co.uk/business_pack/memorandum-of-association.htm l
  9. http://en.wikipedia.org/wiki/Stock
  10. http://books.google.com.bd/books?id=5xT8qG7tv2gC&pg=PA64&lpg=PA64&dq=memorandum+of+association
  11. http://books.google.com.bd/books?id=IBYt4ydRthsC&pg=PA73&lpg=PA73&dq=why+conpany+cannot+go+beyond

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1.The Writing Center: Rensselaer Polytechnic Institute

Memorandum Writing, Patrick Dobel, Richard F. Elmore, Laurie Werner

2. The Companies Act 2006, which received Royal Assent on 8 November 2006 but will not be fully implemented until October 2009, provides for a new form of model articles of association for companies incorporated in the United Kingdom. Under the new legislation, the articles of association will become the single constitutional document for a UK company, and will subsume the role currently filled by the separate memorandum of association.[2]

[3] ^ http://www.sjsu.edu/depts/economics/faculty/stringham/docs/stringham-amsterdam.pdf

^ “Devil the Hindmost” by Edward Chancellor.

^ Jones v. H. F. Ahmanson & Co., 1 Cal. 3d)

^ Jones v. H.F. Ahmanson & Co. (1969) 1 C3d 93

^ Whitman, 2004, 5

^ a b c Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0-691-12335-7

[4] Ashbury Railway Carriage & Iron Co v Riche (1875) .ARC’s objects clause stated that the company was “to build and supply railway stock”. The company made a contract to build a railway system in Belgium for R, but did not perform. R sued and lost, since the company had no power to enter into a contract to build a railway system. R had not read the objects clause of ARC.

[5] The company Act. 1994.