The memorandum is as it were the area beyond which the actions of the company cannot go; inside that area the shareholders may make such regulations for their own governance as they think fit. Explain and illustrate.
The memorandum is a binding contract that a company has to make for its existence which makes it a legal entity and also makes its purpose clear to the public. The purpose of the memorandum is to enable the members of the company, its creditors, and the public to know what its powers are and what is the range of its activities. The memorandum contains rules regarding the capital structure, the liability of the members, the objects of the company, and all other important matters relating to the company. The memorandum makes the purpose of the company official, to be known by the government, the company members, and to the general public. It is one of the documents required to incorporate a company in the United Kingdom, Ireland and India, and is also used in many of the common law jurisdictions of the Commonwealth. It helps the government know and keep track of the company’s legal activities, it helps the people within the organization know their goals, and keep their actions focused to their purpose and within legal laws ascribed in the memorandum, also it gives them an outline as to how much changes they can bring about in their company without contradicting the memorandum, finally it helps potential investors to make a much more informed decision when it comes to investing in companies.
The memorandum in a way makes a clear transparent glass between the company itself and the rest of the world through which concerned parties can take a look and know what the company is about, what its rights and limitations are, and also the purpose of its existence.
The article of association on the other hand is a document which contains rules, regulations and bye-laws regarding the internal management of the company. The articles however cannot contradict the memorandum; it is simply of how a day to day company’s internal operations are to be run as deemed fit by the directors and members of the company for maximizing company’s profit and output, under the principles of the memorandum itself. The articles of association are allowed to be flexible legally, whereas the memorandum is not. In order to perform a change on certain clauses of the memorandum, it is required for the company to take permission from the central government and the court.
Once the memorandum is registered, it forms a binding contract, between the company and its members and between the members themselves, to oversee each other and observe the follow up of the provisions of the memorandum and of the articles. It has been held that the contractual force given to the articles of association is limited to those provisions which apply to the relationship of members in their capacity as members and does not extend to those provisions which govern the relationship of a company and its directors as such.
The courts have interpreted the memorandum binding the members in terms of their rights and limitations as a shareholder but not in any private capacity. Shareholder’s rights found in the memorandum and articles include: the right to dividends; the right to vote at company meetings; the right to appoint directors; the right to participate in surplus assets on a winding up; the right to have statutory and company procedures followed.
The members may sue each other based on the contract of the memorandum and articles in regard to the shareholders’ rights, and need not do so through the company. Money payable by a shareholder to the company under the memorandum or articles is a debt due from him to the company, and is of the nature of a specialty debt and actionable for 12 years, rather than the usual 6 year period.
The conditions contained in the memorandum of association cannot be altered, except in the cases, in the mode and to the extent for which express provision is made in the Act.
The alterations which may be made in the memorandum without a court’s confirmation are: (i)change of name, (ii) alteration of objects, (iii) change of status, instance a company limited by shares to a company limited by guarantee, (iv) alteration of conditions in the memorandum which could have been contained in the articles, (v)increase of share capital, (vi)cancellation of capital not issued or agreed to be issued, (vii)conversion of fully-paid shares into stock, (viii)reconversion of stock into shares, (ix)consolidation of shares into shares of larger amount, (x)sub-division of capital into shares of smaller amount, and (xi)changing the liability of company officers from limited to unlimited.
The alterations which may be made in the memorandum, with confirmation by the Court: (i)reduction of paid or unpaid capital, (ii)reorganization of capital, and (iii)any other alteration under a scheme of arrangement.
The shareholders require receiving notice within the minimum required time to be responsible in making changes within the requirements of the company act and it applies for those members who are authorized to attend and vote at meeting to make such changes.
By in large the general rule holds, for any change in the memorandum, the company has to pay attention and seek permission from the court and sometimes the government, because otherwise the articles in the memorandum are permanent, and are the principles and outlines by which the company has to follow its operations and design its articles of association. The need to inform and seek permission from the court and to notify the government for changes in the principles of the memorandum cannot be ignored, for changes in memorandum to become official and recognized by all sides which includes the government, company members and the general public, it requires changes through proper procedures and authorized members to make the required changes. Because the memorandum in general is the bounding outline outside of which the company cannot operate, and any aspect of the company or actions that contradicts the clauses of the memorandum will be considered void and illegal.
The articles of association however, which basically comes as a sub-branch to the memorandum, makes up the system which details on the internal system of operations by which the company operates. As Lord Cairns in Riche, described the relationship between the memorandum and the articles in this language: “The memorandum is as it were, the area beyond which the actions of the company cannot go; inside the area, the shareholders may make such regulations for their own government as they think fit”. The Articles are basically subordinate to Memorandum.
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:(i)the issuing of shares (also called stock), different voting rights attached to different classes of shares, (ii)valuation of intellectual rights, say, the valuations of the IPR of one partner and, for example, the real estate of the other, (iii)the appointments of directors – which shows whether a shareholder dominates or shares equality with all contributors, (iv)directors meetings – the quorum and percentage of vote, (v)management decisions – whether the board manages or a founder, (vi)transferability of shares – assignment rights of the founders or other members of the company do(vii)special voting rights of a Chairman, and his/her mode of election, (viii)the dividend policy – a percentage of profits to be declared when there is profit or otherwise, (ix)winding up – the conditions, notice to members, (x)confidentiality of know-how and the founders’ agreement and penalties for disclosure, (xi)first right of refusal – purchase rights and counter-bid by a founder.
The company thus have flexibility to make changes within the articles of association which governs the way of how the company operates within the bounds set by the clauses of the memorandum, and thus allows its internal management to come up with managerial skills, creativity and strategic planning to come up with the best procedures that keep the company sound with its stakeholders in terms of financial stability, management of its manufacturing operations, transportation, and controlling of its workers and proper coordination between the directors and sub directors or managers in making periodic meetings, paying off dividends to its shareholders, and at the same time paying off its debt to its debentures while meeting needs of its customers in a fair practice system free from defective or fraudulent practices. It also helps in developing the transparency required to keep all the members in connection to the company informed so as to not endanger the rights of any party while being productive and profitable for its stakeholders while maintaining the interests of the shareholders.
The memorandum is basically a tool used by the government for achieving fair practices within companies, so as to ensure a proper purpose of the company which becomes evident not only to the members within the company itself, but also to the environment in which it operates, such as the government, its creditors, the general public and potential investors by in large. It helps people dealing with the company get a proper and clear insight as to what the company is about, about its rights and limits, so as to make informed decisions which are legal and works in benefit to both sides. It sets up a guiding and acceptable system which stands as a benchmark for the company itself, and allows the government to observe the company by, so as to make sure the company follows up through legal procedures and fair practices that ensures transparency and quality maintenance in its performance so as to balance all the stakeholders of the company. It helps to keep the company to work soundly in the society in which it operates in a systematic manner which looks after the interests of different sides of people involved in the process of working with the company. It looks after the interests of the creditors, the shareholders who are putting investments on the company, and also potential investors who might put significant investment on the company in the future. It helps different sides to be informed, make educated decisions while giving the firm a set of proper goals and limits which allows it to focus on its purpose and carry out legal acceptable operations and procedures that goes in line with legal entities such as the government, creditors and other stakeholders. The memorandum in a way protects the company itself by keeping it within safe limits by which it can operate, and keeping it operating soundly with its stakeholders and dealing with them effectively through balances means and also by creating articles of association which looks after the best interest of all the members in concern.
The Companies Act requires that the memorandum of association of a company to states its objects of existence and operations. The objects of the company identify the nature of a company’s corporate powers, and works to set the boundaries for those powers. The company is then authorized to pursue those objects explicitly set out by its constitution and conducts its business accordingly. 
Basically the memorandum forms the outer principles and legal boundaries and outlines within which the company has to operate, whereas the articles of association is the subordinate of the clauses of memorandum that bring about the details of how the company will function according to the memorandum in its day to day operation; both the memorandum and the articles of association complement each other, the memorandum outlines the purpose and basic broader guidelines for the company, where as the articles of association details those principles which can be carried out by members of the company so as to follow through the clauses within the memorandum. Both balances each other, and one cannot function properly without the other. The memorandum is what the government and court designates for the company, whereas the company establishes its own articles of association as it seems fit to run its organization in the best possible manner which also maximized the company’s performance and output to its clients and works in proper harmony and coordination between its members in concern.
Wikipedia. “Memorandum of association” [Online] Available http://en.wikipedia.org/wiki/Memorandum_of_association, December 01, 2010
Wikipedia. Association of articles, [Online] Available
http://en.wikipedia.org/wiki/Articles_of_association, December 01, 2010
Masum, A.M,The Memorandum and Articles of Association (October 2010)
Gillhams.”Business & Commercial Companies: Internal Governance”, [Online] Available http://www.gillhams.com/articles/136.cfm, December 01, 2010
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 A.M.Masum,”The Memorandum and Articles of Association”(October 2010), 1
 Wikipedia. Memorandum of association, Retrieved December 01, 2010 from http://en.wikipedia.org/wiki/Memorandum_of_association
 A.M.Masum,”The Memorandum and Articles of Association”(October 2010), 1
 Lord Cairns, Riche
 Wikipedia. Association of articles, Retrieved December 01, 2010 from http://en.wikipedia.org/wiki/Articles_of_association
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