A Memorandum of Association is an important document that states the objectives for which a company is formed.
“The purpose of the memorandum is to enable the shareholders, creditors, and those who deal with the company to know what its permitted range of enterprise is,” according to Lord Macmillan.
The Memorandum of Association, also known as the charter of the company, states the rights, privileges, and powers of the company.
Memorandum of Association must be as detailed as possible, as a company cannot undertake or perform any business or activity that is not stated in the memorandum. The memorandum contains the fundamental conditions upon which only the company is allowed to be incorporated.
Since a company can only exercise those powers which are clearly stated in the Memorandum, it is important to know the contents of the Memorandum of Association. In line with the Companies Act, the Memorandum of Association of a company must contain the following clauses:
The Name Clause: The Name of the Company:
It is important for a company to have a name in order to be identifiable; the company’s name is its identity. A company should not use a name that is similar to that of an already-registered company; words like King, Queen, Emperor, government bodies, and names of world organizations like the U.N.O., W.H.O., World Bank, etc. should not be contained in a company’s name.
For a Public Limited Company, the name of the company should end with the word ‘Limited’ while for a Private Limited Company, the name should end with the words “Private Limited”.
Also read: The Contents of an Articles of Association
The Registered Office of the Company – Registered Office Clause or Situation Clause:
This particular clause states where the registered company is situated. It is not mandatory to state the actual address. You can mention the state in which the registered company is situated. Note that if there is a change in the registered office, the Registered Office Clause of the Memorandum of Association has to be updated accordingly.
The Objects of the Company – The Object Clause:
As mentioned above, a company can only exercise those powers that are clearly stated in the Memorandum, the object clause is an important aspect of the Memorandum of Association.
The first paragraph of your memorandum of association should state the object of the company. This is often referred to as its purpose or reason for existence. It’s important to be clear about what you want your business to do, as this will help ensure that it’s well-aligned with what consumers want from companies in that industry.
Your memorandum could also include details on how long you intend for the company to continue being active (i.e., how long before dissolution). If this is not specified in your memorandum and there are no plans for dissolution within two years after incorporation, then any assets acquired during those two years could potentially be considered ‘held by someone else’ and thus subject to capital gains tax if sold within three years after incorporation
This clause states the liability of the members of the company. This clause is dependent on is the company is limited by shares or guarantees, which will detail the amount each member is liable for in the event that the company winds up.
Members are not liable for any debts of the company. They are also not liable for any other liability of the company, including but not limited to:
- Any unpaid amount on their shares (if they have shares) or debt owed to them by a third party.
- Any injury or damage caused by their negligence in connection with their membership as a member.
The Capital Clause:
The share capital and the maximum amount of capital that can be raised are stated in this clause, as is how the capital is divided into shares. This clause should also state the rights and privileges of shareholders. Unlimited companies do not need to state the capital clause in their Memorandum of Association.
The association will subscribe for a specified number of shares and debentures. The shareholders’ rights are as follows:
- The shareholders have the right to vote at meetings of shareholders, on which occasion they can elect or appoint directors, or reject any proposed resolutions submitted by them. They also have the right to receive information about the affairs of the association and its financial state from time to time; this includes minutes of meetings and reports made by directors.
- Debenture holders have no voting rights but do have certain other powers granted under their debentures (for example, they may require that notices be sent out).
Powers of the company
The powers of the company will be set out in its Memorandum of Association. These include:
- Powers to manage the business. This includes all matters relating to its assets and liabilities, including those relating to finance, property and other transactions with third parties;
- Power over its directors;
- Power over shareholders’ meetings; and
- Power over members’ meetings.
The Association or Subscription Clause:
This clause has the declaration of Association that is made by the signatories. It contains the names and addresses of the first set of subscribers. The minimum number of members of a private company is 2, and 7 for a public company.
The Memorandum of Association can be regarded as the foundation of the company, the constitution that guides the affairs of the company. It also determines the relationship between the outsiders and the company.
A memorandum of association is the start of any company. It is an important document that should be taken seriously. You should check the law and regulations before you sign up for a company, that way you will know what type of entity it is.