Articles of Association

>Explain requirements of memorandum of association

A memorandum is a simple document which states that the subscribers wish to form a company and become members of it. The memorandum of association was an extremely important document containing information concerning the relationship between the company before the Companies Act 2006 and the outside world (e.g: its objectives). The purpose of the memorandum is two fold. 

1. The intending share holder who contemplates the investment of his capital shall know within what field it is to be put at risk. 

2. Anyone who shall deal with the company shall know without reasonable doubt whether the contractual relation into which he contemplates entering with the company is one relating to a matter within its corporate objects. 

At least seven persons in the case of public company and at least two in the case of a private company must subscribe to the memorandum. The memorandum shall be printed, divided into consecutively numbered paragraphs, and shall be signed by each subscriber, with his address, description and occupation added, the presence of at least one witness who will attest the same. According to section 13, the memorandum of association of every company must contain the following clauses: 

1. The name of the company with ‘limited’ as the last word of the name in the case of a public limited company and with ‘private limited’ as the last word in the case of a private limited company. 
2. The state in which the registered office of the company is to be situated. 
3. The objects of the company to be classified as: a). The main objects of the company to be pursued by the company on its incorporation and objects incidental to the attainments of the main objects, and b). Other objects not included above 
4. In the case of companies with object not confined to one state, the states to whose territories the objects extend. 
5. The liability of members is limited if the company is limited by shares or by guarantee. 
6. In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount. An unlimited company need not include items 5 and 6 in its memorandum. 

In the case of a company limited by guarantee, its memorandum of association shall state that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is a member or within or year after wards for the payment of the debts and liabilities of the company. Draw up a memorandum of association in given scenario 1. James is considering setting up a house building business as a private limited company.

He decides to adopt the model article as article of association of his company, so he need to draw up a memorandum of association. The following are certain provisions of the memorandum of association of James’s company.

1. The company’s name is ‘Great James Co. Ltd’.
2. The company is to be a private limited company.
3. The company’s registered office to be situated at No. 50 Main Road of Yangon.
4. The company’s objective is setting up a house building business.
5. The liability of the members is limited.
6. The company’s share capital is A£ 30,000 divided into 30,000 shares of A£1 each.

Draw up certain provisions of article for Mick’s company applying the facts given in scenario 2. 

A company‘s constitution comprises the Articles of Association and any resolution and agreements it makes which affect the constitution. According to s 17 of the Companies Act 2006, the constitution of a company consists of:

• The Article of Association
• Resolutions and agreements that it makes that affects the constitution

The Article of Association is a document that specifies the regulations for a company’s operations. The articles of association define the company’s purpose and lays out how tasks are to be accomplished within the organization, including the process for appointing directors and how financial records will be handled. By applying the facts given in scenario 2, the following are certain clauses of Article of Association of Mick’s company.

1. The company issues only ordinary share. But other two types of shares can be issued if it thinks fit for the benefit of the company.
2. The company prohibits from recognizing the interest of a third party in shares registered in the name of member.
3. The company prevents technicians employed from working in or setting up a similar business.
4. The company allows the alteration of article of association if it is approved by three quarters of member by written resolution.
5. The company increases or reduces the number of director by passing ordinary resolution.

Evaluate the doctrine of ultra vires and its effect

The company’s objects are its aims and purposes. If a company enters into a contract which is outside its objects, that contract is said to be ultra vires. However the rights of third parties to the contract are protected.

The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. In the case of Ashbury Rainway Carriage & Iron Co Ltd v Riche 1875, the company had an objects claue which stated that its objects were to make and sell, or lend on hire, railway carriage and wagons and all kinds of railway plant, fitting, machinery and rolling stock; and to carry on business as mechanical engineers.

The company bought a concession to build a railway in Belgium, subcontracting the work to the defendant. Later the company repudiated the contract.

It was held that constructing a railway was not within the company’s objects so the company did not have capacity to enter into either the concession contract or the sub-contract. 

The contract was void for ultra vires and so the defendant had no right to damages for breach. The members could not ratify it and the company could neither enforce the contract nor be forced into performing its obligation. The expression ultra vires means an act beyond the powers.

Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entirely distinct legal principles. 

Consequently, here we restrict the meaning of ultra vires objects clause of the company’s memorandum. Basic principles included the following: An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified. The doctrine of estoppels usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party A fortiori, a transaction which was fully performed by both parties could not be attacked.

If the contract was fully executory, the defense of ultra vires might be raised by either party. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppels into play, a suit for quasi contract for recovery of benefits conferred was available. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires. 

Explain the contents of a prospectus and listing particulars

A prospectus is a disclosure document that describes a financial security for potential buyers. A prospectus must be published where certain types of securities either are offered to the public or are requested for admission on a regulated market. A prospectus is an invitation to the public to subscribe for, or to purchase, shares or debentures in a company.

A prospectus is required when a company is applying for admission to listing or, if it is already listed, wishes to issue additional or a new class of shares or debentures. The transposing British registration puts any person responsible for the prospectus who knows of the change under a duty to notify it to the company or the applicant for admission, if different. It is unclear whether this duty arises if the issuer is unaware of the event and it cannot be said that it should have been. The traditional British prospectus has been a single document containing all the relevant information. Under the Directive it may consist of two documents and incorporate some information by reference.

Where there are two documents, the prospectus will consist of a “registration statement” and a “securities note”. 

The registration statement, containing information about the issuer, can be field with the relevant authority and, if approved, be valid for twelve months. The securities note can then be produced later and contain the information about the scurries on offer plus updated information, if any is needed, about the issuer. When a listed company proposes certain types of transaction it may be required by the Listing Rules to issue a circular to its shareholders, to inform them of the proposal and, in some cases, to obtain their approval.

The public companies are permitted to offer their shares to the public, but may not in fact have chosen to do so. Even if they have, those shares may or not may not be traded on a public share exchange, such as the London Stock Exchange. 

Offering shares to the public and arranging for those shares to be traded on a public market are two separate things, though the public’s willingness to buy the shares offered is likely to be increased if the shares will be traded on a public market. This is because a public share market makes it much easier for a shareholder subsequently to sell his or her shares to another investor, should he or she wish to do so. Consequently, public offerings of shares and the introduction of those shares to trading on a public market often go together.

By and large, the companies legislation makes very few differentiations according to where a public company’s shares have actually been offered to the public or are in fact publicly traded. This is that admission to a public market may bring with it obligations for the company of a recognizably “company law” type, obligations which could have been included in the Act. 

A company seeking to have its shares traded on the main market of the London Stock Exchange must first have them admitted to the “Official List” of securities. Such Listing rules relate mainly to the orderly conduct of the public share market, but they also contain rules regulating the internal affairs of companies, which thus supplement the provisions of the Companies Act and the common law of companies. In short, the fact of listing is being used to identify a small group of very important British companies to which additional company law obligations are attached. 

References:

1. Principle of Modern Company Law, Paul L. Davies, Q.C (Hons), F.B.A, Edition- Eighth Edition, Published in 2008 by Sweet & Maxwell Ltd.
2. https://www.preservearticles.com/201104085069/complete-information-on-memorandum-of-association-of-a-company-its-purpose-contents-a-different-clauses.html
3. https://www.investopedia.com/terms/a/articles-of-association.asp
4. https://www.caclubindia.com/forum/notes-doctrine-of-ultra-vires-effects-and-exceptions-129912.asp#.VDtKJHbZOH8

<

Cite this page