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EORUPA SCIENCE&COMMERCE ACADEMY

Q. No. 10 a:Describe briefly the three basic legal documents of a Joint Stock Company? ANSWER:

THREE BASIC LEGAL DOCUMENTS


INTRODUCTION: The joint stock company is the 3rd major form of business organization. It has become very important in the modern business world due to its large capital and operations. However there are certain documents which are very important for the operation of a company. There are three basic legal documents of a company. These are: i. Memorandum of Association ii. Articles of Association iii. Prospectus 1: MEMORANDUM OF ASSOCIATION: Memorandum of association is the basic document of a joint stock company. It is known as the charger of the company. It sets out the limits outside which the company cannot go. Its main purpose is to enable shareholders, creditors and all those who deal with the company to know what are the boundaries of the company. According to Lord Cairns: The memorandum of association of the company is its charter and defines the limitations of the powers of the company established under the ordinance. It may be noted here that memorandum of association is the boundary line for the objectives and rights of the company which cannot be crossed. As it has been observed by Lord Cairns, The directors and shareholders even if they are unanimous cannot do things which are not authorized by the memorandum. Method of preparing Memorandum of Association: The memorandum must be prepared: i. Very carefully ii. Printed. iii. Divided into different paragraphs. iv. Numbered consecutively. v. Stamped according to the provision of companies ordinance. vi. Singed by each subscriber in the presence of one witness. vii. Attestation of Memorandum of Association. viii. Registration of Memorandum of Association with the registrar. CLAUSES OF MEMORANDUM: The main clauses of the memorandum of association of a company limited by shares have been described in section 16, 17 and 18 of the companies ordinance as under: a. Name Clause: This clause states the name of the company. A company may adopt any name but it should not be identical to the name of an existing company registered with the Registrar of companies. The companies ordinance provides that the name of company must end with the word limited so that all the persons dealing with the company must know that their liability is limited to the extent of their shares. In case of a private limited company, the words private limited are to be used as the last word of the name. Prepared By: H. ABDUL REHMAN 0321-6485593

EORUPA SCIENCE&COMMERCE ACADEMY


The words empress, royal king, impartial, state, federal must not be used with prior sanction of the government. b. Registered Office Clause: According to this clause of company must have a registered office at which all communications and notices are to be addressed. The memorandum will only state the name of the province where office is situated, not necessarily the exact address, and the name of the city where office is situated. c. Object Clause: This is the most important clause in the memorandum. It clearly defines the sphere companys activities. It indicates a series of objects for which the company is started. Any business activity carried outside the territories specified in the object clause of memorandum is and void. d. Liability Clause: The clause of memorandum contains a declaration that the liability of the shareholders is limited to the extent of the value of shares held by them. e. Capital Clause: The clause is required to specify the amount of authorized capital with which the company proposes to be registered and secondly the divisions of that capital into shares of a fixed amount. f. Declaration Clause: This clause contains a declaration by the subscribers (7 persons in public company and 2 in private limited companies) that they are desirous of forming a company and agree to have number of written against their respective names. The subscriber is required to take at least one share written against their respective names. The subscriber is required to take at least one share. ALTERATION OF MEMORANDUM: Any clause in the memorandum may be altered by following condition laid down in the companies ordinance. 2: ARTICLES OF ASSOCIATION: Meaning: The articles of association are the regulations or by laws, which govern the internal organization and conduct of a company. In other words, it is concerned with the procedural matters in the routine conduct of the affairs of the company. Explanation: The articles of association describe the powers of the director, other officers, and shareholders as to voting etc. It also describes the mode and form in which changes in the regulation of the company, may from tie to time, by made. The articles of association subordinate to the memorandum of association cannot go beyond the limit set by it. Method of preparing Articles of Association: The articles must be: (a) Printed (b) Divided into various paragraphs (c) Numbered consecutively. (d) Stamped according to the provision of the companies ordinance (e) Singed by each members to the articles of association in the presence of one witness. (f) Attestation of A O A (g) Registration of A O A with the registrar Contents of Articles of Association: The main contents of the articles of association are as under:-1) Share capital and its division into various classes. 2) Rules regarding underwriting commission. 3) Transfer and transmission of shares. Prepared By: H. ABDUL REHMAN 0321-6485593

EORUPA SCIENCE&COMMERCE ACADEMY


4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) Rules relating to forfeiture of shares. Conversion of shares into stock and re-conversion in to shares. Alteration of capital. The functions and powers of directors. Any share qualification required removal and disqualification of directors, their remuneration, retirements by rotation etc. Powers, duties and remuneration of managing agents. Declaration of dividend and reserve. The common seal of the company. Accounts, audit, financial period. Proceedings at shareholders meetings. Proceeding at board of directors meeting. Rules regarding length of notice, quorum, proxy etc. Extent of borrowing powers. Limitation of nature of contract terms and conditions. Rules in respect of issue of debentures. Procedure for winding up of the company.

Alteration of articles of association: According to section 28 of the companies ordinance, a company may alter or add its articles by special resolution. The alteration made in the articles should not conflict with the memorandum. PROSPECTUS: Meaning: The notice, advertisement or other document inviting offer fort the subscription to the share capital of the company is called prospectus. Explanation: After the receipt of certificate of incorporation from the registrar of companies, the promoters of a public company invite the public and financial institutions to subscribe to the capital of the company. Objects of Prospectus: The objects of issuing prospectus is fourfold:-(1) To bring to the notice of the public that a new company has been formed. (2) To convince those who have saving to invest prospects. (3) To keep an authenticated record of the conditions on which the capital has been raised (4) To secure that the directors of the company accepts responsibility for the statements in the prospectus CONTENTS: Following are the important particulars of prospectus: (1) The main object of the company (2) All the points of memorandum. (3) The name and address of the company. (4) The name and address of the director and managing director. (5) Name and value of share. (6) Number and value of shares. (7) Shareholders right regarding vote. (8) Details regarding the interest of directors and promoters. (9) Balance sheet inspection time and place. (10) Preliminary expenses estimate. (11) The minimum subscription on which the directors may allot the share. (12) Amount payable on application. (13) Date, time and condition of contract made by founders. (14) Brief history of the company. Prepared By: H. ABDUL REHMAN 0321-6485593

EORUPA SCIENCE&COMMERCE ACADEMY


(15) Remuneration of directors. (16) The nature of the interest and of each director in all the matters of the company. (17) The name and address of venders. (18) Appointment of chief executive. (19) Balance sheet of previous year. (20) Progress report of previous year. (21) Name and address of under writers.

Prepared By: H. ABDUL REHMAN

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