Difference between Memorandum and Articles of Association, Prospectus

Memorandum of Association

Memorandum of association for a company is like the constitutional law for a country. It is the document which contains the rules regarding constitution and activities of the company. It is a fundamental charter of the company.

It defines the extent of powers of the company, beyond that it cannot go. It is a document filed at the time of incorporation.

It is a public document ie any interested public can get a copy on payment of prescribed fees.

Contents of MoA

1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.

1. Name clause

The first clause of memorandum requires a company to state its name

Rules: Should not adopt identical with or resembles that of an existing company. Ltd for public company and Pvt Ltd for private company. Should not use a name prohibited by the Name and Emblems Act. 

2. Registered office clause

The memorandum must specify the state in which the registered office of the company is to be situated.

3. Object clause

This is the most important clause of the memorandum of association. It defines the object of the company and the extent of its powers. The object of the company must be state very clearly and a company cannot do anything beyond object clause. The objects of the company shall not be illegal or against public policy. 

4. Liability clause

This clause state the nature of liability of members.

5. Capital clause

This clause contains the total amount of capital with which the company is registered. This capital is known as authorized capital or nominal capital or registered capital.

6. Association clause or subscription clause

The memorandum concludes with subscription clause. The memorandum must be subscribed by at least 7 persons in case of public company and 2 in case of private company. Each subscriber must sign the document and write the number of shares taken by him.

Alteration of the Memorandum

The alteration of the memorandum is possible only by strictly following the procedure laid down in the Act

1. Alteration of a name clause

The name of a company can be changed by passing a special resolution and with approval of central govt. If a company is registered with a name which is in the opinion of central govt is identical with or too closely resemble to the name of an existing company, it can be changed by passing an ordinary resolution but with the approval of central govt.

2. Alteration of registered office clause

If the shift of office is within local limits, ie from one place to another place in the same city, town or village that can be done by giving a notice of change to registrar.

If the shift is outside local limits, a special resolution has to be passed.

If the shift is from the jurisdiction of one registrar to another’s the special resolution should be confirmed by the regional director of the state. (New sec 17 A Amendment Act 2000)

3. Alteration of object clause

The alteration of object clause is subject to so many restrictions. A company may change its objects for the following purposes.

1. To carry business more economically or more efficiently.
2. To attain its main purposes by new or improved means.
3. To enlarge or change local area of operation
4. To restrict or abandon any of its objects specified in the memorandum.
5. To amalgamate the company with any other company.
6. to sell or dispose of the whole or any part of the undertaking of the company.

• A special resolution and approval of company law board is necessary for alteration.

4. Alteration of liability clause

Liability clause cannot be altered so as to make the liability of members unlimited.

5. Alteration of capital clause

Alteration can be made to:

1. To increase share capital

2.To convert fully paid share to stock

3.Cancellation of shares  etc

Doctrine of ultra vires

Memorandum contains the rules regarding constitution and activities of the company. It is a fundamental charter of the company. It defines the extent of powers of the company, beyond that it cannot go.

A co can act and function within the limits of memorandum. Any act which is beyond the memorandum is ultra vires the company. Such acts are void.

Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.

The purpose of this doctrine is to helps the shareholders, creditors and every third person dealing with the company to ensure that their investment are not diverted to unauthorized objects.

Articles of Association

Articles of association are the internal regulations of the company and are for the benefit of shareholders. These are the rules and regulation relating to the internal management of a company. The article define the mode and form on which the business of the company is to be carried on.

Company’s articles of association (AOA, called articles of incorporation in some jurisdictions) is a document which, along with the memorandum of association (in cases where it exists) form the company’s constitution, and defines the responsibilities of the directors, the kind of business to be undertaken, and the means by which the shareholders exert control over the board of directors.

Articles of association are very critical documents to corporate operations, as they may regulate both internal and external affairs.

Articles of incorporation, also referred to as the certificate of incorporation or the corporate charter, is a document or charter that establishes the existence of a corporation in the United States and Canada. They generally are filed with the Secretary of State in the U.S. State where the company is incorporated, or other company registrar. An equivalent term for limited liability companies (LLCs) in the United States is articles of organization.

Contents

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:

• The dividend policy and the transferability of shares.
• Valuation of intellectual rights.
• How the day-to-day operations of the company are conducted, such as by a board of directors.
• The issuing of shares (also called stock) and the classes of shares, such as preferred stock and common stock.
• The appointments of directors, which shows whether a shareholder dominates or shares equality with all of the contributors.
• Special voting rights of the Chairperson and their mode of election
• Directors’ meetings, including the quorum number and the percentage of vote needed to pass a motion.
• Confidentiality and the founders’ agreement with penalties for disclosure.
• First right of refusal for purchase rights and counter-bids by a founder.
• Drag-along provisions, or when the majority shareholders force a sale on the other shareholders.
• Determinations for the price paid for shares transferred following cessation of directorship or employment.

Directors

A company is run by the directors, who are appointed by the shareholders. Usually, the shareholders elect a board of directors (BOD) at the annual general meeting (AGM), which may be statutory (e.g. India and the UK).

The number of directors depends on the size of the company and statutory requirements. The chairperson is generally a well-known outsider, but they may be a working executive of the company, typically of an American company. The directors may, or may not, be employees of the company.

Shareholders

In present countries there are usually a few major shareholders who come together to form the company. Each usually, holds the right to nominate, without objection of the other, a certain number of Directors who become nominees for the election by the shareholder body at the AGM. Shareholders may also elect Independent Directors (from the public). The Chair would be a person not associated with the promoters of the company; a person is generally a well-known outsider. Once elected, the BOD manages the company. The shareholders play no part till the next AGM/EGM.

Purpose of the Articles of Association

Companies incorporate for many reasons. Authorities often require the filing of a variety of documents to ensure companies are rule-abiding. The articles of association are the primary source authorities need to assess and grant a company a separate legal identity from its stakeholders.

The whole document is colloquially known as the Articles. The document may detail the name and legal form of the company, its purpose, capital structure, corporate governance, administration of corporate records, and other terms of its existence.

Jurisdictions may also refer to Articles as Memorandum of Association, Articles of Incorporation (AOI), Memorandum of Incorporation, Constitution, or Articles of Organization, to name a few.

Category	Memorandum of Association	Articles of Association
Purpose	Defines business objectives & Conditions of company formation	Specifies the rules and regulations to follow for achieving those goals & the responsibilities of the people involved
Amended	Under special circumstances	Amended after passing the shareholder resolution.
Obligation	For all companies	Only for private limited entities and PLCs
Status	Subordinate to the governing act	Subordinate to the memorandum of association

Prospectus

A prospectus, in finance, is a disclosure document that describes a financial security for potential buyers. It commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company’s business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors. Today, prospectuses are most widely distributed through websites such as EDGAR and its equivalents in other countries.

Contents of a prospectus:

• Address of the registered office of the company.
• Name and address of company secretary, auditors, bankers, underwriters etc.
• Dates of the opening and closing of the issue.
• Declaration about the issue of allotment letters and refunds within the prescribed time.
• A statement by the board of directors about the separate bank account where all monies received out of shares issued are to be transferred.
• Details about underwriting of the issue.
• The authority for the issue and the details of the resolution passed therefore.
• Procedure and time schedule for allotment and issue of securities.
• Capital structure of the company.
• Consent of directors, auditors, and bankers to the issue, expert’s opinion if any.
• Main objects and present business of the company and its location.
• Main object of public offer and terms of the present issue.
• Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
• Details of directors including their appointment and remuneration.
• Disclosure about sources of promoter’s contribution.
• Particulars relation to management perception of risk factors specific to the project, gestation period of the project, extent of progress made in the project and deadlines for completion of the project.

Prospectus for a stock or bond issue

When a company is issuing stocks or bonds, it publishes a prospectus to provide investors with all the information that they need to make an informed decision. The issuer provides both a preliminary and a final prospectus. A preliminary prospectus is the initial offering document that provides details about the proposed transaction. The final prospectus is offered when the offering’s been finalized and is being offered to the public for subscription.

Information in the final prospectus includes the number of shares issued, offering price, company’s financial data, risk factors, use of the proceeds, the dividend policy, and other relevant information. This information helps an investor make an informed decision on whether to invest in the company.

Prospectus for Mutual funds

A mutual fund prospectus is the legal disclosure documents that the SEC requires mutual funds to file and make available to interested investors. The details provided in the document include the fund’s objectives, risks, performance, distribution policy, executive team, investment strategies, etc.

A mutual fund may provide a summary prospectus, which is a few pages long and contains important information that investors require. It may also issue a statutory prospectus, which is long and extremely detailed, to provide investors with as much information as they may need to make a buying decision. Mutual funds are required to give investors the document after the purchase of shares. Investors can also access the information on the fund’s website.

Types:

Shelf Prospectus

A shelf prospectus is filed when a company intends to issue bonds. Bonds are a way for companies to borrow money to raise capital from the public. Unlike lending from a bank, issuing bonds can be a more affordable option. At the same time, as far as investors are concerned, it is an opportunity to get returns through a less risky investment option.

Reading the prospectus before investing in bonds will help you better understand the same. In addition, there are important numbers such as coupon rate, face value, tenure etc., that you should look at before investing in a bond, and all this information is available in a shelf prospectus.

In the case of a shelf prospectus though, the company will not have to file another one to reissue bonds. In fact, a company can issue bonds up to four times once they issue a prospectus.

Red herring prospectus

Thanks to the kind of demand that the IPO market sees these days, the red herring prospectus has become a known name among many investors. For those who don’t know, a red herring prospectus is a document filed to SEBI before an IPO. During an IPO, a private company becomes public, and a lot of information has to be then disclosed to the public. Companies use a red herring prospectus to publicise this information. The document thus will contain their financials, performance numbers, goals, risks etc., making it an ideal record for investors to dig deep and find the potential and risk in investing in the particular company.

Deemed prospectus

Under the implication of law, any document from the company that is meant to sell shares is considered a prospectus. Deemed prospectus becomes important when a company intends to bypass the SEBI laws and issue securities through an intermediary. Here, whenever the company issues securities, even when it is done through a merchant bank or a broker, the company has to issue a document of an offer for sale. This document is called a deemed prospectus. This way, the sale of securities is marked, and investors’ rights are protected even when the company is trying to sell their stocks through intermediaries.

Abridged prospectus

It is a type of prospectus that contains the list of all the prospectus and offers that the company has completed. This is for investors like you to understand more about the company and use it for research in decisions related to investment in the company.