Should you care about memorandum and articles of association?

One of the first steps of forming a company is the preparation of Memorandum of Association (MoA) and Articles of Association (AoA). These are regarded as a company's constitution or charter documents; so, not to one's surprise, the status of 'constitution' is just as important and significant as it sounds. 

The definition of Memorandum of Association, contained in Section 2(n) of the Companies Act, 1994 stipulates the Memorandum of Association as "originally framed or as altered from time to time in pursuance of the provisions of this Act", however, it is not very elaborate or helpful for understanding the concept and realm of MoA. 

The MoA is a document containing the objects of the company, i.e., the businesses/activities which the proposed company wants to carry out. This is the overarching document regulating the company's activities, as it identifies the possible scope of the company's operation. If a company acts beyond the stated object, then the action will be regarded as ultra vires to the MoA or beyond the legal authority of the Company, and accordingly, be void. 

Section 6 of the Companies Act, 1994 stipulates the mandatory insertions in the MoA of a company. These include the name of the company with 'limited' as the last word in its name; the address of the company's registered office; the objects of the company; a statement that the liabilities of its members/shareholders are limited; and the amount of share capital and classes thereof, divided into shares of a fixed amount. Each subscriber of the MoA is required to take at least 1 (one) share. 

The area where one should focus while drafting the MoA is the object clause. In preparing the object clause, one should bear in mind that this has to be done in a pre-set format prescribed by the Registrar of Joint Stock Companies and Firms (RJSC). There can be seven clauses containing a maximum of 1,000 characters with two additional clauses enabling the company to enter joint ventures, partnerships, mergers, etc. and issue third party guarantees.  As far as the contents of the objects are concerned, the rule is simple: it should be on par with the kind of the businesses/activities that the company intends to perform. So, for example, if you plan to carry out a construction business, you should state so, and not state 'shipping business'. However, with the character limit in mind, while including the objects in MoA, one has to be specific as well as broad, as nowadays, businesses are conducted in a very fluid and interconnected manner. As a result, a company engaged in the construction business may well involve itself in the trading of real estate. Stipulating that all the activities incidental and in furtherance of the objects, it may be a smart method of widening the ambit of the company's specific object clause. 

It is wise to have a MoA that contains a list of objects as exhaustively as possible, as alterations of Memorandum is a time-consuming and expensive procedure requiring not only the permission of the ¾ of the shareholders of the company present and voting at an Extraordinary General Meeting but also of the Honorable High Court Division (HCD) of the Supreme Court of Bangladesh. However, it should be noted that the permission of the HCD is required only when alteration of object clauses is under consideration. If one wants to change or alter the name of the company or the authorised capital of the company, the same can be done by obtaining permission of the shareholders of the company via a special resolution.

In addition to MoA, another instrument that supplements a MoA in regulating a company's functions, working methodology and goal is its Articles of Association or AoA. It defines how activities are to be managed within the company, including the process for appointing directors and the handling of financial records. It can be regarded as a user's manual for a company, outlining the procedures for accomplishing necessary day-to-day operations of the Company. But often, entrepreneurs/sponsors do not bother to know what is in the Articles of Association and, a typical piece of document is subscribed to, which may not fulfil the actual need of, or understanding between, the entrepreneurs/co-founders.

Section 2 (a) of the Companies Act, 1994 defines AoAs as the regulations contained in Schedule I to the Act. One may choose to adopt the whole or part of Schedule I to be the company's AoA. Alternatively, one may also draw up separate regulations. However, it should be noted that some regulations contained in Schedule I of the Companies Act, 1994 about meetings, voting, notice, qualification of directors, books of accounts etc. shall be deemed to be included by the law in the area. Customarily, the companies adopt their own articles and the mandatory regulations of Schedule-I are automatically included. 

The content and terms of AoA in Bangladesh will generally contain the directives regarding shares, different classes of shares, share certificates, regulation about share transfers, dividends, procedures of general and board meetings, the quorum of meetings, powers and duties of directors, operations and signatories of the bank accounts, indemnity, insurance and winding-up process, etc. 

If you are an entrepreneur or investor, you may not be interested in all the legal nitty-gritty of the AoA. However, some points need to be given thought at the incorporation stage of the company to ensure that your interests are protected. Broadly, you should ask yourself the level of control you want the directors, and especially, the Managing Director/Chief Executive Officer to have (powers and duties of the directors), the level of control one has as a shareholder/director (whether presence/voting is mandatory on important decisions), the restrictions on share transfers, shareholders'/directors' rights of access to financial and other records of the company, shareholders' rights in the event of issuance of new shares (to ensure that the shares of the founders/shareholders are not diluted without their consent), etc.

The Articles of Association are not set in stone and may need to be revised over time as the business evolves and different necessities arise to accommodate varying interests of different shareholders. Accordingly, alteration of the Articles of Association can be done as per Section 20 of the Companies Act, 1994. The section provides that to alter, exclude and add articles the company has to pass a special resolution, i.e., approved by ¾  majority of the shareholders present in the meeting. However, the proposed change must be in the best interest of the whole company, as opposed to being in the best interest of some members of the company. Moreover, in altering the articles, one cannot remove the power to make any further changes to the AoA in the future. 

At the time of incorporation of the company, both the MoA and AoA has to be filed together with the RJSC. However, for ease of business, nowadays, the MoA and AoA are submitted with the RJSC electronically and during submission, one has to gradually address the fields for inclusions for most of the information required by law as stated above. 

If you are an entrepreneur who wants to form and incorporate a company to carry on business activities of any kind, you must not undermine the importance of MoAs and AoAs. Moreover, at the incorporation stage of the company, utmost care should be taken while preparing these documents. This is because the object clause in the MoA is the yardstick against which the validity and enforceability of the directors' actions can be measured while the AoA is a crucial document for corporate governance. 

Farhana Khan is an advocate at the Supreme Court of Bangladesh and a partner at AS and Associates

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.