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Introduction to Business

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Introduction to Business ­MGT 211
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LESSON 10
LEGAL DOCUMENTS ISSUED BY A COMPANY
BASIC LEGAL DOCUMENTS
A public company must have three basic legal documents.
Basic Legal Documents
Memorandum
Articles of
Prospectus
of Association
Association
The "Memorandum of Association" is the constitution of a company. The "Articles of
Association" are the basic rules to run the business and the Prospectus" is a notice to the
public for the purchase of securities of the company.
MEMORANDUM OF ASSOCIATION
DEFINITION
According to Companies Ordinance, 1984:
"Memorandum means the memorandum of association of a company as originally
framed or as altered from time to time tin pursuance of the provisions of any previous
Companies Act or of this Ordinance."
Explanation
Memorandum of association is known as "Charter of Company", as it sets the limits, which the
company cannot go out of. Through this, the shareholders and creditors can know about the
range of business activities of the company.  Any work or business not stated in the
memorandum cannot be carried out by the management.
The memorandum of public limited company
Must be printed
Divided into paragraphs
Numbered consecutively
signed by the members
Name, occupation, nationality, address and number of shares taken by each
subscriber
CLAUSES OF MEMORANDUM OF ASSOCIATION
The memorandum of association may has the following six clauses:
1. Name Clause
The name of a company should be carefully selected and it must not be similar to any existing
company. The Companies Ordinance provides that the name of a public company must end
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with the word "Limited".
In case of private company the name must end with the words
"(Private) Limited".
2. Situation of Registered Office
The company should have registered head office in the state or province where it wants to
conduct its business. The company cannot start its business without registered head office.
3. Object Clause
This is the most important clause of the memorandum. In this clause it is mentioned that what
type of business company will do. If the company does not work according to its objects then
this action would be considered as illegal.
4. Capital Clause
It is also mentioned in the memorandum that what will be the amount of total capital, its
division in share and the value of each share.
5. Liability Clause
It is clearly written in the memorandum that the liability of the shareholders is limited or
unlimited.
6. Association Clause
This clause contains a declaration by the subscribers (promoters) that they are desirous to
form a company and agree to have a number of shares written against their names.
ALTERNATION IN MEMORANDUM
According to sections 20 and 21 of the Companies Ordinance, any clause of memorandum
can be altered with the sanction of court or Central Government.
DEFINITION
According to Companies Ordinance, 1984:
"Articles mean the articles of association of a company as originally framed or as
altered in accordance with the provisions of any previous Companies Act or this
Ordinance, including so far as they apply to the company, the regulations contained in
Table A in the first schedule."
Explanation
Articles of association are the by-laws of a company. It includes the rules and regulations,
necessary to manage the internal affairs of the company and to achieve the objectives stated
in the memorandum. Articles are responsible for the good conduct of the whole management.
The articles of association must be:
 In a printed form
 Divided into paragraphs
 Numbered consecutively
 Signed by the subscribers
 Properly dated
CONTENTS OF ARTICLES
The articles usually state the rules and regulations about the following matters:
1. Share capital and its division into different types
2. Methods for the transfer of shares
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3. Conversion of shares
4. Alternation in share capital
5. Methods to call the meetings of the company
6. Voting power of members
7. Appointment of directors
8. Powers and duties of directors
9. Right regarding shareholders
10. Proceedings of Directors' meetings
11. Disqualification of directors
12. Seal of the company
13. Dividends and reserves
14. Accounts and their audits
15. Notices to be issued by the company
16. Winding up a company
ALTERNATION IN ARTICLES
The shareholders of the company can change the articles by passing special resolution but
this change should not be against the memorandum and the ordinance.
PROSPECTUS
DEFINITION
According to English Companies Act,
"Any prospectus, circular, notice, advertisement or other invitation, offering to the public
for subscription or purchase any shares or debentures of the company."
Explanation
A prospectus is a notice to general public about the formation of new company. The company
tries to attract the public to purchase its shares through the prospectus, as the terms and
conditions for the purchase of shares and debentures are written in it. There is an application
form in every copy of a prospectus.  Only the public company is required to issue the
prospectus.
CONTENTS OF PROSPECTUS
The important matters to be included in a prospectus are divided in numbers with separate
headings. Some of them are briefly discussed below:
1. Share Capital
Authorized, issued and subscribed capital with basis of allotment.
2. Commission, Brokerage and Tax Exemption
Commission to be paid to the bankers on issue, brokerage and tax exemption on investment in
shares.
3. Brief history and Prospectus
Brief history, main objects and location of the company, information about project, plant, etc.
4. Financial Information
Auditor's report, shareholders' equity and liabilities, share capital, etc.
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5. Board of Directors
Names, addresses and occupations of board of directors.
6. Interest of Directors
Interest of directors in dividends, remuneration to be paid to directors, secretaries, etc.
7. General Information
General information like:
Appointment,, election and powers of directors
Voting rights
Transfer of shares
Quorum of general meeting
8. Miscellaneous
Place of registered office, factory and bankers, consultants, legal advisor of the company, etc.
9. Application and Allotment
The procedure for applying for shares and their allotment is made clear to the prospectus
investor.
Distinction between Memorandum of Association and Articles of Association.
MEMORANDUM OF ASSOCIATION
Memorandum of association is a basic document of a joint stock company. It is known as the
charter of the company. It sets out the limits, which a company cannot go out of. It main
purpose is to enable the shareholders, creditors and all those who deal with the company, to
know about its permitted range of enterprise.
ARTICLES OF ASSOCIATION
Articles of association is a legal document, secondary in importance of memorandum of
association. The articles of association are the regulations by law which govern the internal
organization and conduct of a company.
Distinction between Memorandum of Association and Articles of Association
Memorandum of Association
Articles of Association
________________________________________________________________________
1. Status
It is the charter of the
It contains regulation and
company to regulate the
laws, which govern the
external affairs of the
internal administration and
company
management of the company.
2. Preparation
It is prepared under the
It is prepared under the
provisions of Companies
provisions of Companies
Ordinance, 1984.
Ordinance, 1984, and
memorandum of association
3. Registration
No company can be registered
Articles of association are not
without submitting memorandum
necessary for the registration
to registrar.
of the company.
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4. Limits
This document determines the
Business limits are not
limit of company's business
mentioned in it.
5. Alteration
It is not alterable, but it can be
It can be altered by a special
altered by court and central
resolution at any time.
government.
6. Nature
It deals with external
It deals with internal
contracts.
administration and management
of the company
7. Priority
If there is a conflict between
Priority is not given to articles
memorandum of association
of association.
and articles of association,
then priority is given to
memorandum of association.
8. Incorporation
A public company cannot be
The registration of articles of
incorporated unless the
association by a company,
memorandum of association is
limited by shares, is optional.
submitted to the registrar.
9. Clauses
The memorandum of
The articles are not limited to
association has usually six
six clauses. For example,
clauses, which can be altered
Table A of Companies
as per the requirement.
Ordinance has 85 clauses.
10. Importance
It is most important and
It is the secondary document
primary document of
of the company.
company.
Discus briefly various types of meetings which are held in a joint stock company.
WHAT IS A "MEETING"
"A gathering of two or more persons by previous notice or by mutual arrangement for the
discussion and transaction of some business is called meeting."
SHAREHOLDERS' MEETINGS AND COMPANY'S MEETING
"When the members of a company gather at a certain time and place to discuss the business
and managing affairs it is called meeting of the company."
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Kinds of Company's Meeting
Shareholders'
Directors'
Meetings
Meeting
Statutory
Annual
Extra-
Meeting
General
ordinary
Meeting
Meeting
SHAREHOLDERS' MEETINGS
The meetings, which are called to discus the affairs of the company with shareholders, are
called shareholders' meetings. These meetings have following three kinds:
STATUTORY MEETING
According to section 157, this meting is held only once in the life of a public company. It is the
first meeting of the members of a public limited company. Its main objective is to provide the
shareholders with first hand information about the exact position of company's affairs.
1. By whom and when held
Section 77 of the Companies Ordinance, 1984, makes it compulsory for:
every public company limited by shares,
every public company limited by guarantee, and
every private company converted into public company
that statutory meeting must be held within a period of not less than 3 months and not more
than 6 months from the date at which the company is entitled to commence business.
2. Objects
Its main object is:
To provide exact and latest information about the affairs of the company,
To win the confidence of shareholders of the company, and
To discuss the statutory report.
3. Notice
At least 21 days before the meeting, a notice must be sent to each shareholder along with the
statutory report, by the secretary.
4. How the meeting is called
Under section 157(2) of Companies Ordinance, the directors should send a notice of statutory
meeting, to all the shareholders, at least 21 days before the meeting. Directors also send
statutory report, duly certified by at least 3 directors ­ one of them should be the chief
executive of the company.
5. Privileges to the members
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The members of the company in meeting have the liberty to discuss any matter relating to
company's affairs.
STATUTORY REPORT
The report prepared by the secretary, certified by at least 3 directors ­ one of them being the
chief executive of the company is called statutory report. The statutory report contains the
following information:
1. Share Allotment
Total number of shares allotted and their consideration for allotment.
2. Summary of Cash received
Summary of cash received in respect of shares allotted.
3. Expenses
List of basic expenses of the company.
4. Commission
Detail of commission for the sale of shares, if any.
5. Particulars of Contract
The particulars of contract and their modifications, if any,
6. Particulars of Directors
The names, addresses and occupations of the directors and other officers of the company.
7. Underwriting Contract
The particulars of underwriting contract, if any.
8. List of Arrears
The arrears, if any, due on calls from director or managing agents.
ANNUAL GENERAL MEETING
According to section 158 of Companies Ordinance, every company must hold an annual
general meeting of its shareholders, once in a year. The meeting provides an opportunity to
evaluate and measure the efficiency of the directors and other officers in carrying out the
company's affairs.
1. Notice
A notice of annual general meeting should be sent to the shareholders, at least 21 days before
the date of the meeting.
2. Place of Meeting
In case of listed company, annual general meeting should be held in town where the
registered office of the company is situated.
3. Role of shareholders
The shareholders can criticize the policies of the directors and other officers and can offer
suggestions for their improvement.
4. Occasion
The first meting of this nature must be held within 18 months from the date of incorporation.
The gap between two annual general meetings must not be more than 15 months.
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5. Objects
The main objective of this meeting is to check that ordinary business is being done according
to the rules laid down in articles of association of the company. The directors submit their
report about the affairs of the company during the proceeding year. This report is known as
director's report. Other objectives are:
Election of Directors
Appointment of auditors
Declaration of dividend
Fixation of director's, auditor's and managing agent's remuneration
Auditor's report and balance sheet are presented in the meeting
6. Winding up
According to section 305(b), a company may be wound up by the court if it does not hold the
two consecutive annual general meetings.
EXTRAORDINARY GENERAL MEETING
All the general meetings other than annual general meeting and statutory meeting shall be
called extraordinary general meetings. There is no time limit for it. It may be held from time to
time
1. Right to Call Meeting
(a)
The directors of the company may call extraordinary general meeting for doing
some urgent business.
(b)
This meeting can also be called by the directors, on the request of
shareholders, having not less than one tenth of the voting power.
©
In case the directors fail to call the extraordinary general meeting within 21
days, the shareholders themselves may call the meeting.  In such, case,
meeting must be held within 3 months.
2. Notice
To call the extraordinary meeting, 21 days notice is served.
3. Procedure
The shareholders have to submit their demand to the secretary of the company. With the
consultation of directors, he will arrange to call the meeting.  The company bares the
expenses of the meeting.
4. Objects
To issue the debentures
To alter the memorandum and articles
To alter the share capital of the company
DIRECTOR'S MEETINGS
The members of the company elect their representatives to run the business and management
of the company. These representatives are called the directors of the company and they are
different in numbers in different companies. All the business affairs are settled with mutual
consultation of all directors. So, the meeting called for directors to discuss the policies or to
take the decisions is called directors' meeting.
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1. When is it held?
This meeting must be held at least once in three months and at least four times in a year.
2. Notice
Notice of every meeting must be sent to each directors, otherwise the proceedings of the
meeting may be declared void.
3. Objects
To allot shares
To invest company's fund
To recommend dividend
To keep reserve out of profit
To make loans
To appoint officers or committee
To discuss the contracts of the company
To determine the date of next meeting
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Table of Contents:
  1. INTRODUCTION:CONCEPT OF BUSINESS, KINDS OF INDSTRY, TYPES OF TRADE
  2. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:THE ECONOMIC ENVIRONMENT
  3. BUSINESS ORGANIZATION:Sole Proprietorship, Joint Stock Company, Combination
  4. SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS:ADVANTAGES OF SOLE PROPRIETORSHIP
  5. PARTNERSHIP AND ITS CHARACTERISTICS:ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
  6. PARTNERSHIP (Continued):KINDS OF PARTNERS, PARTNERSHIP AT WILL
  7. PARTNERSHIP (Continued):PARTNESHIP AGREEMENT, CONCLUSION, DUTIES OF PARTNERS
  8. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:ETHICS IN THE WORKPLACE, SOCIAL RESPONSIBILITY
  9. JOINT STOCK COMPANY:PRIVATE COMPANY, PROMOTION STAGE, INCORPORATION STAGE
  10. LEGAL DOCUMENTS ISSUED BY A COMPANY:MEMORANDUM OF ASSOCIATION, CONTENTS OF ARTICLES
  11. WINDING UP OF COMPANY:VOLUNTARY WIDNIGN UP, KINDS OF SHARE CAPITAL
  12. COOPERATIVE SOCIETY:ADVANTAGES OF COOPERATIVE SOCIETY
  13. WHO ARE MANAGERS?:THE MANAGEMENT PROCESS, BASIC MANAGEMENT SKILLS
  14. HUMAN RESOURCE MANAGEMENT:Human Resource Planning
  15. STAFFING:STAFFING THE ORGANIZATION
  16. STAFF TRAINING & DEVELOPMENT:Typical Topics of Employee Training, Training Methods
  17. BUSINESS MANAGERíS RESPONSIBILITY PROFILE:Accountability, Specific responsibilities
  18. COMPENSATION AND BENEFITS:THE LEGAL CONTEXT OF HR MANAGEMENT, DEALING WITH ORGANIZED LABOR
  19. COMPENSATION AND BENEFITS (Continued):MOTIVATION IN THE WORKPLACE
  20. STRATEGIES FOR ENHANCING JOB SATISFACTION AND MORALE
  21. MANAGERIAL STYLES AND LEADERSHIP:Changing Patterns of Leadership
  22. MARKETING:What Is Marketing?, Marketing: Providing Value and Satisfaction
  23. THE MARKETING ENVIRONMENT:THE MARKETING MIX, Product differentiation
  24. MARKET RESEARCH:Market information, Market Segmentation, Market Trends
  25. MARKET RESEARCH PROCESS:Select the research design, Collecting and analyzing data
  26. MARKETING RESEARCH:Data Warehousing and Data Mining
  27. LEARNING EXPERIENCES OF STUDENTS EARNING LOWER LEVEL CREDIT:Discussion Topics, Market Segmentation
  28. UNDERSTANDING CONSUMER BEHAVIOR:The Consumer Buying Process
  29. THE DISTRIBUTION MIX:Intermediaries and Distribution Channels, Distribution of Business Products
  30. PHYSICAL DISTRIBUTION:Transportation Operations, Distribution as a Marketing Strategy
  31. PROMOTION:Information and Exchange Values, Promotional Strategies
  32. ADVERTISING PROMOTION:Advertising Strategies, Advertising Media
  33. PERSONAL SELLING:Personal Selling Situations, The Personal Selling Process
  34. SALES PROMOTIONS:Publicity and Public Relations, Promotional Practices in Small Business
  35. THE PRODUCTIVITY:Responding to the Productivity Challenge, Domestic Productivity
  36. THE PLANNING PROCESS:Strengths, Weaknesses, Threats
  37. TOTAL QUALITY MANAGEMENT:Planning for Quality, Controlling for Quality
  38. TOTAL QUALITY MANAGEMENT (continued):Tools for Total Quality Management
  39. TOTAL QUALITY MANAGEMENT (continued):Process Re-engineering, Emphasizing Quality of Work Life
  40. BUSINESS IN DIGITAL AGE:Types of Information Systems, Telecommunications and Networks
  41. NON-VERBAL COMMUNICATION MODES:Body Movement, Facial Expressions
  42. BUSINESS ORGANIZATIONS:Organization as a System
  43. ACCOUNTING:Accounting Information System, Financial versus Managerial Accounting
  44. TOOLS OF THE ACCOUNTING TRADE:Double-Entry Accounting, Assets
  45. FINANCIAL MANAGEMENT:The Role of the Financial Manager, Short-Term (Operating) Expenditures