LEGAL ASPECTS OF
BUSINESS
Syllabus
UNIT 4
Company – Definition-Characteristics - Kinds of Companies –
Formation-Incorporation of Company-Memorandum of
Association – Contents - Articles of Association - Contents –
– Prospectus – Contents-Liabilities in Misstatements of
prospectus(as per companies act 2013)
What is a Company
According to Section 2 (20) of the Company Act 2013 "Company means a
company incorporated under this Act or any previous Company Law."
In general, a company is an artificial person, created by law that has a
separate legal entity, perpetual succession, and common seal and has limited
liability. It is a voluntary association of person who together contributes in the
capital of the company to do business.
A company is a legal entity formed by a group of individuals to engage in and
operate a business—commercial or industrial—enterprise.
A company may be organized in various ways for tax and financial liability
purposes depending on the corporate law of its jurisdiction.
Characteristics of a Company
Separate legal entity
Limited liability
Perpetual succession
Common seal
Transferability of shares
Separate property
Capacity to sue
Kinds of Companies
Classification on the basis of incorporation Classification on the basis of number of members
Statutory companies Private company
Registered companies Public company
Classification on the basis liability Classification on the basis of control
Companies with limited liabilities Holding company
Limited by shares Subsidiary company
Limited by guarantee Classification on the basis of ownership
Unlimited companies Government company
Foreign company
Memorandum of Association
A Memorandum of Association (MoA) represents the charter of the company.
It is a legal document prepared during the formation and registration process of a
company to define its relationship with shareholders and it specifies the objectives
for which the company has been formed.
The company can undertake only those activities that are mentioned in the
Memorandum of Association.
MoA lays down the boundary beyond which the actions of the company cannot
go.
Contents - MoA
The Name Clause
The Registered Office Clause
The Object Clause
The Liability Clause
The Capital Clause
The association clause
Articles of Association
The Articles of Association of a company are that which prescribe the rules,
regulations and the bye-laws for the internal management of the company, the conduct
of its business, and is a document of paramount significance in the life of a company.
The Articles of a company have often been compared to a rule book of the company’s
working, that regulates the management and powers of the company and its officers.
It prescribes several details of the company’s inner workings such as the manner of
making calls, director’s/employees qualifications, powers and duties of auditors,
forfeiture of shares etc.
Articles of association form a document that specifies the regulations for a company's
operations and defines the company's purpose.
The document lays out how tasks are to be accomplished within the organization,
including the process for appointing directors and the handling of financial records.
Articles of association can be thought of as a user's manual for a company, defining its
purpose and outlining the methodology for accomplishing necessary day-to-day tasks.
Contents - Articles of Association
Share capital, rights of shareholder, variation of these rights, payment of commissions,
share certificate
Lien on shares
Calls on shares
Transfer of shares
Transmission of shares
Forfeiture of shares
Conversion of shares into stock
Share warrants
Alteration of capital
Manager
Secretary
Dividends and reserves
Winding up
Capitalization of profits
Distinction Between Memorandum and Articles of
Association
Memorandum of Association Articles of Association
1. Contains fundamental conditions upon 1. Contain the provisions for internal
which the company is incorporated regulations of the company.
2. Meant for the benefit and clarity of the 2. Regulate the relationship between the
public and the creditors, and the company and its members, as well amongst
shareholders.
the members themselves.
3. Lays down the area beyond which the
company’s conduct cannot go. 3. Articles establish the regulations for
working within that area.
4. Memorandum lays down the parameters for
the articles to function. 4. Articles prescribe details within those
5. Can only be altered under specific parameters.
circumstances and only as per the 5. Articles can be altered a lot more easily, by
provisions of the Companies Act, 2013. passing a special resolution.
Permission of the Central Government is
also required in certain cases. 6. Articles cannot include provisions contrary
6. Memorandum cannot include provisions to the memorandum. Articles are subsidiary
contrary to the Companies Act. to both the Companies Act and the
Memorandum is only subsidiary to the Memorandum.
Companies Act.
Prospectus
The Companies Act, 2013 defines a prospectus under section 2(70).
Prospectus can be defined as “any document which is described or issued as a
prospectus”.
This also includes any notice, circular, advertisement or any other document
acting as an invitation to offers from the public.
Such an invitation to offer should be for the purchase of any securities of a
corporate body.
Contents - Prospectus
Name of the Company
Registered Address of Company
Objects of the Company
Purpose of the issue
Nature of Business
Capital structure of Company
Name and address of Signatories and no of shares subscribed by them
Qualification shares of the Directors
Particulars of Debentures and redeemable preference shares
Remuneration of Directors and Promoters
Minimum Subscription for allotment
Date of opening and closing of issue
Details of Underwriter
Underwriting Commission and Brokerage
Name and address of Auditor, Company Secretary, Banker and Trustee of Company
Particulars of material documents
Expected rate of dividend and voting rights
Types- Prospectus
Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013
Section 25 (1). When a company allows or agrees to allot any securities of the company,
the document is considered as a deemed prospectus via which the offer is made to
investors. Any document which offers the sale of securities to the public is deemed to be a
prospectus by implication of law.
Red Herring Prospectus – Red herring prospectus does not contain all information about
the prices of securities offered and the number of securities to be issued. According to the
act, the firm should issue this prospectus to the registrar at least three before the opening of
the offer and subscription list.
Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act,
2013. Shelf prospectus is issued when a company or any public financial institution offers
one or more securities to the public. A company shall provide a validity period of the
prospectus, which should not be more than one year. The validity period starts with the
commencement of the first offer. There is no need for a prospectus on further offers. The
organization must provide an information memorandum when filing the shelf prospectus.
Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient
features of the prospectus as specified by SEBI. This type of prospectus includes all the
information in brief, which gives a summary to the investor to make further decisions. A
company cannot issue an application form for the purchase of securities unless an abridged
prospectus accompanies such a form.
Misstatements in prospectus
Statement of lieu in prospectus
The Statement in Lieu of Prospectus is a document filed with the Registrar of the
Companies ( ROC ) when the company has not issued prospectus to the public for
inviting them to subscribe for shares.
The statement must contain the signatures of all the directors or their agents
authorized in writing. It is similar to a prospectus but contains brief information.
The Statement in Lieu of Prospectus needs to be filed with the registrar if the
company does not issues prospectus or the company issued prospectus but
because minimum subscription has not been received the company has not
proceeded for the allotment of shares.
