17
Nov

Constitution of the company

As part of the registration procedure both public and private companies must provide a constitution which sets out the powers of the company and allocates them to the company’s organs, usually the general meeting and the Board of Directors. This constitution consists of two documents: the Memorandum of Association and the Articles of Association.

The memorandum

The memorandum is addressed to the general public and contains the company name, its share capital, the address of its registered office, the objects of the company and a statement that the liability of its members is limited. A private company needs at least one person to subscribe to the memorandum and a public company two people. The subscribers agree to take some shares or share in the company and become its first shareholders.
The memorandum contains three important aspects of company law:
  1. It announces the limited liability of the members.
  2. It sets out the objects of the company, i.e. it states what the company has been formed to do. This was once a very complex area of study for company lawyers because of the tendency of companies to change the nature of their business without changing – or because they were unable to change – their
    objects clause. Companies can choose to have a restrictive objects clause if they wish but in general the objects clause issue should recede further.
    However it still forms an important part of company law.
  3. The share capital in the memorandum is known as the nominal or authorised share capital. It represents the amount of share capital that could be issued to investors. Once an amount has been issued to investors that amount is called the issued share capital. The memorandum will also state the amounts that the authorised share capital is subdivided into, for example £100 subdivided into shares of £1 each. The value given to each share is known as its ‘par’ or ‘nominal’ value. Shares can be fully paid, partly paid or even unpaid. With partly and unpaid shares the shareholder can be called upon to pay for them at a later date. Shares may also be paid for in goods and services and not necessarily in cash.
The articles of association

The articles of association are a set of rules for running the company. They set out the heart of any company’s organisational structure by allocating power between the Board of Directors (the main management organ) and the general meeting (the main shareholder organ). Those forming a company can provide their own articles.The articles can be altered if three-quarters of the members (by a special resolution) vote to do so. Therefore while the Board is the primary management organ under the constitution it is subject to the continuing approval of the shareholders in general meeting.
Advantages:
  • Companies are designed as investment vehicles. Companies have the ability to subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment.
  • Limited liability also minimises the risk for investors and is said to encourage investment. It is also said to allow managers to take greater risk in the knowledge that the shareholders will not lose everything.
  • The constitution of the company provides a clear organisational structure which is essential in a business venture where you have large numbers of participants.
Disadvantages:
  • Forming a company and complying with company law is expensive and time consuming.
  • It also appears to be an inappropriately complex organisational form for small businesses, where the Board of Directors and the shareholders are often the same people (we discuss this further below).
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