Memorandum Of Association

A Memorandum of Association or MOA is a legal document that a company prepares during registration and formation. It is a company's basic charter; it defines the organization's relationship with shareholders and specifies the business's objectives. Companies can only conduct activities mentioned in this document.

MOA consists of all rules and regulations governing a company's relationship with its shareholders, creditors, and any other person dealing with the business. Having this document is mandatory for any company. Once prepared, an organization's actions cannot go beyond the scope of operations mentioned in it. Prospective shareholders check the contents of the memorandum of the association before investing in a company.

Key Takeaways                                                               

• The memorandum of association meaning refers to a document that defines a company's objectives and scope of operations. It serves as a company's constitution and governs its external affairs. Typically, companies need to prepare an MOA during the registration process.
• There are various advantages of a memorandum of association. For instance, it helps prospective investors decide whether investing in the company is right. Moreover, it defines a company's rights and limitations.
• Companies cannot alter their capital clause without getting written consent from every member.
• The contents of an MOA include name, registered office, object, liability, and association clauses.

The memorandum of association refers to a company's basic charter, symbolizing the organization's foundation. This legal document specifies the purpose of forming the company and consists of all details regarding the organization's structure. Moreover, it clearly defines the company's scope of operations. All actions undertaken by the company beyond the scope are considered 'ultra vires' (beyond the powers) and are thus invalid.

Individuals interested in dealing with a company may check this document to get information concerning the organization, including its powers and basic rights. Preparing an MOA is not mandatory for companies in the US. However, limited liability companies based in European nations like France, the UK, Netherlands and companies in certain Commonwealth countries must prepare this document.

In the UK, companies must deliver the MOA, which includes a statement of compliance, to the Companies House, an executive agency responsible for maintaining the companies register. Also, every company must submit the article of association and application for registration with the MOA. They must prepare this document in the prescribed format found in Schedule 1 and Schedule 2 of The Companies (Registration) Regulations 2008. According to this format, the document must include the following information:

• The registered name of the company.
• Subscription date.
• The act under which the company is formed, i.e., Companies Act 2006.
• All subscribers' names.
• Whether the organization is limited by guarantee or shares

Also, one must remember that all guarantors or initial shareholders agreeing to form the company must sign it.

Before the enforcement of the Companies Act 2006, an MOA included certain provisions which are now part of a company's articles of association.

The following are the different types of MOA:

• Table A: In the case of companies with share capital.
• Table B: Applicable for limited-by-guarantee companies that do not have share capital.
• Table C: When share capital and a guaranteed limit, a company.
• Table D: Applicable for unrestricted companies with no share capital.
• Table E: When an unrestricted company has a share capital.

Let us look at the contents of the memorandum of association in detail.

#1 - Name Clause

The first clause specifies the company's name. That said, there are certain conditions that companies must remember while preparing this document.

• The name must not be misleading.
• Private companies must have the words' Private Limited' at the end. In contrast, public companies' names must end with 'Limited'.

Also, the name must not match that of an already existing company.

#2 - Registered Office Clause

The registered office clause mentions the name of the state where the company has its registered office. This office's physical location helps determine the Registrar of Companies' jurisdiction. Therefore, companies must specify the registered office's full address.

#3 - Object Clause

This is the most crucial part of an MOA because of these reasons:

• First, it clearly defines a company's scope of operations.
• The clause explains how the company will utilize members' capital. This safeguards shareholders' funds as it ensures that the company will only use the money to fulfill certain business purposes.

A company can divide its objectives into these three categories:

• Incidental Objective: It is ancillary to the fulfillment of the primary objective.
• Main Objective: It is a company's primary objective

The third category is 'other objectives.' They include any objective other than the main and incidental objectives.

#4 - Liability Clause

It states the liability of every member of a company. In the case of companies limited by shares, the liability of a member cannot exceed the face value of shares held by them. However, in the case of companies limited by guarantee, the liability clause must define each member's liability. One must remember that this clause is not necessary for unlimited companies.

#5 - Capital Clause

It mentions the maximum amount that a company can raise. This amount is the nominal or authorized capital of the company. The capital clause also explains how the company's capital is divided into preference and equity share capital. Also, all companies must mention the number of shares they put in the equity and preference share capital along with the value.

#6 - Association Clause

It explains that all individuals signing the document wishes to be a part of the company formed by the memorandum.

There are separate alternation procedures for the different clauses. Let us look at them.

#1 - Altering The Name Clause

Companies must pass a special resolution and send the registrar a copy to alter the name clause. Also, the organization must pay certain fees, if necessary. After the change of name is complete, the company receives an updated certificate of incorporation.

#2 - Altering The Registered Office Clause

Companies must apply to change the address of their registered office and pay the necessary fees. The change will only happen once the government approves it. One must note that companies must get the shareholders' consent to alter the registered office clause.  

#3 - Altering The Object Clause

Companies must pass a special resolution to alter their MOA's object clause, and the authority must confirm the change. Also, they must file the document confirming the alteration and the printed copy of the updated memorandum with the Registrar of Companies.

#4 - Altering The Liability Clause

Making changes to the liability clause is only possible if all company members give written consent. Companies can alter the details in the clause by passing a special resolution and sending a copy of the same to the Registrar of Companies.

#5 - Altering The Capital Clause

Companies must pass an ordinary clause to alter their capital clause. Here are some changes they can make to the clause:

• First, increase the nominal or authorized capital.
• Covert any or all of their fully paid-up shares into stock and reconvert them. Into fully paid-up shares.
• Sub-divide the shares.
• Divide or consolidate any or all of the share capital into shares of higher value than the existing ones.

Let us look at a few memorandum of association examples to understand the concept better.

Example #1

The Reserve Bank of India (RBI) has instructed the State Bank of India (SBI) to remove or make changes to over ten clauses in the latter's original memorandum of association. If India's largest lender makes these changes, RBI will only approve SBI's proposal to establish a subsidiary that can offer operational support services.

For instance, an original clause in the MOA said that the company's new subsidiary would offer cash management services, including reconciliation and tracking cash movements between the bank branches and ATMs (automated teller machines). To this, the Reserve Bank of India said that reconciliation services are part of a bank's core activities and must not be offered by a subsidiary. Hence, RBI directed SBI to remove this clause.  

Example #2

Suppose David, James, and Matthew agree to form a company in the UK. To complete the registration procedure, they must prepare a memorandum of association and submit it with the other necessary documents, like the articles of association, to the Companies House.

Some of the crucial details they must include in the MOA are the company's name and objectives. Moreover, they must ensure to specify the company's scope of operations.

Let us look at the benefits and limitations of an MOA.

#1 - Advantages

The following are the advantages of a memorandum of associations:

• First, the document explains the company's scope of activities and objectives. This is beneficial, especially for prospective investors, who can make investments based on such information.
• It provides all details of the company's structure.

Another key benefit of an MOA is that it helps anyone dealing with the company, including creditors and investors, to know about the organization's powers and rights.

#2 - Disadvantages

The following are the disadvantages of an MOA:

• First, preparing this legal document can be time-consuming.
• Suppose an organization specifies in its MOA that it will only conduct business activities in the information technology industry. The activities will be deemed void if it carries out operations in the infrastructure industry.

1. How many clauses are there in the memorandum of association?

There are six clauses in an MOA. They are as follows:
- Name clause
- Object clause
- Association clause
· Registered office clause
- Capital clause
- Liability clause

2. Is memorandum of association the same as articles of association?

An MOA is not the same as a company's articles of association. These two documents have distinct features. Let us look at some of them.
- An MOA regulates a company's external affairs. On the other hand, an AOA governs a company's internal affairs.  
- A company's MOA consists of the basic details of a company and its purpose of establishment. In contrast, an AOA consists of certain guidelines that a company must follow.
- The contents of an MOA include six clauses, which include the name clause and object clause. On the other hand, an AOA consists of information regarding dividends and reserves, voting rights of the members, accounts, audits, alteration of capital, etc.

3. Is memorandum of association a public document?

An MOA is a public document.

4. Who can be subscribers to the memorandum of association?

Any person, individual, or corporate entity can be a subscriber.