Understanding Memorandum of Association

Updated on : Jan. 31, 2023 - 5 p.m. 17 min read.

If you're starting a new business or thinking about incorporating your existing one, you may have heard the term "Memorandum of Association" thrown around. But what exactly is it, and why is it so important? In short, the Memorandum of Association is a legal document that outlines the fundamental principles and objectives of a company. It's essentially the blueprint for your business, defining what your company does, how it operates, and who is responsible for what. But for many first-time entrepreneurs, navigating the world of legal jargon and corporate law can be overwhelming. That's why we've put together this beginner's guide to help you understand what a Memorandum of Association is, why it's important, and what you need to include in yours. Whether you're starting a small business or planning to go public, understanding the Memorandum of Association is crucial for setting your company up for success. So let's dive in and demystify this essential legal document!

Importance of Memorandum of Association

The Memorandum of Association is a legal document that describes the basic framework and objectives of a company. It outlines the company's purpose, its registered office address, the names of its shareholders, and the amount of share capital they have each subscribed. This document is essential as it serves as a reference point for the company's stakeholders such as its shareholders, directors, and creditors. It is also one of the documents required to be submitted to the registrar of companies when incorporating a new company.

One of the most critical functions of the Memorandum of Association is that it sets out the company's objectives and purpose. This information is essential for potential investors, creditors, and partners as it allows them to understand what the company is about and what its long-term goals are. It also acts as a guide for the company's directors, helping them to focus on the company's objectives and to make decisions based on those objectives. Additionally, the Memorandum of Association provides a degree of protection to shareholders by ensuring that the company is run in accordance with its stated objectives and within the law.

Contents of Memorandum of Association

The Memorandum of Association is divided into several sections, each of which serves a specific purpose. The first section is the name clause, which specifies the name of the company. This name must be unique and not similar to any other registered company. The second section is the registered office clause, which provides the address of the company's registered office. This address must be a physical location and not a PO box.

The third section is the object clause, which outlines the company's objectives and purpose. This clause must be drafted with care as it defines the scope of the company's activities and cannot be altered without the approval of the company's shareholders. The fourth section is the liability clause, which specifies the liability of the company's shareholders. This clause can either be limited or unlimited, depending on the company's structure.

The final section is the capital clause, which outlines the company's share capital and the number of shares available for purchase. This clause also defines the value of each share and the rights attached to them. It is important to note that the Memorandum of Association must be signed by each shareholder in the presence of a witness.

Memorandum of Association vs Articles of Association

While the Memorandum of Association sets out the company's fundamental principles and objectives, the Articles of Association provide more detailed and specific instructions on how the company will operate. The Articles of Association are a set of rules and regulations that govern the internal affairs of the company, such as the appointment of directors, the conduct of meetings, the issue and transfer of shares, and the distribution of profits.

Unlike the Memorandum of Association, which cannot be altered without the approval of the company's shareholders, the Articles of Association can be amended by the company's directors or shareholders. However, any changes to the Articles of Association must be made in accordance with the procedures set out in the company's Memorandum of Association. Together, these two documents provide a comprehensive framework for the company's operation and management.

How to draft a Memorandum of Association

Drafting a Memorandum of Association can be a complex process, and it is advisable to seek the assistance of a legal professional. However, if you are starting a small business, you may be able to draft the Memorandum of Association yourself.

The first step in drafting the Memorandum of Association is to determine the company's name and registered office address. Once these have been established, you can begin drafting the object clause, which outlines the company's objectives and purpose. This clause should be carefully drafted to ensure that it accurately reflects the company's goals and objectives.

The liability clause should also be drafted with care, as it defines the extent of the shareholders' liability. The capital clause should specify the number of shares available for purchase and their value, as well as the rights attached to them. Once the Memorandum of Association has been drafted, it must be signed by each shareholder in the presence of a witness.

Legal requirements for Memorandum of Association

The Memorandum of Association must comply with certain legal requirements, including the Companies Act 2006. The Act requires that the Memorandum of Association must be in writing and signed by each shareholder in the presence of a witness. It must also include the company's name, registered office address, and the object clause.

The object clause must be drafted in accordance with the law and must not include any illegal activities. The liability clause must specify whether the shareholders' liability is limited or unlimited, and the capital clause must comply with the Companies Act 2006. The Memorandum of Association must be submitted to the registrar of companies when incorporating a new company.

Altering Memorandum of Association

The Memorandum of Association can only be altered with the approval of the company's shareholders. Any changes to the Memorandum of Association must be made in accordance with the procedures set out in the company's Articles of Association.

If the company wishes to alter the object clause, this must be done by passing a special resolution. The resolution must be approved by 75% of the shareholders and must be filed with the registrar of companies. Any changes to the liability or capital clauses must also be approved by the shareholders.

Common mistakes to avoid while drafting Memorandum of Association

One common mistake that many first-time entrepreneurs make when drafting the Memorandum of Association is failing to include a comprehensive object clause. This clause is essential as it defines the company's purpose and objectives. It should be drafted with care and should accurately reflect the company's long-term goals.

Another common mistake is failing to comply with the legal requirements for the Memorandum of Association. The document must be in writing and must be signed by each shareholder in the presence of a witness. It must also include the company's name, registered office address, and the object, liability, and capital clauses.

Finally, it is important to ensure that the Memorandum of Association is consistent with the company's Articles of Association. Any inconsistencies between the two documents can cause confusion and may lead to disputes.

Role of Memorandum of Association in company registration

The Memorandum of Association is one of the documents required to be submitted to the registrar of companies when incorporating a new company. It is an essential document as it sets out the company's objectives and purpose, and provides a reference point for the company's stakeholders.

In addition to the Memorandum of Association, the company must also submit its Articles of Association, a completed registration form, and the appropriate fee. Once these documents have been submitted and approved, the company will be registered with the Companies House and will be able to begin trading.

In a memorandum of affiliation, the following information is often included:

Name of the company: The official name of the company is stated in the memorandum.
Objectives: The memorandum outlines the company's main objectives, such as manufacturing goods, trading, or providing services.
Powers: This section sets out the powers of the company, including the ability to borrow money, acquire and dispose of property, and enter into contracts.
Capital: The memorandum specifies the authorized share capital of the company and the number of shares into which it is divided.
Liability of members: The memorandum defines the liability of members, whether it is limited by shares or unlimited.
Registered office: The address of the company's registered office is stated in the memorandum.
Subscribing members: The names, addresses, and occupations of the subscribing members (founders) are included in the memorandum.

Clauses in the Memorandum of Association

The clauses of an MOA can vary depending on the specific agreement, but some common clauses include:

Purpose and Objectives: This clause outlines the purpose of the agreement and the goals that both parties hope to achieve.
Scope of Cooperation: This clause defines the specific activities that the parties will undertake as part of their partnership.
Roles and Responsibilities: This clause outlines the duties and responsibilities of each party and specifies how they will work together to achieve the goals of the agreement.
Funding and Budget: This clause details the financial arrangements between the parties, including any funding provided by one party to the other.
Timeframe: This clause establishes the start and end dates of the agreement and any deadlines for the completion of specific activities.
Termination and Amendment: This clause outlines the conditions under which the agreement may be terminated by either party and the process for making changes to the agreement.
Confidentiality and Non-Disclosure: This clause outlines the obligations of both parties to maintain the confidentiality of certain information and not disclose it to third parties without the other party's consent.
Dispute Resolution: This clause outlines the process for resolving disputes that may arise between the parties.
Governing Law: This clause specifies the jurisdiction and laws that will govern the agreement.
Signature and Effective Date: This clause includes the signature lines for both parties and the effective date of the agreement.

An MoU is not legally binding, but it provides a framework for future cooperation and establishes a mutual understanding between the parties. It is important that the MoU be drafted carefully and accurately to ensure that it meets the needs and expectations of all parties involved.

Uses of Memorandum of Association

A Memorandum of Understanding (MoU) is a document used to establish a formal agreement between two or more parties. MoUs are typically used to establish a general understanding of the goals and objectives of a relationship, and to provide a framework for future cooperation. Some common uses of MoUs include:

Collaboration agreements: MoUs can be used to establish partnerships between organizations for joint projects or initiatives.
International agreements: MoUs are often used in international relations to establish cooperation between countries.
Business partnerships: MoUs can be used by businesses to establish partnerships or joint ventures.
Research agreements: MoUs can be used to establish research collaborations between universities, research institutes, or private sector organizations.
Non-binding contracts: MoUs can serve as a precursor to a more formal agreement, such as a contract, and help to define the terms and conditions of a future relationship.
Grant agreements: MoUs can be used by foundations, government agencies, or other funding organizations to establish the terms and conditions of a grant.
Memorandum of Association: In some countries, MoUs are used to establish the incorporation of a company or a society.

MoUs are flexible and can be used to establish relationships in a wide range of contexts. It is important that memoranda of understanding be drafted carefully and accurately to ensure that they accurately reflect the goals and expectations of the parties involved.

Conclusion

The Memorandum of Association is a crucial document that defines the fundamental principles and objectives of a company. It serves as a reference point for the company's stakeholders and is one of the documents required to be submitted to the registrar of companies when incorporating a new company.

When drafting the Memorandum of Association, it is important to ensure that it accurately reflects the company's goals and objectives, and that it complies with the legal requirements. It should be consistent with the company's Articles of Association, and any changes to it must be made in accordance with the procedures set out in the Articles of Association.

By understanding the importance of the Memorandum of Association and how to draft it correctly, you can set your company up for success and ensure that it operates in accordance with its stated objectives and within the law.

By Esha Arora

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