Memorandum of Association: Meaning, Objectives, Clauses and Importance in Company Law

Last Updated: 17 Oct 2024

Every company depends much on its Memorandum of Association. Since it defines and sets the boundaries between the company and its owners, stakeholders, and regulatory agencies, it is essentially a very important legal instrument. The Articles of Association define the allowed activity scope and offer the structural structure of the company. Thus, for anybody who has questions regarding persons in the corporate sector, business owners, investors, or specialists specialized in corporate law, the Memorandum of Association is a necessary document.

What is a Memorandum of Association?

Establishing the scope of activities and obligations of a corporation, a memorandum of association is a legally enforceable contract. Moreover, it clarifies the basic criteria defining the allowed activities of a company in a certain jurisdiction. Company law mandates that either a private or public company create a Memorandum of Association (MOA) upon incorporation. When the company is first founded, the petition needs to be filed to the registrar of companies and acts as official documentation controlling it.

The Memorandum of Association especially addresses the hierarchical framework of the corporate organization. Employing thorough rules and defining the processes for handling outside parties, the Articles of Association control the large-scale administration and everyday operations of a company and its internal management.

Objectives of the Memorandum of Association

The company’s mission is stated in the Memorandum of Association. This statement informs shareholders, creditors, and regulators of the company’s mission and operations. The MOA document is public, so anybody can comprehend a corporation’s purpose, jurisdiction, and scope of activity.

The principal motives for the preparation of the Memorandum of Association are:

1. Corporate Powers:

It puts a check on the powers vested with the company so that the company acts within the contours of law.

2. Protection of Shareholders:

The MOA acts as a guideline for the company and prevents the company from coming into activities that might hurt the interests of the shareholders.

3. Compliance with Law:

The document will help in making sure that the company is strictly under the purview of the company law, and most importantly the legal liabilities.

4. Explanation to the Investors and Creditors:

Other third parties such as investors and creditors, may use the MOA for explanation purposes of what type of focus the company will have so that they can be in a better position to provide the much-required clarity and guidance on prudent decisions.

Key Clauses in a Memorandum of Association

The memorandum of association contains various clauses differing in their purpose but are ultimately summed up to give the company its broad legal framework. Many of the clauses involved are referred to in terms of company law, and they significantly define the operating characteristics of a company.

1. Nominal Clause:

It is the clause mentioning the legal name of the company. As per law, public limited companies must append “Ltd.” or “Plc.” in the name, while private limited companies generally prefer “Pvt. Ltd.” or “LLP” or Limited Liability Partnership. The name should not be ambiguous, also should not be a copy of another existing one.

2. Registered Office Clause:

The clause deals with the state or country where the registered office of the company is located. The registered office address plays an important role in receiving all kinds of official correspondence and notices.

3. Object Clause:

It is the most basic clause of the Memorandum of Association, specifying the activities for which the company is legally empowered to conduct. It does not allow the company to exceed the set business objectives and makes shareholders and creditors secure due to this, as it illuminates transparency in the operations. Company law declares that all the actions performed beyond this scope are ultra vires (actions that go beyond the powers of the company), hence not legal.

4. Liability Clause:

It prescribes how much liability the shareholders have to the debt of a company. In most cases, it equals the amount not paid on their shares.

5. Capital Clause:

This clause explains how much share capital has been issued by the company and how much this capital is divided in terms of shares of fixed value. It gives the framework through which a company can raise funds by soliciting a portion of shareholders to provide shares for the company.

6. Association Clause:

In this clause, original shareholders or subscribers declare that they shall form the company and be governed by the MOA.

Memorandum of Association vs. Articles of Association

Although often spoken of together, the memo and the articles of association work to serve two very different purposes within the corporate framework.

•  The Memorandum of Association is writing the outer limit of the company. It focuses on the relationship of a company with the outside world.
• Articles of Association would concern the management and internal regulation of the company’s running. Articles that would further include details on the rights of directors, conventions for general meetings, declaration of dividends, voting rights, the procedure for issuing shares, etc.

Both are compulsorily required in company law; together, they form the constitution of the company.

How MOA Affects Company Law

Since it is a sort of legal contract between the company and its shareholders, the Memorandum of Association plays an important role in company law. According to law, each company must prepare an MOA at the time of its incorporation. Once registered, it binds the company to all its terms and conditions laid down in the MOA.

It is, therefore, critically very important, from a legal point of view, why the Memorandum of Association strictly confines the scope of activities of a company. When a company does anything that is outside what it had specified in its MOA, then that counts to be a very serious kind of penalty and legal consequence. This is all the more so when it pertains to finance, real estate, or insurance.

Company law also often requires that an amendment in the MOA be filed by the companies if they wish to expand or change the scope of their operations. The process of amending an MOA also goes through a hassle with the shareholder’s approval and possibly board resolution along with regulatory approval.

The Process of Drafting and Registering a Memorandum of Association

Preparation of a Memorandum of Association involves much serious thinking over the long-range activities and scope of the company, which it undertakes or would undertake in its legal capacities. An erroneous draft of an MOA in company law can, in fact, hamstring the expansion prospects of the company besides throwing it off the course of business orientations much later.

Here is a general outline of the process.

1. Drafting

The MOA draft is prepared by the legal advisors of the company or the experts with views in consideration of the nature of the business of the company and the aims that it intends to achieve.

2. Shareholders Subscription:

Subscribers to the MOA approve the same relating to the shares of the company to be acquired and the objectives contemplated.

3. Filing with the Registrar:

After it has been approved, the MOA with other incorporation documents is filed with the Registrar of Companies.

4.Scrutiny by Authorities:

The registrar scrutinizes the document for conformity with the provisions of company law and will seek the introduction of amendments if there is nonconformity.

5. Certificate of Incorporation:

After the approval of the MOA, the issuing authority issues a certificate of incorporation to the company, which then can start the business.

Conclusion

Apart from a legal obligation, a Memorandum of Association is a fundamental stone in building the corporate identity of a corporation. It guarantees legality, support for shareholders, and provision of transparency in access to knowledge for external stakeholders, so defining the boundary of operations for a corporation. The Memorandum of Association can decide which path a company chooses whether it is founded or when studying company law. Along with the Articles of Association, this phrase constitutes the basic foundation of corporate governance of a company to guarantee that a concern operates within the legal frame defined by its founders and the law.

Frequently Asked Questions

1. What is the difference between the Memorandum of Association and the Articles of Association?

The difference between the two, therefore, is that the Memorandum of Association deals with the external boundaries of the company and its relationship with other entities outside the company whereas the Articles of Association deal with internal management and operational procedures.

2. Why is a Memorandum of Association required in company law?

It outlines the level of business activities a company can be involved in, thus confined to the legal limits of what the company does. It serves as a compliance and governance document.

3. Can a company alter its Memorandum of Association?

Of course, the company may change its MOA. Changing the MOA requires shareholders’ approval, obtaining board resolution, and sometimes regulatory approval. 

4. Who writes a Memorandum of Association?

A Memorandum of Association is usually prepared by the solicitors of the company or the experts who have expertise in the company law.

5. What happens when a company deals with things beyond its Memorandum of Association?

If the activities that a company performs are such which are not mentioned in MOA, then in accordance to that, it is ultra vires and that company has to face different types of penalties from the legal world.