Mistakes Related To Memorandum of Association

If you are one of those business owners who let your consultant/advisor/lawyer/chartered accountant decides what to mention in the memorandum of association, without taking your opinion, or discussing with you the issues related to it, then you are doing a big mistake.

A memorandum of association is one of the main constitutional documents of a company. It covers most of the important legal aspects of the company and governing clauses related to the business operations.

Some things which are common among the memorandums all over the world are the company’s objects, shareholders details, activity of the company, liquidation process, share capital, appointment of auditor, voluntary reserve, transfer of shares, process in case of death of shareholders, sale of shares, etc.

Unfortunately, small companies do not realise its importance and believe the memorandum is a normal document, and it is not important memorandum looks like or what it contains, but things get complicated when the business is growing and one partner wants to expand while others are doing nothing and causing hinderance.

How to avoid mistakes related to the memorandum?

Usually, a standard format is used and amended, but before drafting the memorandum for our clients, we sit with our clients and a few of the things which we discuss with our client includes:

1. The vision of the company
2. Plans for the company
3. Organizational structure
4. Powers and responsibilities of the partners
5. Liquidation procedure
6. Share transfer
7. Capital increase
8. Voluntary reserve
9. Process in case of partners’ death
10. Profit and loss
11. Appointment of directors
12. Reserve director
13. Increasing partners’ liability
14. Future restructuring plans, etc

We have noticed that unfortunately most of the firms do not discuss all these things with the client and just use a standard format, changing few details like name, capital, address and activity in the memorandum and finish their job, which is not the professional way.

As a lawyer, CA, consultant or whatever role you are advising your client, discuss with them the future implications of the memorandum they are going to sign.

As a client, discuss with your consultant/advisor/lawyer/chartered accountant everything you have in your mind related to the business and ask him questions as well regarding the legality of the clauses or general questions too, to have an idea whether he really understand his job.

RECENT CASE

Recently we noticed that one of our client is doing frequent changes in the company and in some transactions losing the shareholding as well. We realised a stage might come when the client will lose the control over the company. We discussed the implications in future for him and suggested that he make some major changes to the original memorandum via an amendment, before doing partnership restructuring, so he keeps control over the management of the company.

The client understood what we were advising him and agreed to the amendments. We drafted a board resolution to that effect, all the partners signed and amended the memorandum of association and later on did the restructuring related to the partnership as well.

CONCLUSION

Memorandum of association is the most important document related to your company. In your country it might be known by a different name as well, but irrespective of that, you should always let a professional draft it for you, who knows what company law is all about.

Recently, the consultant we hired to register one of our companies in a certain jurisdiction shared with us his draft, which we completely rejected and did ourselves because we understand what we need.

Copyright ? KHALID KHAN,?2023