Difference Between company Memorandum of Association and Articles of Association

Last Updated on July 1, 2024 by admin

When it comes to setting up a company, there are two important documents that play a crucial role: the Memorandum of Association and the Articles of Association. These documents are like the company’s DNA, outlining its identity, purpose, and internal workings.

The company Memorandum of Association and Articles of Association serve as foundational documents that govern the establishment, structure, and operation of a company.

While both documents are essential components of company formation, they serve distinct purposes and hold different legal significance. Understanding the disparities between the Memorandum and Articles is crucial for company directors, shareholders, and stakeholders to ensure compliance with legal requirements and effective governance.

This article delves into the different between the Memorandum of Association and Articles of Association, outlining their respective purposes, scope, differences, and legal implications in the context of company governance

Company Memorandum of Association

A memorandum of association is a legal document that sets out the constitution and objectives of a company. It is one of the key documents required to form a company, along with the articles of association.

The memorandum must be filed with the relevant government authority when incorporating a company, and it is a public document that anyone can access. It outlines the company’s name, registered office address, objectives, and the type of business it will engage in.

The memorandum of association acts as a sort of contract between the company and its shareholders, as well as between the company and the outside world. It sets out the fundamental characteristics of the company, such as its name and purpose, and provides a framework for the company’s operations.

For example, if a company’s memorandum specifies that it will engage in manufacturing, it cannot suddenly start selling real estate without first amending the memorandum. This document also helps to protect the interests of shareholders by clearly defining the scope and nature of the company’s activities.

Overall, the memorandum of association is a crucial document in the formation and operation of a company. It provides transparency and clarity on the company’s objectives and structure, helping shareholders, employees, and external parties understand the company’s purpose and operations. As such, it is important for companies to carefully draft their memorandum to ensure that it accurately reflects their intentions and complies with regulatory requirements.

Here’s a breakdown of what a Memorandum of Association (MoA) is, its purpose, and its essential elements:

What is a Memorandum of Association?

• Foundational Legal Document: The MoA is a crucial legal document submitted during the registration process of a company. It lays down the essential conditions for a company’s existence and operation.
• Defines External Relationships: The MoA essentially outlines the company’s relationship with the outside world. It defines the scope of activities the company can legally engage in.
• Limits of Authority: Any activity the company undertakes outside the scope defined in the MoA can be considered “ultra vires” (beyond powers) and legally void.

Key Clauses of a Memorandum of Association

1. Name Clause:

   • Specifies the official name of the company.
   • The name must include a suffix indicating its legal status (e.g., “Limited”, “Ltd”, “Private Limited”).

2. Registered Office Clause:

   • States the official address of the company’s registered office, located within the jurisdiction of incorporation. This is the address for legal communications and notices.

3. Objects Clause:

   • The heart of the MoA. This clause meticulously defines the company’s purpose, objectives, and the scope of activities it can engage in.

4. Liability Clause:

   • Clarifies whether the liability of the members (shareholders) is limited or unlimited. Limited liability is the most common, meaning shareholders are liable only up to the amount they invested in the company.

5. Capital Clause:

   • States the company’s authorized share capital – the maximum value of shares it’s allowed to issue.
   • Details the different types of shares and their values.

6. Subscription Clause (or Association Clause):

   • Lists the names, addresses, and occupations of the initial subscribers (usually the founding shareholders).
   • Each subscriber agrees to take a minimum of one share in the company.

You can also read : Difference Between company Shares and Debentures

Company Article of association

A company’s articles of association are a set of rules and regulations that govern the internal management and operations of the company. These articles are crucial for providing clarity and structure within an organization, as they outline important details such as the responsibilities and powers of directors, the procedures for conducting meetings, and the rights of shareholders.

By defining these key components, the articles of association help ensure smooth and efficient functioning of the company.

One of the main functions of the articles of association is to establish the rights and obligations of the company’s stakeholders, including shareholders, directors, and officers.

This document clearly outlines the powers and duties of each party, preventing misunderstandings or conflicts from arising. For example, the articles may specify the process for appointing directors, the procedures for handling shares, and the rules for distributing dividends.

By providing a clear framework for decision-making and responsibilities, the articles of association help create a cohesive and well-organized corporate structure.

In addition to defining the internal workings of the company, the articles of association also serve as a legal document that governs the relationship between the company and its stakeholders.

These articles are legally binding and must be adhered to by all parties involved in the company. Failure to comply with the provisions outlined in the articles can result in legal consequences, such as fines or lawsuits.

Therefore, it is essential for companies to carefully draft and regularly review their articles of association to ensure that they accurately reflect the company’s operations and comply with relevant laws and regulations.

Here’s a comprehensive look at a company’s Articles of Association (AoA), including their purpose, typical content, and how they function:

What are Articles of Association?

• Internal Rulebook: The AoA acts as a set of rules and regulations that determine the internal operations and governance of a company. It works in tandem with the Memorandum of Association (MoA).
• Complements the MoA: While the MoA outlines the company’s relationship with the external world, the AoA focuses on how the company will run itself.
• Binding Agreement: The AoA is a legally binding agreement between the company and its shareholders, as well as among the shareholders themselves.

Typical Contents of Articles of Association

The exact contents of an AoA can vary, but they commonly cover the following areas:

• Shares:
  • Rules on the issuance and transfer of shares.
  • Different share classes (ordinary, preference, etc.) and their rights.
  • Procedures for share capitalization (e.g., issuing new shares).
• Directors:
  • Powers and responsibilities of directors.
  • Processes for appointment, removal, and remuneration of directors.
  • Directors’ decision-making procedures (meetings, voting).
• Shareholders’ rights:
  • Voting rights associated with different share classes.
  • Procedures for general meetings of shareholders (notice periods, agendas, etc.).
  • Rules on dividend distribution policies.
• Administrative Matters:
  • Company accounting and auditing procedures.
  • Company seal (if applicable).
  • Winding up procedures (in case of dissolution).

Importance of Articles of Association

• Operational Framework: The AoA clearly defines how the company will be managed, providing structure and reducing potential disputes.
• Protection of Rights: It safeguards the rights of shareholders and outlines the limits of directors’ powers.
• Flexibility: Companies often use the Model Articles provided by their jurisdiction as a base, but can tailor them to their specific needs.
• Amendments: The AoA can be amended more easily than the MoA, typically through special resolutions passed by shareholders.

You can also read : How to Register your Company/Business in Nigeria with CAC

Comparing The Differences: Memorandum Of Association Vs Articles Of Association

Here’s a breakdown of the key differences between the Memorandum of Association (MoA) and the Articles of Association (AoA), presented in an easy-to-understand format:

Key Differences

Relationship

• The MoA and AoA work together to form the complete legal framework upon which a company is founded and operates. Think of the MoA as the company’s outline and the AoA as the detailed instructions.

Example to Illustrate the Difference

• MoA: States that the company’s objective is “manufacturing and selling bicycles.”
• AoA: Outlines the procedure for appointing a new CEO, which may include a board nomination and shareholder vote.

FAQ

Q:What is the primary purpose of the Memorandum of Association?

A:The primary purposes of the Memorandum of Association (MoA) are:

• Defines the Company’s Scope: The MoA, specifically its objects clause, clearly outlines the purpose and the activities the company is permitted to undertake. This protects shareholders by ensuring their investment is used for the intended business objectives.

• Limits the Company’s Powers: The MoA acts as a boundary for the company’s actions. Any activity pursued outside the scope defined in the MoA is considered “ultra vires” (beyond powers) and can be legally void. This protects the company from engaging in risky or unauthorized ventures.

• Establishes External Relationships: The MoA forms the basis of the company’s relationship with the outside world. Potential investors, creditors, and anyone dealing with the company can refer to the MoA to understand the company’s objectives and assess its potential.

Q: How can the Articles of Association be amended?

A: The Articles of Association (AoA) can be amended, but the process generally involves the following steps:

1. Proposal for Change:

   • Directors and/or shareholders can propose amendments to the AoA.
   • The specific percentage of shareholders required to propose an amendment might be detailed in the existing AoA.

2. Special Resolution:

   • In most jurisdictions, amending the AoA requires passing a special resolution.
   • This typically means a majority vote of at least 75% of shareholders eligible to vote. The exact percentage may vary by jurisdiction or company’s specific AoA.

3. Notice and Meeting:

   • Shareholders must receive proper notice of the proposed amendments and a meeting where the vote will take place. This can be a general meeting specifically convened for this purpose.
   • The notice period and meeting procedures are often outlined in the existing AoA or company law.

4. Filing with Registrar:

   • Upon passing the special resolution, the company must file a copy of the amended AoA with the relevant registrar (e.g., Companies House in the UK, Corporate Affairs Commission in Nigeria).
   • There might be a fee associated with this filing.

Q: Are the Memorandum of Association and Articles of Association legally binding documents?

A: Yes, both the Memorandum of Association (MoA) and the Articles of Association (AoA) are legally binding documents. Here’s why:

Q: What happens if there is a conflict between the provisions of the Memorandum and Articles?

A: If there’s a conflict between the provisions of the Memorandum of Association (MoA) and the Articles of Association (AoA), the Memorandum of Association prevails. Here’s why:

Hierarchy: The MoA establishes the company’s foundation and fundamental objectives. It’s like the company’s constitution.

Specificity: The AoA provides details on how to run the company internally, following the guidelines set out in the MoA. It acts as a set of bylaws.