Capital Clause of Memorandum of Association

Introduction

The Memorandum of Association (MoA) is a legal document that establishes the foundation for the formation of a company. It is a critical document necessary for establishing a company in numerous jurisdictions, such as the United Kingdom, India, and other common-law countries.

It comprises the company’s name, registered office address, nature of business, authorized share capital, and the names and signatures of the subscribers who are the initial shareholders. 

It also delineates the company’s objectives, powers, and limitations, which must be adhered to.The Memorandum of Agreement is essential because it establishes the company’s activities and safeguards the interests of its shareholders.

What is a Capital Clause of Memorandum of Association?

The capital clause, the fifth clause in the Memorandum of Association (MOA), is imperative in determining the share capital of a company during the registration process. It delineates the authorized or nominal capital, which is the utmost amount of capital that the company is permitted to raise. 

This clause also establishes restrictions on the company’s capitalization and the number of shares it may issue. The clause must be amended if the company requires additional capital or desires to issue additional shares beyond the limit specified in the capital clause. 

Furthermore, the capital clause specifies the categories of shares that the company may issue, as well as their nominal value and quantity. The capital clause of the MOA must specify the nominal value of the shares of publicly listed companies.

Features of a Capital Clause of Memorandum of Association

1. Authorized Capital: This section specifies the maximum amount of capital the company is authorized to issue. Any increase beyond this limit requires shareholder approval and adherence to regulatory procedures.
2. Division of Capital: This part outlines how the company’s capital is divided among its shareholders. It describes the types of securities the company can issue, such as ordinary or preference shares, along with their nominal or face values. It also specifies any restrictions or obligations associated with these shares.
3. Share Issue Limit: The Capital Clause sets the maximum number of shares the company can issue at any given time. This limit can vary depending on the company’s business needs and the regulatory framework in its jurisdiction.
4. Currency of Capital Investment: This clause defines the currency in which capital investments will be made, whether in the local currency or another specified form.
5. Rights Associated with Shares: This section details the rights and conditions attached to different classes of shares. For instance, preference shares might grant holders priority in dividend payments or preferential treatment in the event of liquidation, compared to ordinary shareholders.
6. Increase of Authorized Capital: The Capital Clause outlines the procedures for increasing the company’s authorized capital, including the necessary approvals from shareholders and regulatory authorities.
7. Change of Capital Structure: If the company needs to alter its capital structure by subdividing or consolidating shares, the Capital Clause provides the process for implementing these changes.
8. Issue of Shares: This clause establishes the conditions under which shares may be issued, transferred, or forfeited. It may also include pre-emption rights, transferability restrictions, and provisions for issuing new shares.
9. Redeeming Shares: If the company is authorized to redeem its shares, the Capital Clause should specify the conditions and procedures for redemption.
10. Buyback of Shares: Should the company choose to repurchase its shares, the Capital Clause must include provisions regarding the sources of funding for the buyback, as well as any restrictions or limits on these transactions.

Altering the Capital Clause of Memorandum of Association

Five distinct categories of modifications can be implemented to modify the capital clause of the Memorandum of Association (MOA), each of which serves distinct strategic objectives for a company:

Increase in Authorized Share Capital

This modification enables the organization to increase the utmost amount of funds it can obtain by increasing the authorized share capital. This expansion allows the company to issue additional shares as required.

Share Capital Consolidation

This modification allows for the consolidation of smaller denomination shares into larger denomination shares, thereby reducing the total number of shares while simultaneously increasing their individual value.

Share Capital Conversion

This modification enables a company to convert its stock into fully paid-up shares or fully paid-up shares into stock, thereby enabling the company to manage its capital structure with greater flexibility.

Divestiture of Share Capital

A company can increase the total number of shares without affecting the overall value of the capital by dividing its existing shares into smaller units through subdivision.

Revocation of Share Capital

Typically, a company must make this adjustment in order to reduce its share capital, which is achieved by canceling unissued shares or reducing the number of extant shares to align with the company’s revised financial strategy.

Each of these modifications affords a company the ability to modify its capital structure in accordance with its changing requirements and objectives.

Procedure for Altering the Capital Clause of Memorandum of Association

An amendment to the Memorandum of Association (MOA) is necessary to modify the capital clause of a company, which is a substantial change to the company’s fundamental document. The procedure for modifying the capital clause is delineated in the subsequent steps:

Step1: Publish a Notice of Board Meeting

Commence by sending out a notice of the board meeting at least seven days in advance. The agenda, which encompasses the proposed modification of the capital clause in the MOA, should be explicitly delineated in the notice.

Step 2 : Adopt a Board Resolution

At the board meeting, adopt a resolution that authorizes the modification of the capital clause. Before proceeding to the subsequent stages, this formal sanction is required.

Step 3: Obtain the approval of shareholders 

The subsequent phase entails obtaining shareholder sanction. Arrange a shareholders’ meeting by selecting the date, time, and location.

Step 4: Notice for Extraordinary General Meeting (EGM)

The notice of the extraordinary general meeting (EGM) must be distributed to all shareholders by the company’s directors. The notice must be sent at least seven days prior to the meeting’s scheduled date.

Step 5: Pass a Shareholders’ Resolution

For the proposed capital clause modification to be approved, a resolution must be passed by a majority of the shareholders at the shareholders’ meeting. This approval is essential for the change to be implemented.

Step 6: Notify the Registrar of Companies

Lastly, the company is required to inform the Registrar of Companies (RoC) of the capital clause modification within 30 days of the resolution’s passage. A sanction may be imposed if the RoC is not notified within this period.

The company guarantees that the capital clause is amended in accordance with legal requirements and accurately reflects the company’s revised capital structure by adhering to these procedures.

Conclusion

Since the capital clause in the Memorandum of Association (MOA) deals with a company’s share capital, it is a cornerstone of the charter document. Altering this clause is a complex process that requires careful attention, including a board resolution and shareholder approval. 

If you’re navigating this or any other legal intricacies, Lawgical Adda is here to help! Our expert team is ready to guide you through every step of business registration and compliance, whether you’re launching a new venture or managing an established one. 

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