Memorandum of incorporation template free

The Memorandum of Incorporation (MoI) of a company plays a critical role in defining its capital structure, particularly regarding its shares. According to Section 36 of the Companies Act, 2008, the MoI must specify the classes of shares and the number of shares of each class that the company is authorised to issue. Understanding the difference between authorised and issued shares and the specific rights and limitations attached to each class of shares is is important.

Authorised vs. Issued Shares

• Authorised shares: These are the maximum number of shares that a company is allowed to issue, as stipulated in its MoI. It represents the total share capital that the company can potentially issue to shareholders.
• Issued shares: These are the shares that have actually been issued to shareholders. The number of issued shares can be less than or equal to the number of authorised shares but cannot exceed it.

Important aspects of each class of shares

When defining classes of shares, the MoI must address the following key aspects:

• Voting rights: The MoI should specify the voting rights attached to each class of shares. Some shares might have full voting rights, while others could have limited or no voting rights. For example, ordinary shares typically carry one vote per share, whereas preference shares might have no voting rights.
• Dividend rights: The MoI should detail the rights of shareholders to receive dividends. This includes the right to receive preference dividends, where applicable. Preference shares often have a fixed dividend rate and are typically paid dividends before ordinary shareholders.
• Liquidation rights: The MoI should state the rights of shareholders to receive a proportion of the company’s residual value upon liquidation. Preference shares might have priority over ordinary shares in the distribution of residual assets.

Additional preferences, rights, limitations, or terms

Additional provisions can be tailored to each class of shares to meet specific company needs or investment strategies:

1. Redemption rights: Some shares might be redeemable at the option of either the company or the shareholder, often at a predetermined price.
2. Conversion rights: Shares might have the option to be converted into another class of shares under certain conditions.
3. Anti-dilution provisions: These provisions protect shareholders from dilution in case the company issues more shares in the future.

Practical Scenarios

• Technology startup: A tech startup might issue two classes of shares: class a ordinary shares with full voting rights for the founders and venture capitalists, and class b preference shares with a fixed dividend rate but no voting rights for angel investors. This structure allows founders and major investors to retain control over company decisions while providing angel investors with priority in dividends.
• Family-owned business: In a family-owned business, the family members might hold class a ordinary shares with voting rights, while external investors are issued preference shares with no voting rights but with a fixed dividend rate. This setup enables the family to maintain control over the business while offering attractive returns to external investors.

In conclusion, the provisions in the MoI regarding shares must be carefully structured to balance the control, income, and liquidation preferences of different shareholders, aligning with the company’s strategic objectives and investor expectations.

Unclassified Shares

Section 36(1)(c) of the Companies Act, 2008, introduces a provision for “unclassified shares” in a company’s Memorandum of Incorporation (MoI). This provision allows for a degree of flexibility. Here’s an explanation of how this works and its implications:

The MoI may authorize a certain number of shares without classifying them into specific a specific class. These unclassified shares can later be classified into different classes (e.g., Class F, Class G, etc.) by the board of directors as and when the need arises. This allows the company to respond to changing financial needs, investment opportunities, or strategic directions without having to amend the MoI each time.

While these shares are initially unclassified, the MoI must already outline the preferences, rights, limitations, and other terms associated with these shares. This pre-determination is crucial for legal and operational clarity and ensures that the board’s classification of these shares at a later stage is not arbitrary but follows the MoI.

Class X Shares

Section 36(1)(d) of the Companies Act, 2008, introduces an interesting aspect of share classification in a company’s Memorandum of Incorporation (MoI). This provision allows a company to define a class of shares without specifying the associated preferences, rights, limitations, or other terms. Instead, it empowers the board of directors to determine these aspects at a later stage. This approach offers significant flexibility for the company’s capital management and strategic planning.

The MoI can establish a class of shares (like Class C) but leave the specifics of these shares (such as voting rights, dividend preferences, etc.) to be determined by the board at a future date.

This flexibility is particularly valuable in allowing a company to respond rapidly to changing market conditions, investment opportunities, or strategic needs. For example, if the company needs to raise capital quickly or wants to attract a specific type of investor, the board can tailor the rights and preferences of these shares to suit the situation.

Debt instruments

The provisions in Section 43 of the Companies Act, 2008, outlines the framework for the issuance and management of debt instruments by companies. These provisions, in conjunction with the company’s Memorandum of Incorporation (MoI), govern how a company can issue debt instruments, the nature of these instruments, and any special privileges they may confer.

As per Section 43(1)(a), a debt instrument includes any security other than shares of a company. This can include bonds, debentures, or other forms of debt securities. However, it does not include simple promissory notes or loans.

Section 43(1)(b) defines a “security document” as any document that embodies the terms and conditions of a debt instrument, such as a trust deed or certificate.

Section 43(2)(a) states that the company’s board may authorize the issuance of secured or unsecured debt instruments, unless restricted by the company’s MoI. This gives the board considerable flexibility in deciding how and when to raise debt.

The board must determine whether each debt instrument issued is secured (backed by the company’s assets) or unsecured.

Under Section 43(3), except as limited by the MoI, a debt instrument may grant its holders special privileges. These can include rights to attend and vote at general meetings, influence the appointment of directors, or involve the allotment or substitution of securities.

Provisions relating to debt instruments in the MoI

The MoI can play a significant role in shaping a company’s approach to debt instruments and can:

• restrict or expand the board’s authority to issue debt instruments. For instance, it might require shareholder approval for the issuance of certain types of debt or for debt over a certain amount;
• outline specific terms and conditions for debt instruments, including interest rates, maturity periods, and redemption rights;
• limit or specify the types of special privileges that debt instruments can confer, ensuring they align with the company’s strategic objectives and governance structure; and
• help ensure that the issuance of debt instruments aligns with the company’s overall financial strategy and risk management policies.