TyroCity: Company Law Notes

Allotment of Share

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Section 28 of Nepalese Company Act.
Allotment is the process of distributing and selling of shares by company for the persons who are going to be future shareholders of the company.
Prospectus issued by the company is the invitation to the public to apply for the shares of the company.
On the basis of invitation the persons apply to the company for its shares.
An application for shares is an offer from the applicant to purchase the shares.
When such application is accepted by company that is called an allotment.
Allotment is the appropriation of shares to a particular person, out of the previously inappropriate capital of the company.
So, allotment is the fresh issue of shares by company.
It is a binding contract between the company and shareholders.
The rules of offer and acceptance of contract law are applied in allotment process.
The company must make a decision of allotment to go in public. The board fixes certain reasonable time frame to pay the share amount.
General rules of allotment; – 1) the allotment must be made by proper authority e.g. board of directors, or delegated authority.2) the allotment must be communicated. – to the applicant e.g. postal communication, public notice.3) there should be a reasonable time for application.4) the allotment must be unbiased and absolute.4) There must be clear terms and conditions in application itself.
The allotment process must be mentioned in MoA and AoA as per the legal provisions of the companies Act 2006.
The allotment is done privately in case of private company, not publicly, private company cannot make public offer for allotment, if made that is punishable by section 160(q).
Respective legal provision of allotment is sections 28 of the Companies Act 2006 of Nepal

Controls over the Management

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Control over the management -by shareholders, by government, by company law Board for good governance of company. Which we know as corporate governance
Good governance in political and administration sector.
Corporate governance in corporate sector.
Control over the management is the way of application of corporate governance in company or corporation. Control is necessary for check and balance of powers role duties and jurisdiction of overall management including BOD and other stakeholders.
Corporate governance is set of process, customs policies, law and institution affecting the way of a corporation is directed administered or controlled. Corporate governance also includes the relationship among many stakeholders for which corporation is governed. The principle stakeholders are the shareholders, management and the boards of director, other stakeholders are employee, suppliers, customers, lenders regulatory, the environment and the community at large.
Controls of shareholders government and regulatory is essential for check and balance of scope and power of management.
There are so many stakeholders in any company or corporation. The harmonies, accountable, fair, credible, trustworthy and responsible relationship is possible from the check and balance. The way of check and balance is controls over the management.
Controls by different stakeholders such as by shareholders, by regulatory by government and by court is necessary for the protection of rights of shareholders and customers.

Control is the way of achieving the corporate governance which includes the following key elements.

Honesty,
Trust and integrity
Accountability
Responsibility
Mutual respect
Performance oriented
Commitment to the desired goal of corporation.

The important theme of corporate governance is to ensure accountability of certain individuals in a corporation through the mechanism which tries to reduce or eliminate the principal agent problem in corporations.

The corporate governance has some eminent principles which are as follows.

Right and equitable treatment to shareholders
Interest of shareholders and other stakeholders
Role and responsibilities of the board(Management)
Integrity and ethical behavior
Transparency etc.

Corporate governance is the system of structuring operating and controlling a company in order to achieve the following objectives.

To fulfill the long term strategic goals of the owners
To consider and take care of the interest of the different stakeholders or company
To maintain good relationship to customers and suppliers.
To take account of needs of environment and local community.
To ensure proper compliance with all applicable legal and regulator’s requirements

Organization of Economic Co-operation and Development) OECD- defines- corporate governance as a system by which business corporations are directed or controlled.

Check and balance of power of management shareholders and investor’s responsibility and accountability of management and board, Transparency and disclosure respect to law and system, respect to code of conduct, equal treatment to shareholder protection of interest of various stakeholders, a effecting accounting and auditing system are basic element or ingredients of corporate governance.

Therefor control over the management is the method of ensuring right and protecting to stakeholders. The concept and legal provision about controls are directly connected with corporate governance.

But controls should be based on law, policy and grounds of reasonableness otherwise controls may lead the management toward the defunct management.

Buy – Back of shares

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Buy back is the process of purchasing of its own share by company.
Purpose of purchasing is to reduce a number of shares in market and to increase the value of shares in market.
Repurchase of its own shares for reducing the share capital.
The buyback reduces the number of outstanding shares in market.
Buy back is restricted or prohibited. Though it is restricted buy back is allowed in some special conditions prescribed by law. Mainly buy back is permitted on following grounds;
Why company is willing to buyback, objective must be clear and bona fide.
If a company is making profit and if there is sufficient free reserve fund in company.
If a company has an idle cash fund.
Section 61 of the Companies Act of Nepal has prohibited on purchase by company of its own share.
As per section 61(1) of the Companies Act, no companies shall purchase its own shares(buy back) or lend moneys against its securities of its own shares.
But section 61(2) has specified some circumstances, where a company may buy back its shares out of its free reserves available for being distributed as dividend, by giving information to the office of the company registrar.( Circumstances; clause ‘a’ to ‘g’ of section 61 (2)) .
The process and procedures for getting permission to buy back of shares have been mentioned in section 61(3) clauses ‘a’ to g and subsection ‘4’ to ‘10’ of section 61.

Articles of Association (AoA)

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

AoA is another important document needs at the time of incorporation of company.
AoA and Articles of Incorporation (AoI)are same.
AoA regulates the way in which a company’s internal affairs are managed.
(Ashbury Rail Carriage & Iron Company V. Riche 1875 LR 7 HL 653) - “ the articles defines the duties, rights, and powers of governing body as between themselves and company at large, and the mode and the form in which the business of the company is to be carried on, and the mode and form in which changes in internal regulations of company may from time to time, be made.’’
Rules and Regulations for governing body of company or management.
AoA is subordinate to the memorandum.
Rules & Regulations do not exceed provisions of memorandum.
“The Articles of Association are the internal regulations of the company and are for the benefit of shareholders’’( Guiness v. Land Corporation of Ireland 22 ch. D. 349)
Thus, AoA is the collection of rules & regulations, framed for the internal management of the companies.
Section 20 of the Nepalese Companies Act has mentioned about meaning of AoA and matters to be included in AoA.

Amendment of MOA and AOA

There are some special legal provisions relating to amendment of MOA and AOA in the Companies Act 2063 BS.
Generally, a company shall not alter the conditions contained in its memorandum except in the cases, in the mode and to extent for which express provision made in the Act
There are some prescribed conditions for amendments in MOA and AOA in Section 21 of the Companies Act 2063 B.S.
Generally, there may be following conditions of changes in MoA & AoA
- Change in Name
- Change in objects
- Change in Procedures

Change in Name

By special resolution, Section 21(3) - any company can amend its name by adopting a special resolution to that effect at its general meeting and make an application, accompanied by the prescribed fees, for prior approval of the office and if the office gives approval to amend the name as per application so received, the name of the company shall be amended.

So, prior approval of the authority is most for the amendment of name.

Change in Objects

The object’s clause can also be altered but the alteration is subject to a number of restrictions.

These restrictions are for the protection of the interest of the shareholders and creditors.

As per the determined process of sec 21(1) of the companies Act 2063 B.S. the general meeting of a company can amend the MOA and AOA by adopting a special resolution

Special Resolution

Special resolution is most for amendment, except the change in name, in other change giving the information of amendment is sufficient.

As per the legal provision stipulated in section 21(2)- The Company shall give information of amendment made to MOA and AOA to the office within 30 days and the office shall record the same and give information thereof to concerned company within 7 days after receipt of such information.

Restriction on Amendment

On the following basis;

As mentioned the basis in section 6 of Nepalese Company Act ‘power to refuse to register’.
The company cannot amend the objects clauses or name as a routine affair.

Change in Name or objects is necessary for the following purpose;

To conduct its business more economically or efficiently.
To attain its main purpose by new or improved means.
There is only limited scope for change. That is to conduct the business efficiently. The business must be same as before e g. Pharmaceutical Company cannot change objects to carry the business of real state.
For the attainment of the objects.
for the improved means of conducting business.
enabling the company to take advantage of new scientific discoveries and inventions.
to enlarge or change the area of operation
to make changes number of shareholders, capital of company, shares, etc.
to make change in status of company i.e. conversion private to public & public to private company.
to restrict or abandoned any objects specified.
to sell or dispose the whole or any part of undertaking.
to amalgamate with any other company or body of person.
to adopt the new process and procedures mentioned in AOA regarding meeting notice,
to carry on some additional or convenient business under the existing circumstance. e.g. School level company converted in to college and school both or in college only.
In a Public company shareholder has right to challenge in court for amendment within 21 days of that change (Section 21(4)), otherwise it is automatically activate.

Change in Procedures

AOA is related to procedures. The amendment is possible regarding the various procedural aspects.
Section 148 - private company which has no annual general meeting, if they passed the unanimous agreement.

Controls of shareholders

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

General meeting; Chapter 5, Sections 67 to 85 of Nepalese Company Act i.e. Appointment of directors by general meeting – section 87 section 92 of Nepalese Company Act; disclosure by directors.
Section 138 to 141 (chapter 12) of Nepalese Company Act – protection of shareholders
Responsibilities and duties of directors, Section 99 of Nepalese Company Act
Section 102 of Nepalese Company Act -prohibition on giving false statement by officers in general meeting.
Section 105 of Nepalese Company Act – restrictions on authority.
Maintaining of accounts (chapter 7) Section 108/109 of Nepalese Company Act
Audit committee –Section 164 of Nepalese Company Act.
Appointment of Auditor; Section 110/111 of Nepalese Company Act
Protection of shareholders rights ; Section138,139,140,141 of Nepalese Company Act
Control by regulatory. Section 120, 121,122,123,124,125 etc. of Nepalese Company Act
Section 78, 79 & 80 of Nepalese Company Act, Return of Reports to CRO
NRB for Banking Companies
Insurance Board –Insurance Companies

Control by Company Board

Chapter 20 Interim provision; Section 169 of Nepalese Company Act, but now it has been sifted in court jurisdiction.

Controls by Court

Chapter 17, proceeding of Lawsuits and punishment; Sections 159,160,161,162,163 etc. of Nepalese Company Act

Capital and its Types

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

The term capital cannot be defined in one sentence or one line. The meaning of capital may vary. It depends on the different situation or context. Generally the meaning of capital is real value of property. So, capital has different meaning according to context.
In simple word, the term capital denotes a particular amount of money with which, a business is started.
In the case of company, the term share capital refers to amount raised by the issue of shares.
Actually, the real value of business is capital.
C. B. Gower ‘’ with the normal business capital is a simple name given to the ‘net worth of business’, the amount by which the value of assets exceeds the liabilities.
By this definition only value of assets which exceeds the liabilities is the capital.
So, what is net worth?
As per Section (2 z 3) of the Companies Act 2063 of Nepal ‘’ net worth means the assets of a company remaining after deducting the paid up capital, reserve, fund or free reserve of whatever designation to which shareholders have right or all other liabilities other than goodwill, if any, of the company as well as loss provisions, if any, from the total assets of the company for the time being.
Capital is highly important to run a company on the basis of limited liability.
Creditors always recover their debt from only the capital of company, not by the shareholders individually or personally.
So, company laws in every state have prescribed a guideline regarding capital raising or formation and its maintenance of limited liability of company.
Mainly, there are three ways to raise capital for company.
By issuing shares
By issuing debenture
By accepting other types of loan
One of fundamental or basic source of capital in company is Share.

Share Capital

Share capital is an important source of company to raise a fund or capital.

By the phrase it is clear that share capital is the capital raised by issuing the share.
Share + capital=share capital.

If so, what is share?

Share is certificate representing a unit ownership in a company.
A share is the interest of shareholder in the company measured by a sum of money, for the purpose of liability in first place and of interest in second, but also consisting series of mutual covenants entered in to by all shareholders (Farwell J in Borland’s Trustee v. Steel Brothers, 1901, 1 Ch 279)
Section 2 (n) of the Companies Act 2063 BS states that share is divided portion of share capital of a company.
Share capital is equity of company. Share capital generally refers the nominal value of all share issued by company.
Every company should mention its share capital in its MoA & AoA.
Share capital refers to the amount of company raised by the issuing of shares.
Issuing of share is mandatory legal provision as per section 18(1) e, f, g, h, i of the Companies Act 2006 of Nepal.
As per these legal provisions;
- The figure of authorized capital of company, the figure of share capital to be issued by the company and the figure of capital undertaken to be paid by promoters must be mentioned in memorandum.
- Similarly, types of shares, inherent right in such shares, value and numbers of shares , restriction (if any) on purchase of shares, promoters’ shares (undertaken to subscribe for the time being) & terms of payment of share amount must be mentioned in MoA.
The CRO will take certain fees on basis such share capital amount as registration fees of company.
The person who has ownership in share of company is known as shareholder of company.
As per section 2(r) of the Companies Act, Shareholder means a person having ownership in the share of company.
According to section 2(n) Share means the divided portion of share capital of a company.
According to Robert R. Pennigton (Pennigton’s Company Law 6th ed p. 136) –Share Capital is amount contributed by shareholders to company’s resources.
The received amount for the price of share is share capital.
The amount contributed by shareholders is main capital of company. Such share capital is the real property of company, not a loan, but property.
Share capital is not refunded until company is liquidated.
The company is not allowed to distribute dividend from such share capital, can distribute only from profit.
There is statutory provision relating to prohibition on purchase by company of its own share.
Section 61(1) of the Companies Act , No company shall purchase its own share (buy- back) or lend money against security of its own share except in particular conditions prescribed by the company Act.
Company is not a creditor and debtor of its own.
So, share capital is fixed capital of company.
The desired goal or nature of business of company determines the share capital of company.
The share capital is depended upon the nature of particular company. For example; Private company, public company, Banking Company, Insurance company, Company as school.
Companies expect profit not sharing company should mention share capital in MoA & AoA in the form of Authorized Capital \ Issued Capital \ Paid up capital.
The share capital is divided on different value units or shares.
So, price value of each share is mentioned in share certificate.

Types of Capital

There are so many types of share capital in the companies.
Basically, The Companies Act 2006 (2063 B. S.) of Nepal has determined following types of share capital.

Authorized Share Capital or Nominal Capital
A

uthorized share Capital is sum of money which is mentioned in MoA as the authorized capital of company.
It is nominal or registered capital of company.
It is maximum amount which a company is authorized to raise by issue of shares and upon which company pays the registration fees of company.
Either the full amount or part of full amount can be issued whenever needs to rise.
Total nominal value of shares which is mentioned in memorandum is authorized capital.
Practically, the size of authorized capital is decorative significance for private company.
Present company Act of Nepal is silent about how much authorized capital should be mentioned in a company, but it is understood that issued & paid up capital must not exceed the authorized capital.
Paid up capital of a public company shall be a minimum of 10 million or one corer rupees. (Section 11 of Act).
So, it is clear, there is a pre-condition regarding authorized capital of a public company that public company shall have a minimum of a 10 million share capital.
No authorized capital is needed for a profit not sharing company.
No such demarcation of authorized capital for a private company in Nepal.
Life & non-life insurance company should maintain their paid up capital 25 corer & 10 corer or 250 million or 100 million respectively. It means the authorized capital of such insurance company should not be less than that figure of amount. Authorized capital of banking company is guided by BaFI Act and NRB Act.
For private company, it depends upon the business volume, nature of business or transactions e.g. vehicle trading company, vegetable trading company, Hydropower Company, constructions company , consultancy service provider company etc.
Authorized capital is maximum limitation of capital of company. So, company cannot issue share above the authorized capital, if issued it will be null & void.
As per section 18(1) (e) of the companies Act, the authorized capital of company must be stated in MoA.
As per legal provision of section 51 (2 ) (a) of Nepalese company Act every company shall prepare the inventory regarding authorized capital and shares of the company.
Section 56 (1 )(a) &( 3) states that the company should give information within 7 days about alteration of authorized capital. If such alteration took place the MoA & AoA must be amended according to such alteration.

Issued Capital

Part of authorized capital which is offered for subscription is known as issued capital of company.
Issued capital is the portion of company’s authorized capital that can be issued to its shareholders.
It is not obligatory for the company to issue the whole of the authorized capital for subscription.
In almost situation, company need not necessary all its authorized capital, at that time company can issue lower share than its authorized capital. It depends upon business transactions of company.
The capital that will be collected from issuance of such lower share is actually the issued capital.
Public company must have 10 million paid up capital as per section 11 of the companies Act 2006 of Nepal. So, Issued capital of public company must not be below the 10 million.
As per section 18(1) (e) of the companies Act, the issued capital of company must be stated in MoA.
As per legal provision of section 51 (2 ) (b) of Nepalese company Act every company shall prepare the inventory regarding issued capital and shares of the company.
As per Section 56 (5), if a company is required to increase its issued capital to the extent of its authorized capital, it may increase by adopting an ordinary resolution at the general meeting.
Public company must have 10 million paid up capital as per section 11 of the companies Act 2006 of Nepal. So, Issued capital of public company must be maintained as per this legal provision.
As per special law, some companies such as banking companies & insurance companies must have the issued capital as stated in special law relating to such companies e.g. for insurance company and banking companies.
Private company can determine its issued capital as per the requirements of its business transactions.

Paid – up Capital

In reality, paid up capital is that type of capital which the company actually gets from the shareholders.
By the name, it is understood that paid up capital is the capital which is paid by the shareholders in company.
The paid amount by the shareholders for share is paid up capital of company.
Paid up capital is the amount that has actually been paid – up by shareholders.
The paid – up Capital must be paid by the shareholders, otherwise it is treated as unpaid amount to the company. Like dues.
Public company must have 10 million paid up capital as per section 11 of the Companies Act 2006 of Nepal. So, paid- up capital of public company must be maintained as per this legal provision. Private companies can manage its paid up capital as per its necessity, nature & volume of business transaction.
As per section 18(1) (e) of the Companies Act, the paid-up capital of company must be mentioned in MoA. Private company can mention the paid up capital as per their needs, no any legal instructions for private companies.
As per legal provision of section 51 (2 ) (c) of Nepalese company Act every company shall prepare the inventory regarding paid-up capital and shares of the company.
As per Section 56(1)& (5),every company can make alteration on its share capital by adopting a special resolution in general meeting. It means the paid up capital of company may be altered, if altered, the MoA & AoA must be amended as per section 56(2) of the Companies Act.

Other Types of Capital

Subscribed Capital

Subscribed capital is the amount of share capital which the shareholders have subscribed or agreed to subscribe.
The subscribed capital should be described in balance sheet of company.
Sometime the issued shares of a public company may not be sold or subscribed. The part of issued capital which has been actually taken up or subscribed for the public is the subscribed capital. Which the shareholders have actually subscribed or agreed to subscribe. All issued capital may not be subscribed or agreed to subscribe. So, subscribed capital is the capital which is actually subscribed or agreed to subscribe.
The entire issued capital may be agreed to subscribe or subscribed by public in case of a reputed company because of has lot of good will, but in case of very unpopular or unsound companies the subscribed capital may be less than issued capital.
The subscribed capital is not mentioned in MoA & AoA, it is mentioned only in balance sheet of company.
Though there is no clear provision regarding subscribed capital in Nepalese companies Act, but the concept of subscribed capital is accepted by this Act. That can be found by reading of respective sections of chapter 4 of the Companies Actg. the provisions relating to alteration & reduction of share capital, mentioned in section 56 & 57 of the Companies Act.

Reserved Capital

The capital of a company which can be generated by issuing of share in particular event, if the board feels necessary. The reserved capital is collected from the remaining part of issued capital which is not called for payment or subscribed before.
The reserved capital is the part of issued capital of a company, which the company has not issued but that is the amount within the issued capital. From such part of issued capital, if the board feels necessary, the board can collect the reserve fund from that part of issued capital only in the event of liquidation or insolvency of company.
There will not be provision of reserve capital in all companies. As per the legal provision of section 53(7) of the Companies Act 2063 “ a company which has been making profit for a period of 3 consecutive years or more may , by a special resolution adopted at its general meeting, determine that a call may not be made in respect of certain portion of its share capital not call in expect in case of liquidation or insolvency of company.’’ Such uncalled capital is reserve capital of company.

Amalgamation (Merger and Take- Over)

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Amalgamation is the process of blending of two or more undertakings into one undertaking.
It is conduct of two or more than two companies by which they make one company.
The ordinary dictionary meaning of amalgamation is ‘combination’.
The effect of amalgamation is to wipe out the merging companies and to fuse them into the new one created.
There are two forms of amalgamation; merger & take – over
Respective legal provision regarding amalgamation or merger are section 177 of Nepalese Company Act and few sections of BaFI Act 2063 BS ( See; respective legal provisions)

Merger:
Corporate combination of two or more than two companies to a single company.

Merger will take place by:

Purchasing assets
Purchasing shares
Acquiring the assets and liability
By scheme of arrangement
A merger is the fusion or absorption of one thing or right into another, where one of subjects is of less dignity importance than the other. Here less important ceases to have an independent existence. When a bigger company with next smaller company wants to join in to one entity, such kinds of fusion of two or more company is called merger. The identity of one company ceases to exist.

Methods of merger

By purchase of shares.
Merger with holding company.
Merger under a scheme of arrangement or compromise.
Merger by scheme of winding –up.
Merger by exchange of shares –followed by winding up.
Winding up by scheme of exchange of share
Merger in public interest in the order of government in India central govt. may order.
In Nepal, for banking companies, NRB. Insurance Board, for Insurance Companies can suggest for the merger.

Take-over

Take – over is the term which is used to describe the acquisition of one company by another generally by buying.
A company wants to control the target company

Stages of Incorporation of Company

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Incorporation is the first process of giving existence or birth of company.
Registration or establishment of company is incorporation.
Incorporation is creation of a legal person by registration of a company with existing law.
A legal person is created artificially by law and contributed as a legal personality from the process of Incorporation.
A company is an artificial entity created by law for the purpose of carrying on any objects such as business, sports research, education charity etc. But commonly companies are formed for the purpose of conducting business.

Basically, there are 4 stages of forming of a company;

Promotion
Incorporation or registration
Capital subscription
Commencement of Business

In case of private company it needs to go through the 1st two stages only, as soon as it receives the certificate of incorporation and it can commence the business.

Private company cannot invite public to subscribe the shares.

Private company must arrange the capital privately, not publicly.

But a public company having a share capital has to go through all 4 stages. Only then it is formed and commences its business.

Promotion

Promotion is the 1st stage of formation of a company. It is the discovery of business opportunities. First of all idea of carrying a business which can be profitably undertaken is conceived either by a person or by a group of persons who are called promoters.
After conceiving the idea the promoters make detail investigations to find out the weakness and strong points of idea to determine, the amount of capital, and to estimate operating expenses and probable income.
When promoters are satisfied to that idea they come in one place and form a company through incorporation process.
Preliminary contracts or pre incorporation contracts may be the documents of arrangement before incorporation or at the phase of promotion. Section 17 of the Companies Act.
Such contracts are generally entered into by promoters to acquire some property or right for and on behalf of the company to be formed.
Promoters have been defined in section 2(i) of Act. Promoters are the persons who incorporate the companies.

Incorporation
The second stage is incorporation of company. All process relating to filing the application to CRO & getting incorporation certificate come under the stage of incorporation.

Capital Subscription
Third stage is capital subscription

Private company can commence business immediately on receipt of certificate of incorporation
But public company commences business after capital subscription stage first among the promoters and second for public.
Through capital subscription public company makes necessary arrangement for raising capital
Invite public for subscription

Commencement
Commencement of business is the 4th Private company can commence business immediately but public company after issuing prospectus and receiving the business commencement certificate. Section 23 and 63.

Incorporation or Registration of Company
(Chapter 2 Section 3, 4, 5, 6 and 7 of the Nepalese Company Act )

Essential documents for Registration of Company are:

Application
Citizenship/ID certificate
MOA 2 copies
AOA 2 copies
Promoter’s agreement (if necessary etc.)
Unanimous Agreement (if necessary etc.)
Approval letter from regulatory, (if necessary etc.)

Memorandum of Association (MoA)

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

MoA is very basic document of company. MoA can be compared with constitution and AoA with Acts or Rules of country.
MoA contains name clause, objectives clause, major functions clause and capital arrangement clause etc.
As per Section 2(k) of Nepalese Companies Act, memorandum of association is memorandum of association.
MoA is the 1st important document to be filed for incorporation.
It is a charter or constitution of company as it regulates the relationship of company with the outsider stakeholders.
Name of company, Powers, objects and scope of operation of company are major elements of memorandum of association. That is actually essential element of memorandum of association.
Lord Cains, observation regarding MoA is “ the memorandum is as it were the area beyond which the action of company cannot go; inside that area the shareholders may make such regulations for their own governance as they think fit. (Ashbury Rail Carriage & Iron Company V. Riche 1875 LR 7 HL 653) .
MoA is a public document, the person who deals with company is presumed that s/he has sufficient knowledge regarding contents of memorandum.
Egyptian Salt & Soda Co. Ltd. v. Port Said Salt Association Ltd. 1931 AC 677 – “a memorandum of association is a document which sets out the constitution of a company and as such it is really the foundation on which the structure of company is based. It defines its relation with outside world and scopes its activities. Its purpose is to enable shareholders, creditors and those who deal with company to know what is permitted range of enterprises.’’
MoA is needed at the time of incorporation of company.
Name clauses, objects clauses, main functions, provisions of capital etc. must be stated in MoA.
The matters to be stated in MoA have been clearly mentioned in Section 18(1) and 18(2) of Nepalese Company Act.

Advantages and Disadvantages of MNCs and Nepalese Context

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Concept of MNCs and Operational Provision:

National means one nationality connected with particular nation. Vice versa of this is multinational. It means more than one nationality or including several nationalities.
Multinational companies mean such companies those are operating in several countries or more than one country.
Company is an artificial person, incorporation of company gives the birth of company the company where it takes its birth is the nationality of company like a natural person. One company incorporated in one nationality and then transacts in other countries by fulfilling the prescribed legal procedure for operation is the situation of existence of multinational companies.
The headquarters of Multinational Company normally is based on one country and operates on several countries. Typically MNCs functions with headquarters while other facilities are based in location in other countries.
Multinational company is referred to as Multinational Business Enterprises (MBE) Transnational Corporation (TNC).
MNC, MBE & TNC are the same.
The exact model for MNC may vary slightly. But common model of MNC is the positioning of executive headquarters in one nation, while production, business transaction or other types of facilities are located in one or more other countries. It is the operational system of MNC.
In this model, the multinational companies take advantage of benefit of incorporation in a particular country. While also being able to produce goods or services or to transact in the geography where the cost of production or service is lower than the incorporating nationality. It is also the way of operation of MNC.
Another structural model is based on parent and subsidiary company. Parent and subsidiary company also may be MNCs. Parent is based on one nation and operates its subsidiary in other countries around the world. So, the model of operation of MNCs or operational provisions of MNCs may vary.
One approach to set up an MNC involves the establishment of headquarters in one country that oversees a diverse conglomeration that states many different countries and industries with this model.
Following on success of corporate model at a national level many corporations have become transnational or growing beyond the national boundaries to attain sometimes remarkable position of power and influence in the process of globalizing.
Multinational Corporations are important actors in the international system as they are not only major source of investment, trade, and employment but also they exercise considerable influence in economic and social policy of many developing countries in which they operate.
The United Nation Commission on Trade and Development (UNCTAD) is acting in the field of effects of operation of MNCs in the many countries especially in developing countries.
The driving force behind business of MNCs is profit motive and free market economy.

From human right perspective

MNCs should be held accountable and responsible to the host state or affected community for violation of human rights through appropriate legal regime and mechanism.

Ways are;

Reciprocity –the company should give something back to society.
Compensation
Ethical principle

Kofi Anan Launched a ‘’Compact for New Century” in 1999, which stressed the need for business community to observe the human rights, labor standards and environment protection.

ILO declaration on fundamental principles and rights at work.

Fundamental principles

Freedom of association
Right to collective bargaining
Elimination of all forms of forced and compulsory labor.
Abolition of child labor.

Development:

The idea of MNC has been around for centuries. Some trace the origin of MNC concept back to Dutch East India Company of the 17th century.

The corporate structure of Dutch East India Company involved a presence in more than one country.

During 19th and 20th century the idea regarding MNC became increasingly common.

In 21st century this business model continues to be highly desirable.

There are several approach that MNC came into existence;

1st approach:
MNC is to intentionally establish new company with head quarter in one country while producing goods and services in facilities locates elsewhere.

2nd approach:
MNC comes about due to merger b/w 2 or more companies based on different countries.

3rd approach:
Acquisition and hostile takeover also sometimes result in creation of MNC.

Due to the concept of global village, the interdependency in goods and service from one corner of world to another corner is increasingly growing more interconnected each day.

Door for diversification of business:

Possibility to remain solvent, even one subsidiary is posting to a temporary loss.
MNC often creates global business strategy that targets emerging markets in countries that offers maximum growth and profit potential.
Executing a successful multinational strategy can create tremendous value for MNC’S shareholders.
Global company operates in multiple countries.
Before becoming a MNC a company may first sell its product or services in foreign countries with limited risk by exporting or licensing its product in that company.
To expand foreign market, to save on shipping or transportation cost and foreign tariffs the MNCs are establishing or incorporating.
A company typically becomes a MNC when it makes direct investment in foreign countries to establish operations and conduct business there. That gives the company more control over its business in the country.

A company can setup its operation in a foreign country from scratch by establishing its own manufacturing distribution and retail operation or use several other strategies to build its foreign presence. It can establish branches or partnership with and established firm in a foreign country. It can buy complete ownership or a controlling stake in a foreign country. A company that aims for a larger approach can form a long term global partnership with another company to invest and penetrate multiple foreign markets

Advantages and Disadvantages

A MNC benefits from international growth opportunity that may not exist in its home market.
It may be able to manufacture its products in a foreign country cheaper than it can in its home country.
MNCs can minimize the effect of foreign currency exchange rate fluctuation.
MNCs can take advantages of lower tax in foreign country, especially in developing countries.
The disadvantage is operating in foreign countries poses risk.
A company is exposed to a country’s law regulations and political environment that can less stable than those in its home country.
Investors in MNCs can take benefit from their international diversification for example investing in a multinational food company that generates a significant percentage of its profit in other countries gives an investor’s exposure to growth potential of those countries.

Operational provision in Nepalese context

Section 154 to 158 (Chapter 16) of Nepalese Company Act has mentioned about operational legal provision of foreign company which is related with MNC. The provisions of ;
Branch office
Liaison office or contact office
Registration compulsory
Incorporation process
Approval from concerned regulatory, ministry department or regulatory
Registration fee, determined by notification in Gazette.
Account and Audit of foreign company
Power to attorney
Cancellation or registration and liquidation of foreign company.
Similarly, Foreign Investment and Technology Transfer Act 2049 (FITT Act) BS also creates space for foreign company.

Board of Directors: Function, Duties and Liabilities

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

(Chapter 6, section 86 to 104 of Nepalese Company Act)

A board of directors is a body of elected or appointed person who jointly oversee the activities of a company or organization. Oversee in the sense of monitor, control and guide through policy formulation and directives.
The body has different name BOD, board of trustees, board of governors, board of managers or executive board etc.
It is often simply referred as “the board”
Board activities are determined by the powers, duty and responsibilities delegated to it by authorities General Meetings & other regulators.
The powers, duties and responsibilities are typically detailed in companies buy laws.(MOA,AOA or others internal rules)
The buy laws commonly also specify the numbers of board members, how they are to be chosen, when and how they are to meet and function.
Section 2(Y) of Nepalese Companies Act ‘director’ means any director of a company this term includes any alternate directors.
Section 2(z) ‘board of directors’ means the board of directors of a company.
Section 2(z1) ‘Managing Director’ means a managing director of a company.
CEO is popular and now in use.
Director is a person occupying a position of a director.
A director is a person who performs the duty of directors.
Directors are the persons who are responsible for direction, control and management of the affairs of a company.
Since company is an artificial person, it is the directors who exercise the powers, and functions of company.
The board of such directors is the board or BOD.

Powers and function of Board of Directors
(Section 95 of Nepalese Company Act)

Governing the organization by fulfilling the objectives.
Selecting, appointing supporting and reviewing the performance of the CEO or manager or managing director.
Insuring the availability of the adequate financial resources.
Preparing and approving the annual budget.
Typically, the board chooses one of directors to be chair or chairperson of the board of directors.
Theoretically, the control of a company is divided between two bodies;
BOD
General Meeting

Practically, it depends on the nature of company.

In small private company, the directors and shareholders will normally be the same people.There is no division of power.

In Large public limited company

The board tends to exercise more of supervisory role. There may be; professional directors (such as a finance director a marketing directors).
The board tends to have more de facto power.

Responsibility & Duties of Board of Director
(Section 99 of Nepalese Companies Act)

A board of director is a group of people elected by the owners of a corporation or a company who have;

Decision making authority
Voting authority (in Meeting)
Specific responsibility is to distinct and separate from the owners (shareholders) or members of company or business entity. (Divorce between ownership and management)
Directors must be individuals.
Directors can be owners, managers or any other individuals elected by business entity.
Some time in exception, board of directors are compared with advisory board or board of advisors.
An advisory board is group of people selected (but not elected) by the person wanting advice.
Advisory board- No decision making authority no responsibilities.
Role and responsibility is also power and duty.
The role and responsibility depends upon the business entity.
House of Lord observed that unless the directors are acting contrary to law or provisions of articles, the powers of conducting the management and affairs of the company are vested in them. (Quinn and Artens v. Salmon (1909) A 442 )
In most legal system, the appointment and removal of directors is voted.

Directors are removed;

By expiry of tenure
By resignation
By resolution of remaining directors only by any cause
By removing by the G.M.

Exercise of Powers by BoD

The exercise of powers by the board usually occurs in meeting. (Section 97 of Nepalese Company Act).
Sufficient notice has to be given to all directors of these meetings in most legal system.
Quorum must be present before taking decision.
In most legal system the power of board of directors is vested in a board as a whole not only in the individual.
Decision is based on majority basis, but minority can claim regarding their interest.
Power must be used by the individual directors by virtue of ostensible authority.
Director exercise control and management of the company, but company are run for the benefit of the shareholders (in theory at least)
The law imposes strict duties on the directors.
Generally, the duties imposed to the directors are fiduciary duties.
Typically, there are two important points in relation to director’s duties.
The directors’ duties are several which must be done jointly.
The duties are automatically associated with company. But it does not mean that director can never stand fiduciary relationship to the individual shareholders.

Fiduciary Duties (on the basis of Court Developed Principles)

Acting in bona fide
Directors must act honestly and in bona fide, not mala fide.
Directors must act in good faith what they consider.
Proper purpose
Directors must exercise their power for proper purpose.
Purpose of company
Whether the purpose is serving the purpose of company or not.
Unfettered Discretion
Duty to avoid conflict of interest
Transaction with company conflict
Use of corporate property & opportunity and company.
Duties of care and skill

(Section 93, 94,95,99,100 & 103etc. of Nepalese Companies Act 2063 BS)

Duties of Directors
Fiduciary duties & Statutory Duty

Fiduciary Duty
Fiduciary means power is entrusted for the benefit of others.

Acting in bona fide

Directors must act honestly and bona fide
They must act in utmost good faith what they consider
They should act in the interest of the company

Directors are not required by the law to live in a unreal region of detached altruism and to act in a vague mood of ideal abstraction from obvious facts which must be present to mind in any honest and intelligent man when he exercise his powers as a directors. (Mills v Mills 1938, 60 CIR 150 an Australian case)

Sometime distribution of dividend may be considered as the act not bona fide act Improper distribution of dividend may reduce the wealth of company but sometime this is considered as honest , not breach of fiduciary duty.

Acting for proper purpose

Directors must use power for proper purpose of company.
Providing opportunity to their close relative may not be for the purpose of company.
Banks strictly prohibits providing loan for their close relative.
The powers must be exercised within the ambit of authority of company.
They cannot use their power for improper purpose.

Unfettered Discretion

Not to fetter
The discretionary powers or responsibility conferred upon the directors must not be delegated to others.
Section 95(6) of Nepalese company Act the matters which cannot be exercised by the decision of board of directors.
Directors cannot without the consent of company, fetter their discretion in relation to exercise of their powers.
Directors cannot delegate the power of vote in meeting to other or they cannot say that I am not going to vote.

Duty to avoid conflict of Interest

Directors must avoid the conflict of interest between them and company. Good faith must not only be done but must manifestly be seen to be done.
As a fiduciaries, the directors may not put themselves in the position where their interest and duties conflict.
Section 89 (1), ( f )of the Nepalese Company Acts – directors cannot compete directly with the company.
They should not act as the directors of competing company,
When directors himself enters into a transaction with a company, there is a conflict between the director’s interest and duty with company’s interest.
If director falls under such transaction he/she must ensure that the company gets as much out of the transaction but that is very difficult to prove.
Directors must not enter in a transaction which create problem.
Directors must avoid his /her transaction with companies,
Director must disclose and avoid close relative’s direct involvement or any kind of interest in transaction with company.

Duty of care and skill

A director must show reasonable care & skill.
Responsible care & skill.
A director need not exhibit in performance of his duties a greater degree of skill than may responsibly be expected from a person of his knowledge and experience.
Such care & skill should be a responsible care & skill of an ordinary man that might be expected to take on his own behalf.

Statutory Duties of BoD

Duty to disclose interest – Section 92 & 100 of Nepalese Company Act.
Interest in Transaction.
Any kind of interest in appointment of MD/ company secretory or officer of the company.
If he is director of another company.
Transaction on securities of company.

Duty to exercise corporate power

Section 95(1) of Nepalese Company Act – The directors shall use the corporate power according to company law, article of association, and decision of general meeting.

Duty to manage transaction and exercise of power

Section 95(1) of Nepalese Company Act –The directors shall manage all transactions, exercise the power and perform the duties of company through the board of directors collectively.
To present in meeting personally, not through the (proxy).
The directors must be present in person not the proxy, (Section 97 of Nepalese Company Act.)

To participate in general meetings as far as possible.

Section 68 of Nepalese Company Act; Directors required to be present in general meeting as far as possible.
Not to participate and vote which is going to decide his obligation of his misconduct etc. (Section 70(2) of Nepalese Company Act)

To prepare and submit annual account and report as mentioned by law – Section 78,80,109 of Nepalese Company Act.

Duty not to receive remuneration of the directors without decision of G.M.

The director cannot obtain any remuneration or other facilities or incentive without decision of general meeting.

Duty not delegate authority on; – (Section 95 (6) of Nepalese Company Act)

The power to make calls on shareholders in respect of money unpaid on their share.
The power to issue debenture.
The power to borrow the loan.
The power to invest funds of company.
The power to make loan.

Duty and power to appoint MD/CEO (Section 96)

Duty not to take personal benefit, to take oath of secrecy and honesty, (Section 99 of Nepalese Company Act).

Duty to discharge duty on good faith. (Section 99(4) of Nepalese Company Act).

Duty to disclose about securities. (Section 100 of Nepalese Company Act).

Remedies for Breach of Duties

Injunction or declaration
- Section 138 & 139 of Nepalese Company Act provides remedy of injunction also.
Recovery for Damages
- Section 140 of Nepalese Company Act -If any director has caused loss to company while acting contrary to the Act, MOA, AOA or consensus Agreement Company or aggrieved party may demand the recovery of such loss.( need to read whole clauses of this section 140)
Restoration of company’s property
- Section 163 of Nepalese Company Act speaks about realization of amount loss.
Recession of relevant contract
- If a director has concluded a contract beyond the scope of his authority or working scope of company any shareholders may make an application to rescind from implement and avoid the contractual liability.
Summary Dismissal
- Section 89(3) (b) of Nepalese Company Act states that if the general meeting possess a resolution to remove from the post, the director shall not continue to hold the office of director.

Directors’ Liabilities, Immunities and Limitation

The authority of directors is usually determined by the MoA AOA and decision of general meeting (Section 95(1) of Nepalese Company Act)
If all the acts have been performed in good faith within the scope of authority, the directors cannot be held liable personally for such loss or damages.
But if the director fails to perform good faith, the director is liable for such consequences.

Independent Directors

Public company should appoint independent directors under section 86(3) –if 7 directors-1 independent director, if more than 7 - 2 independent directors.
The independent directors should have qualification prescribed in AOA and also have knowledge of and experiences of business of company
The shareholders cannot be appointed as independent director.

Share Qualification of Director

Section 88 of Nepalese Company Act, if AoA specifies the number of shares as a requirement.

Disqualification of Directors – See; Section 89(1) of Nepalese Company Act.

Term of Office of the Directors (See; Section 90 of Nepalese Company Act).

Meeting of Directors

Section 97 of Nepalese Company Act.
Private company as per provision of AOA
For public company shall be at least six times in a year.

Prospectus of Company

Company Law Notes — Sun, 18 Aug 2013 05:41:42 +0000

Any document, described or issued by a company includes any notice or circular, authentic advertisement inviting deposits from the public.
Document inviting offers to the public for the subscription or purchasing of shares, debenture or securities.
Elements of prospectus;
A valid invitation to the public.
The invitation must be to subscribe or purchase shares or debenture of company.
The invitation must be made by or on behalf of the company.
Only the commercial advertisement is not prospectus.
Section 2 ( m) and 23 & 24 of Nepalese Company Act to know the concept, features and importance of prospectus.