Floatation of a Company

Before a company can become registered, the Act provides that the following documents are drawn up and sent to the Registrar of Companies:

• a Memorandum of Association
• Articles of Association

The Memorandum of Association must contain the following 5 items of information:

1. the name of the company with “Limited” or PLC as the last word
2. the address of its registered office
3. the object of the company
4. a statement to the effect that the liability of its members is limited
5. the amount of the capital to be raised and the division into shares of a stated amount

The word “limited” or PLC must be indicated on all business letters, on invoices, order forms, cheques, etc. as it is a warning to people doing business with the firm that the shareholders only have limited liability, and the risk involved is greater than when trading with for instance a partnership. The name must not be too much like the name of another company; if so the Registrar will order the company to change it. British registered companies now have PLC at the end of the company name whereas foreign companies and their subsidiary companies have “ltd” as the last word. Clause no. 3 gives a detailed description of the purposes and activities of the company. If the company later wants to change its objects, it can only be done within the regulations of the Act. Shareholders who feel that new activities mean a risk to their investments can apply to the Department of Trade and Industry and have its inspectors look into the matter. Very often, the objects clause is deliberately drafted in a broad manner to facilitate diversification of company activities.

Limited liability means that shareholders are only liable for their shareholdings. Thus, if the company fails, shareholders can only lose their investment. Shares are normally issued in denomination of ₤ 1 or 50 p to attract small investors as well.

The Memorandum contains matters of interest to people who intend to invest in or do business with the company. The Articles are rules for the regulations of the internal affairs such as the powers and duties of directors, procedures at board meetings and general meetings, voting rights of different classes of shares, etc.

If the Registrar satisfied with the above documents, it will issue a Certificate of Incorporation and if it is a public company, a Trading Certificate as well. Not till this has happened, does the company start existing – it becomes a “legal person” with the same rights as any person to own land, buildings, employ staff, sue others or be sued, etc. But before doing so, it must raise its capital. In a private company, the capital is obtained among the founders whereas the promoters of a public company draw up a prospectus, which is a very detailed description of the company’s plans and activities, to induce public to buy shares of the company. The prospectus must be approved by the Registrar before publication to ensure that it is not misleading in any way. Normally an issuing house (a commercial bank) will arrange the sale of the shares. Each investor fills an application form and on payment of the amount required, he/she a share certificate (the share) stating his name, address and the number of shares taken. The company must keep a Register of Members, which is open to the public. If the capital stated in the Memorandum cannot be raised, each investor must be paid back his contribution.

Date: 2015-12-24; view: 801