Before delving into the changes under this heading in the new Act, it is important to understand what the memorandum and articles of association are.
The memorandum of association is commonly known as the document that sets out the objects of a company. Object (from the word objectives) of a company mean the range of activities that a company intends to undertake upon incorporation. The memorandum contains the company’s purpose and/or objectives. These objects are then binding upon the company and the company cannot undertake any activity outside the listed objects/activities.
Therefore the objects of a company circumscribe the capacity, or power, of a company to act. The legal position is that any contract entered into beyond the objects would be deemed void. Articles of a company, on the other hand, contain clauses on how members intend to run the affairs of a company and interact with each other. It would contain issues as regards; shareholding, voting rights, appointment and removal of directors, the passing of resolutions, the calling of general meetings, etc.
The Change in the Act
While the repealed Act expressly provided that a company is restricted by its objects as encapsulated in the Memorandum of Association, the 2015 Act provides that a company’s objects are unrestricted unless a company opts to restrict them.
The Repealed Act
The repealed Company’s Act provided that a company is limited to acting within the objects set out in its memorandum of association. Anything purported to be done by a company which is beyond those objects would be considered void at and the directors could be personally liable for such acts.
Because of this limitation, companies would have very long objects clauses, setting out in detail all the possible types of business the company may want to engage in, followed by supplementary objects or powers covering all the standard activities of a company, such as taking interests in land, borrowing money, lending money, employing people, etc. Such prolixity was an attempt to avoid the effects of the company’s action being considered void.
Government authorities and various companies would always study the memorandum of association of a company before issuing the company with a tender or entering into a contract with that company. For instance, a bank would not advance loans to a company if the objects did not provide that the company can borrow such funds. Another example, a company could not be given a license to undertake construction if its objects did not expressly state that it can do so. Or a company cannot pre-qualify for a tender if the tender requires services, which services are not expressly stated in the objects.
The New Companies Act, 2015
The Memorandum of Association
Under the new Act, the Memorandum of Association (“memorandum”) of a company will no longer form part of a company’s constitution. The memorandum (which initially contained the objects) will still be required, but it will be in a prescribed form. It will not contain the objects of a company but instead will simply provide that the members wish to form a company and wish to take at least one share each.
Information about the proposed company’s name, its registered office, limited liability, total number of shares taken by subscribers, and public or private status will be dealt with in the other registration documents. Not in the memorandum of association.
The memorandum will therefore be crucial to registering a company, but after that it will not be a “living” or relevant document. Matters that are currently in the memorandum will, from the date of operation of the Companies Act 2015, be dealt with in the Articles of Association.
Articles of Association
The Companies Act 2015 defines a company’s constitution as its Articles of Association and any resolutions and agreements that affect a company’s constitution. The objects of a company will now be contained in the articles of a company. While under the repealed Act, the activities of a company were restricted by its objects, under the 2015 Act, a company’s objects are unrestricted. Meaning under the Companies Act 2015, a company can undertake whichever activity it is interested in, and its acts will not be considered void.
However, a company may choose to restrict its objects in its articles (section 28). If the articles do contain a restriction, that restriction will act as a fetter on the directors. The directors may be liable to the company if they enter a transaction in breach of the restriction. It is key to note that any restriction on a company’s objects needs to be registered with the Registrar, and the alteration does not take effect until it has been registered.
For an existing company, the objects in the memorandum will be deemed to be automatically incorporated into the company’s Articles of Association.. This is because the memorandum is no longer a relevant document.
Further, if a company restricted itself in its activities and operations, even after the coming into effect of the 2015 Act, its activities will still be restricted.
It would therefore be prudent for companies to adopt new articles with no restriction on their objects. This would also have the benefit of updating the articles in other ways. If an existing company wishes to amend its constitution to provide for unrestricted objects, it will need to also amend its Articles of Association by special resolution.
This change will be great for entrepreneurs who are interested in various ventures as they can conduct different businesses without the hustle of incorporating multiple companies. Further restrictions that would limit entrepreneurs from getting into contracts or from being awarded tender are now a thing of the past. This change, therefore, opens up business for entrepreneurs to pursue various ventures and prevents companies being blacklisted from various projects due to its objects.