Your start-up idea is now ready to go to the next stage, i.e., from an idea to a business venture but starting a new business venture can be an exciting and challenging endeavour. As a founder, you solve many challenges faced by emerging startups that might not belong to your domain of expertise, legal documentation is one of them. It is however recommended to get professional legal advice prior to such documentation, but there are some essentials that every startup founder must know for smooth functioning and compliance. This article will guide you by simplifying essential legal documents required for your startup and empower you to navigate the legal landscape with confidence.
The Memorandum of Association is a fundamental document that will provide an outline of the startup’s constitution and objectives. It’s important to establish a clear scope of operations for your startup, as well as define the roles and responsibilities of shareholders and members. This will ensure a smooth distribution of power and a strong foundation for your business.
When drafting your MOA, it’s crucial to remember that any actions outside of the stated objectives will be considered ultra vires or beyond the authorized powers. Keep this in mind to ensure that your company stays within its legal boundaries. It’s important to remember that the MOA outlines the scope and constraints of your startup’s authority. When drafting an MOA, it’s important to keep in mind the key clauses that must be included. These clauses are crucial to ensuring that the agreement is comprehensive and effective.
It contains the name of the company which gives a separate identity and signifies that the startup has an independent corporate existence. In order to ensure that your startup’s unique name is not taken by someone else you can reserve the name either through an RUN (Reserve Unique Name) facility or directly through the SPICE+ form.
To ensure the success of your business, it is crucial that you carefully craft a well-written object clause that aligns with the purpose of your startup. This will serve as the foundation of your business and guide your decision-making process. To ensure success, it’s important to clearly define the main objective of your startup and identify the necessary steps to achieve it. Additionally, it’s crucial to consider all potential business opportunities that your startup could pursue. Make sure your plan encompasses these key elements.
It’s important to include a liability clause in your startup’s Memorandum of Association (MOA) to establish a strong legal framework and safeguard the interests of all stakeholders. It’s important to have a liability clause to clearly define the level of responsibility that the members, directors, or shareholders of the startup have in case of any financial obligations or legal claims against the company.
It is important to consider the liability of your startup’s members, which can be limited by either shares or guarantees. It’s important to consider implementing a limited-by-shares structure for your startup. This will ensure that in the event of insolvency, the liability of shareholders will be limited to the number of shares they own. Incorporating your startup as a limited-by-guarantee entity would limit the liability of your members to the number of their contributions in the event of insolvency.
The capital clause in an MOA outlines the maximum amount of capital that can be raised by the startup, also known as the “authorized capital”. The capital clause would also contain the following information:
It indicates the proportion of authorized capital that has been issued to shareholders. It comprises the shares that have been allotted to shareholders and are in their possession.
This indicates the amount of money that shareholders have actually paid to the startup against the shares allotted to them. The paid-up share capital is typically a percentage of the issued share capital and represents the actual funds infused into the startup by the shareholders.
The capital clause specifies the types of shares that can be issued by the startup. For example, it may include equity shares, which represent ownership in the company and carry voting rights, or preference shares, which have certain preferential rights, such as a fixed dividend rate or priority in repayment of capital in case of liquidation.
The capital clause may also outline the distribution of shares among the shareholders, indicating the percentage of ownership held by each shareholder or category of shareholders. This provides clarity on the shareholding structure and the rights and privileges associated with different classes of shares.
To establish a clear understanding between you, the subscriber, and the company, it’s important to define the association or subscription clause. It’s important to keep in mind that the Association Clause plays a critical role in the Memorandum of Association (MOA) of a startup. It’s important to establish a strong association among the initial members or subscribers who are coming together to form the company.
To clarify, by subscribing to a certain number of shares or guaranteeing a specific amount through the MOA, one expresses their desire to become a member of the association being established by the MOA. To ensure compliance with the Act, each subscriber to the MOA must hold at least one share. To ensure proper documentation, it is imperative that each subscriber accurately records the number of shares they own and signs the MOA.
Additionally, it is necessary to have at least one witness present to attest the signature. In order to ensure proper legal compliance, it is recommended that the Memorandum of Association (MOA) be signed by a minimum of seven individuals, or more if the company is publicly traded. In order to ensure proper documentation and accountability within a private company, it is imperative that any important documents are signed by multiple individuals, typically two or more. Drafting a well-crafted MOA is crucial for establishing a solid legal foundation for your startup.
The AOA outlines the internal rules, regulations, and procedures that govern the startup’s operations and relationships among its members. The key is to keep in mind the company’s size, nature and resources along with the various agreements entered before incorporation such as co-founder’s agreement, partnership agreement, and LLP agreement, as the terms now must be reflected in the AOA. In order to get a better idea of the AOA you can refer to the AOA of a similar startup.
In a broader sense, the AOA comprises two parts, let’s say Part A and Part B that co-exist with each other. Part A will contain definitions, share capital, alteration and the issue of capital, transfer, forfeiture, and voting rights concerning shares that were decided during the incorporation. However, as the startup will progress the investments will flow in and the alterations will be required to be made for such a scenario, the startup must incorporate a Part B to the AOA that shall contain the newly defined clauses, and amended terms as agreed with the shareholders post investment in the startup.
Here are some important clauses to include while drafting the AOA:
This clause will specifically define the recurring terms that are to be used in the AOA. It is important as it dispels ambiguity when a subscriber or a third party seeks to interpret a particular term.
This clause should mention what are the kinds that would be issued. An important thing to keep in mind is that paid-up share capital is the money that the company has received from the sale of its shares and that it is not borrowed. The AOA should also include the restriction imposed on the transfer of shares and also that irrespective of the number of shares a member possesses, they shall be considered as a single member only.
Lien is a right that is conferred on the company to keep the shares of a member until a claim is satisfied. The member will not be able to transfer the shares until he satisfies the claim. The company generally issues a notice before taking ownership over unpaid share capital such notice period must be mentioned in the AOA, along with the consequences in the event of non-payment.
The board may from time to time make calls upon members in respect of any amount unpaid for their shares. If a shareholder wishes to transfer the shares it must be done only after obtaining permission from the board of directors and it has to be specifically mentioned that if a share cannot be transferred. The AOA must also provide a mechanism for the transfer of shares.
Transmission is a kind of transfer, where the title is transferred by the operation of law to the legal heir or any other person as the board of directors may decide after the death, insolvency, lunacy, or bankruptcy of the shareholder. It is pertinent that this clause in the AOA must also that such interest of the shareholder or the debenture holder passes to the nominees specified at the time of purchase of shares or debentures. However, the board of directors have the absolute power to decide the application of the nominee or member.
In a situation where the shareholder or the member of the startup fails to pay the unpaid share capital amount on request of the directors and fails to show his case, the company would then forfeit the shares of such shareholder or member through a notice issued by the directors. It is relevant to put forward here that lien comes in before forfeiture in the AOA and hence this clause can also be included with lien.
This clause is significant in the AOA as it speaks about the reduction and increase of the share capital of the startup. The increase in share capital indicates that the startup is issuing new shares and this issue shall come with terms and conditions, rights and privileges, along with the types of shares being issued, preference or equity has to be decided as well.
The clause shall also lay down the circumstances under which the company cannot buy back shares. In order to reduce the share capital of the company a special resolution shall be passed to that effect.
The startup can invest its profits in either the expansion of the business or pay off credit, in such a case how the profits must be utilised has to be mentioned in the AOA. The dividends must be paid to the members and they cannot be waived off merely in the name of capitalisation of profits.
The startup can buy back its shares from the shareholders under certain circumstances, which have to be listed in the AOA on which the board can exercise such powers. The buyback can be limited to approvals the same must also be mentioned in the AOA.
A member or shareholder in the startup can vote either through proxy or attorney, the number of votes each member is entitled to must be mentioned in the AOA. It is important to note here that voting rights in case of a lien must also be specified.
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