Here’s how your business charter documents can help you
What are the charter documents for partnership firms and private limited companies?
The primary document of a partnership firm is a partnership deed. A partnership deed is basically a document that governs the relationship between the partners by prescribing terms and conditions of the partnership and rights and obligations amongst the partners.
The primary documents of a private limited company are the memorandum of association (MOA), articles of association (AOA), and shareholders agreement (SHA). While incorporating a private limited company, MOA and AOA should mandatorily be submitted to the Office of Company Registrar (OCR). However, SHA is submitted only if the same is entered into amongst the shareholders.
What does a partnership deed contain?
The partnership deed generally contains details of the partners, the objective of the partnership firm, and other necessary details relating to the firm and its partners. There are certain provisions that can be made in a partnership deed that may help an entrepreneur secure his/her interest:
It is not necessary that all partners invest equal amounts or that all partners invest in cash. A partnership deed should stipulate the assets contributed by partners at the time of starting the business. Unless the partnership deed requires, it is mandated by law that no partner is obliged to contribute capital more than what is mentioned in the partnership deed.
Replacement of Partner
Unless the partnership deed allows for the replacement of one partner by a third person, the law does not permit such replacement, even if the same is desired by the outgoing partner.
Participation in Firm Business
There may be some partners who are only willing to invest capital and make a profit but not indulge in the day-to-day management of the business. For such partners, the partnership deed can provide an exemption for one or more partners from taking part in the management of the partnership firm. In the absence of such exemption, the law presumes that every partner is entitled to participate in the management of the firm’s business unless opposed by other partners.
Right to access to the firm’s books
The partnership deed can stop a partner from having access to the account and books of the firm. If such provision has not been made in the deed, then the law presumes that such a partner is entitled to have access to the account and books of the firm.
Remuneration and Interest
A partnership deed provides (a) whether or not partners are allowed to draw remuneration for being involved in the management, and (b) the amount of remuneration.
Profit and Loss Sharing
Partners are free to decide on the profit as well as loss-sharing modality. However, if such modality has not been provided in the deed, then loss and profit should be divided equally among the partners.
What do MOA, AOA, and SHA contain?
MOA and AOA contain, among other things, the objectives and capital of the company, voting rights, dividend distribution, etc. The formats and provisions of MOA and AOA are prescribed by OCR, therefore, any other provisions in addition to that of MOA and AOA are incorporated in the SHA. Some of the provisions which should be analysed while drafting charter documents are:
The MOA should clearly provide the number of shares to be subscribed by the shareholders.
Different classes of shares
A company can issue various classes of shares with different rights. Shares can be issued with mainly following different rights:
Dividend rights: It largely involves the priority order of receiving dividends and whether a shareholder of a particular class will receive dividends before shareholders of another class, whether they will receive a certain percentage of a dividend, or they will receive a dividend based on the profit of the company;
Rights in general meeting: While drafting the charter documents, shareholders can also agree on whether shareholders of a particular class will have voting rights in general meeting or not, the subject matters in which shareholders of a particular class can vote, and also the voting ratio;
Right to receive shares: This right involves the situation of cancellation of a company that is, after all the liabilities of the company are paid during the cancellation of the company, whether a shareholder of a particular class will receive his/her shares from the remaining amount after paying the liabilities or not; and
Director appointing right: Whether shareholders of a particular class can vote to appoint a director or not.
Limitations and restrictions on share issuance, pledge, and transfer
Charter documents can be drafted in a way to restrict shareholders from transferring or pledging their shares without the board of directors’ approval. Further, the shareholders can be granted the right to have the first choice to purchase any shares that other shareholders want to sell, and such first choice to purchase can be provided for issuing new shares by the company as well.
Quorum of a general meeting
The law provides space to determine quorum requirements in the charter documents. For example, a certain number or all shareholders or shareholders subscribing to a certain number of capitals must be present to satisfy the quorum requirement of the general meeting.
In the case of shareholders who do not express consent to the alteration or transfer of shares or sale of a company’s assets during the merger, charter documents can provide a value in which the shares of such shareholders can be bought. For example, provision to buy shares of such shareholders in accordance with the valuation before the merger or in premium or discount on such valuation.