Corporate lawCorporate law/joint stock company law: Def: the set of rules and regulations/sections and subsections regarding the creation of the joint stock company. The arrangement of annual General meetings, The issuance of new shares as well as additional shares rights and powers of the board of directors as well as the members of the company and the winding up of a company under the company ordinance 1984 of Pakistan.

History of company law in Pakistan

1 The concept of company was developed in the 2nd half of 19th century (1850 onwards).

2 Different laws were developed during this era3 The first act was passed in the British India in 1850 for the

registration of joint stock co’s4 Another act for the registration of joint stock co\s in the UK in 18845 A complete and basic act of 1913 was developed.6 A company law commission was appointed by the Pakistani govt in

19597 The submitted their report to the govt in 1960. 8 Its contents was made publically available in 19729 The title of the report was the company law commission of Pakistan10 At least in 1984 Pakistan has developed its own complete law for their

co’s in the form of “company ordinance 1984”

Constituents of the company ordinance 1984It consist of 514 sections and 8 schedulesThe 514 sections have been divided into 16 parts and are as follows.

1) Preliminary2) Jurisdiction of the court3) Corporate law authority4) In corporation of the company and their matters5) Prospectus. Allotments. Issue and transfer of shares and debentures6) Share capital7) Registration of mortgages etc8) Management and administration9) Arbitration. arrangements and constitutions

10) Prevention of mismanagement11) Winding up12) Application of ordinance of co’s formed and registered under

any previous act.13) Winding up of unregistered co’s14) Companies established outside Pakistan15) Registration offices and fees etc16) General

Eight schedules:1. regulation of a Co’s ltd by shares

memorandum of association article of association

2. Matters to be specified by prospectus. rules and regulations3. Form and context of annual return report.4. balance sheet and profit and lost account of listed co’s5. balance sheet and profit and lost account of non-listed companies6. Fees to be paid to the registrar. Authority. And federal Govt7. The detail of enactment (to give a practical shape)8. Amendments

PROCEDURE FOR FORMING A COMPANY1 Promotion stage:

The idea of forming a company must be conceived by a person who is called promoterHe is expert in forming a company workHe is to prepare necessary documents in order to get incorporation certificate from the registrar of joint stock co’s There are two types of promoters

1 Professional promoterWhen starting a company so they contact with professional promotee because they are experts in company creation and charges fees/commission2 General promoterMinimum 7 members combine and want to start a business and submit there application to the registrar called general promoter

Promoters’ duties or promoters characteristics:a. Idea for businessb. Investigation (raw material. Demand )c. Selection of first directors (90% of promoters are BOD’s)d. Selection of legal advisor (lawyer) auditors and banks like

investment bank Three main function of investment bank is

1. Underwriting facility The facilities extended by the investment bankers to the issue of

securities, assuring them that they will get an expected amount to be paid by the purchaser of the securities. Two types of underwriting facilities we have. i.e.

a. Best offer Here the underwriting firms take the commission they try their level best to flowed the company shares and also advertise Here Risk is beared by company

b. Firm commitment.Here the underwriter makes full payments and purchase all the shares…Risk is totally beared by underwriting i.e. investment bank

2. Investment advices It simply means to provide advices to banks, govt etc and also to

the small businesses.

3. Mergers and acquisition The process in which one of the combining companies looses its

separate identity and the assets and liabilities of the loosing company become a part of the surviving company- mergers

Acquisition: can’t loose its separate legal identity and take the liabilities and assets of the company in their sharing amount.

1 Promote all the necessary documents (prospectus, memorandum)

2 Submition of the documents3 To meet all the preliminary expenses4 To collect the share capital

Incorporation stageTo get the certificate of incorporation from the registrar of joint stock company. The promoters must submit the following necessary documents to the registrar.

1. memorandum of association2. articles of association3. notice of the address of the head office4. list of directors5. consents in writing of directors6. directors contract to purchase qualification shares(directors have to

purchase)7. statutory declaration of legal documents of incorporation

* Here are two more steps involve in case of public ltd company i.e.

Raising of share Capital (public)After the incorporation of a public company, the director will file a copy of prospectus with the registrar, to offer investors, that they shall submit their application along with the application money with the company bankers.

Certificate of commencement of business (public)This certificate will be issued by registrar, if the following documents are submitted to him.I. Declaration by the company that the minimum subscription as per

prospectus has been received in cashII. Declaration by the company that all the directors have taken up their

qualification shares and paid for them.III.Declaration by the company that all legal requirements to the

commencement of business have been fulfilled.

Private company Public companyMembers 2-10 7- ∞Cannot issue share to public Raising of share capitalCannot trade in stock exchange Easily trade in stock exchange

Basic legal documentsa) Memorandum of association (company’s charter) It is the basic document on which the whole superstructure of the company is based. It is also called the constituents of the co. it is primary document it the company formation. It is for the external management of the company.

Contents of memorandum of association.1 In case of public ltd co the names of the co with the word “limited”

as the last word of the name while the private ltd with the name of the “private ltd co” as the last word of the name.

2 The province where the registered office of the co is to be situated.3 The objects of the co and their extensions4 The liabilities of the members is limited5 The amount of the shares capital and the no of shares with which

the company is to be registered.

Form of memorandum of association1 It must be printed 2 Must be divided into paragraphs and consecutively numbered3 Signed by each subscriber (who must give his full address and

occupation) in the presence of atleast one witness who must attest the signature.

Memorandum of association consist of 6 clauses1. name clause2. situation clause3. object clause (objectives of company)4. liability clause (limited up to their investment)5. capital clause6. subscription clause (integral part of capital clause)

Let us know brief abt types of capital.Authorized capital: nominal or registered capital with which company is registered with registrar.

Issued capital: amount of shares actually issued.Subscribed capital: actually apply by public for shares.Paid up capital: shares actually purchased (in accounting it is called as Realization of cash) Procedure for alteration of objects

The following procedure must be followed otherwise alteration become void.

1 A special resolution is passed by giving a notice to all persons who are interested in alteration.

2 An application is filled with the SECP for confirmation of change.

3 The SECP must check the objections of creditors and be satisfied that their consent is obtained.

4 After that the SECP will confirm the change if it deems fit.5 With in 90 days from the date of order of SECP , a certified

copy of the order of the court along with the printed copy of memorandum must be submitted with the registrar of SECP

6 Registrar will then issue a certificate of registration, which will be a proof of alteration in objects.

Doctrine of ultra-vires: An act performed but not authorized by the object clause of memorandum of association or by statute is called ultra-vires (unlawful activities)

1 Ultra-vires the memorandum: the act which ultra-vires the memorandum, the memorandum become void.

2 Ultra-vires the articles: the act which ultra-vires the articles , the article become void

3 Ultra-vires directors: the act which is beyond the capacity of board of directors, such acts may be breach of articles so the Co in annual general meeting may ratify such an unauthorized act of directors by passing an ordinary resolution.

Procedure for change of name. A company at many times during the course of its business may change its name by fulfilling the following conditions.1 A special resolution is passed2 Approval of registrar is obtained in witting with respect to change in

name. 3 The registrar enters the new name in register and shall issue a

certificate of incorporation in the changed name.4 Where the co has unintentionally registered a name similar to that of

an existing name, it can be changed only with the sanction of the registrar.

b) Article of association.

It is also known as supplementary or secondary document of the co. It is used for the internal matters/management of the company. Articles of association must be signed by each subscriber.

Contents of articles of association3 Amount of share capital issued and transmission of shares4 Rights of shareholders regarding voting, dividend and return of capital5 Rules regarding issue of shares and debentures. 6 Procedures as well as regulations on “making calls” on shares7 Manners of transfers of shares 8 Rules regarding appointment of directors, managing agent, secretary

and treasurers etc9 Number , qualification, power and liabilities of directors10 Convening and conduct of meetings with respect to quorum , poll,

proxy , resolution etc11 Rules regarding the forfeiture of shares12 Rules regarding the winding up of shares13 Matters relating the winding up of the Co.14 Declaration of dividend.(responsibility of Board of directors )

Difference b/w Transfer of shares and transmission of shares

Transfer of share: when the person is mentally sound and sale out his shares (dispose off).

Transmission of shares: it is the process of transfer of shares to legal successor (next to kin) or representative of the deceased person (shareholder) by the operation of law in case of death, insolvency or lunacy (unsound mind).

Note: forfeiter- to possessed someone else assets. Quorum- number of person for conducting meeting, its 1/3 of directors.

Memorandum of association Article of association

Memorandum is a fundamental document.

The memorandum lay down the objects of the company.

Memorandum indicates the scope of affairs of company.

Memorandum is the dominant instrument.

If memorandum is silent on a point.

If memorandum is clear on a point.

Article is a supplementary document.

Article lay down the manner in which the object is to be fulfilled.

Article indicates how the business is to be carried out.

If any part of article conflict with it, such part of article is to be deemed as void.

Article explains that point.

Then there is no need that the article supplements that memorandum.

Procedure for alteration of article of associationThe following procedure must be followed while altering the articles.

A. Instruct the company’s legal advisor to draft the alterations together with a notice to the members of Extra Ordinary General Meeting (EOGM).

B. When the company is listed on the stock exchange the draft of alteration must be sent to the stock exchange for approval.

C. After the approval of stock exchange, call a members of directors for the approval of alterations and the fix a date for (EOGM)

D. Notice of alteration must be sent together with alteration of articles atleast 21days before the meetings to the members.

E. With in 15days of EOGM, file with the registrar a copy of special resolution passed in the meeting.

F. Send a copy of special resolution together with amended copy of articles of association for approval to stock exchange.

G. Amend all unissued copies of the company’s article.

Note. EOGM- a meeting of shareholders in case of sudden change or emergency.Draft-a legal written document must be prepared by company’s legal adviser (lawyer)

c) Prospectus (public ltd company only)Prospectus is a document that includes notice or advertisement inviting public for subscription or purchasing and shares or debentures of a company or inviting deposits from the public.

Contents of prospectusI.The contents of memorandum with the name, address, occupation and

description of the person who’s names (their in memorandum) , the nature and the extent of interests of the shareholders in the profit and property of the Company.

II. Description of business to be undertakenIII. Description regarding remuneration of the directors or chief

executive officerIV. The names, address, occupation and description of the

important office bearers of the company.V. Where shares are offered to the public for subscription,

information regarding minimum subscription, preliminary expenses payable and underwriting commission payable etc.

VI. The date and time of opening and closing subscription listVII. The names of the underwriters and directors opinion about them

that their resources are sufficient to fulfill their obligationVIII. The names, addresses, description and occupation of the

company vendors and the amount paid or payable to them.IX. The estimated amount of preliminary expenses paid or payable

by the companyX. Any amount paid to the promoters in previous two years.XI. The names and addresses of auditors and legal advisors.XII. The right of voting of meeting and dividend attached to shares.XIII. The length of time during which the business of the company

has been carried on.XIV. A reasonable time and place for the inspection of balance sheet

and income statement.XV. A summery in column from the earnings of the company for

each 3 financial years.XVI. Pending legal proceedings to which the Company is a party.

Liabilities arising from mis-statement in a prospectus 1. civil liabilityhe who is the director at the time of issue of prospectus, he who has authorized the issue of prospectus, he who is the promoters of the company , shall be liable to pay compensation to all those person who has subscribed to the shares and suffered from mis-statement.

2. criminal liabilityWhere a prospectus includes any untrue statement, every person who signed or authorized the issue of prospectus shall be punishable with imprisonment which may extend to 2years or with a fine which may extend to RS 10000 or with both.

Statement in lieu (instead of) prospectus.A company having a share-capital which does not issue a prospectus, so that has been delivered to the registrar for registration a statement in lieu of prospectus signed by every person who ‘s name their in as a director atleast 3days before the first allotment.

Jurisdiction of the company courtsIt is provided that court having jurisdictions under the company ordinance 1984, shall be the high court, having jurisdiction at a place at which the registered office of the company is situated , the central govt may empower any district court to exercise all or any of the jurisdictions.

Company BenchesThere shall be benches in each high court , one or more benches , each to be known as company bench , to be constituted by the chief justice of high court, to exercise the jurisdictions under the company ordinance 1984.

Procedure of the company courti. All matters coming before court under the company ordinance shall be

disposed off (solved) and the judgment pronounced as soon as possible but not later then 90days form the date of the presentation of the petition to the court except in extra ordinary circumstances, the court shall hear the case from day to day.

ii. The hearing of the matters shall not be adjourned except for sufficient cause or for more then 14days at one time or for 30days at all.

Corporate Law Authority (secp)It is constituted under section 11 of the company ordinance 1984. The federal Govt is empowered to constitute the CLA. The authority must consist such number of members not being less then 3 to be appointed by the Govt, one of the member is to be appointed as chairman of the authority by the federal Govt.

Power and functions of Authority (company law authority)1 Issues orders and instructions to all persons and officers in the execution of

ordinance.2 Confirm alteration to memorandum 3 Extend time for filing documents with the registrar.4 Grant license and allowing an association to enjoy all the rights of a

limited company with out using the word “limited”5 Allow a public company to convert it self into a private Company.6 For special reasons allow a prospectus to be issued more then 30days

before the subscription list is due to open.7 Specify the form of application for r subscription to shares or debentures.8 Permit a company to with hold or delay payment of dividend in certain

cases.9 Allow extending of time for holding annual general meeting and filing a

document by the listed company up to 90days.

Share certificate It is a document issued under the common seal of the company and contains

1 Name and address of the holders2 Name of shares held by them3 Their distinctive numbers4 Paid of amount.

Register of membersIt contains:

a) The name, father/husband’s name, address, nationality and occupationb) Statement of shares held by each member, their distinctive numbers,

paid up amount.c) The date at which any person was entered as a member of the CO.d) The date at which any person was ceased to be a member and reasons

of ceasing. Rights of members.

1. Inspect register of members and debenture holders.2. In case of public ltd company, they will receive a statutory report.3. have copies of memorandum and articles on payment of fee4. receive share certificate with in prescribed time 5. transfers of shares6. Receive minutes of the proceedings of general meeting.7. Remove directors.8. Receive copies of annual accounts.9. Appoint auditors at general meeting.10.Inspect auditors report at general meeting.11.Resolve by special resolution that the company ay be wound up by the

court.12.Resolve by special resolution that the company may be wound up

voluntarily.13.Appoint and fix remuneration of liquidators.14.attend meetings and vote at meeting 15.Approved dividend as recommended by the directors.16.Have a share in the capital of a company.

Liabilities of share holders.Where a company is limited by shares, the liability of shareholders is limited to amount, if any unpaid on shares held by him. This liability is continuous as long as anything remains unpaid on shares.

Commission on issue of shares. It shall be lawful for a company to pay commission to any person in consideration of his subscribing either absolutely or unconditionally for any shares in the company if:

1. The payment of the commission is authorized by article of association.

2. The commission paid should not exceed the rate fixed by the authority.

3. The amount and rate must be disclosed in prospectus, if issued by the Co.

4. Where a prospectus is not issued, the amount and rate must be disclosed in a statement in lien of a prospectus.

5. The number of shares for which the persons have agreed to subscribe absolutely for a commission is disclosed in a specified manner.

Premium on issue of shares

Where a company issues shares on premium, the values of premiums shall be transferred to an account called “the share premium account”. This account may be applied by the company as under.

1 In writing-off the preliminary expenses of a Co.2 In writing-off the expenses of commission and discount on

issue of shares and debentures.3 To pay premium on redeemable preference shares or

debentures.4 In paying up un-issued shares of the company as fully bonus

shares.

Issue of shares at a discount It shall be lawful for a company to issue shares at discount if:

1 It must be authorized by a resolution passed at general meeting and sanctioned by the authority.

2 The resolution must specify the maximum rate of discount not exceed than 10% or higher rate fixed by the authority.

3 Not less then any year must at the date of issue have elapsed since that date on which the company was entitled to commence its business.

4 The shares are to be issued at a discount must be issued with in 60days after the date on which the issue is sanctioned by the authority.

Capital structureThe combination of debt and equity financing in the capital of a company is called capital structure.While a particular amount of money with which the business is started is share capital.

Kinds of preference share1. simple preference share They are usually entitled to receive fixed dividend before any dividend is pairs on the ordinary shares. If there are no profits in the year then there is no dividend for the simple preference shares2. cumulative preference share if in any year the profits are not enough, their right to dividend does not lapse, but carried so that when the company makes the profits in the subsequent year it must first pay off the arrears of dividend before paying dividend to other kind of shareholders.

3. cumulative participating preference share these share holders is not only entitled to receive arrears of dividend but are entitled to share with the ordinary shareholders , the balance of profit in some proportions after the right of ordinary share holders have been met.4. redeemable preference shares normally shares of company are not redeemable they can be redeemed only when the company goes into liquidation however, the law in section 85 of the ordinance 1984 has provided for the redemption of redeemable preference shares during the lifetime of the company.5. deferred/mgt share/founder shares These shares are normally issued to the company promoters or founders of the company or the underwriter of the share capital, these shares receive no dividend until the dividend on all other classes of shares has paid in full.

Company directors Directors includes any person occupying a position of a director, the position of

a director by whatever name called every private company must not less then two directors and every public company not less then 7 directors .

Directors having power to issue shares. First directors are appointed by promoters A company can’t make loan to its directors.

Directors as an agentThe director may make contracts as agent of the company if the contract made

by a director ultra-vires his power made with a member is only voidable but if made with an outsider who had no notice of the wants of his power, it is binding on the company.

Director as trusty Directors are trustee regarding the power conferred on them by the articles

and the capital under their control. They are not persons in the employment of the company. They are trustee for the company and not for the individual share holders they are not trustee for third party who have made contract with the company they are also trustee for the company in respect of their power of approving transfer of shares, issuing and allotment of shares as well as making calls and forfeiting of shares.

Eligibility of a person to become a directorA person is appointed as a director if he:

is a major share holder is of sound minded is a member of a company has not been convicted by court of law is a solvent person is a natural person

Power of directors1. To make calls on share holders in respect of money unpaid on their shares.2. To issue shares.3. To issue debentures.4. To borrow money otherwise then on debentures.5. To invest the funds of the company.6. To make loans.7. To approve annual, semiannual, or periodical accounts as are required to be

circulated to the members.8. To incur capital expenditure exceeding Rupees 2 lac on any single item or

dispose off a fixed asset of value exceeding rupees 1 lac.

* will friends there is much more on this subject but I wrote upto here coz I m having my exam and I do not have more time to write any more. I will try to write after my exam In-sha-Allah. Hope this little piece of mine will help u all a lot, I dedicate it to my kindest and hardworking teacher Sir Muhammad Arif.

Written by Amir Sajjad KhanBBA (hons) 6th semesterDedicated to Sir Muhammad ArifTitle Company law of PakistanInstitute of business and management sciences (ibms)Agriculture University Peshawar.Dated: 20/11/09Email address: amirsajjadkhan_ibms@live.comMobile no# 03339041896

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