BE Gens oe! PROMOTION AND FORMATION OF A JOINT STOCK COMPANY Company Promoters and their functions . Formation of a public company . Basic legal documents issued by a company |. A statement in lieu of prospectus Salient points of distinction between n memorandum: of association and articles of association oe oe Raat Three important legal doctiments of a joint stock company (Summarized)INTRODUCTION TO BUSINES: Chapter-5 D THEIR FUNCTIONS A to describe the person of persons Ww ho initially essary steps to form a company with reference fo a given object and set it going g to L.H, Haney Promotion may be defined as the process of organizing and planning the finance of a business enterprise nder the corporate form”. In the words of Justice Cokburu, “A promoter is one who undertakes to form a company with reference to a given object and sets it going and takes the necessary steps-to accomplish that purpose.” Classification of Promoters. Promoters may further be divided into three classes. (1) Professional promoters (2) Occasional promoters and (3) Promoters. (1) The Professional Promoters ‘as the name signifies are the persons who form or float the company as their profession. When the company is incorporated, they either get the commission or a fixed amount for the formation of a company and get it going (2) The Occasional Promoters are those persons who undertake to form a company occasionally and take the forming or floating of a company as their part time job: (3) The person who make all: investigations, preparation and arrangements for incorporating a company are called promoters. The Professional promoters and Occasional Promoters generally retire after the company is floated. The promoters, the third category, float the company for their own self interest and take active part for its successful operation. 1. COMPANY PROMOTERS The promoter is a business term, It is used }-Functions of a Promoter: The main functions of a promoter arc as follow (1) To Discover an idea for establishing a company. (2) To make detailed investigation about the demand for the product, availability of power, labour, raw mate to. etc, : (3) To find out suitable persons who are willing to act as first directors of the company. and are ready to sign on the Memorandum of Association (4) To select bank, legal advisor, auditors, underwriters for the company. (5) To prepare essential documents of the company (6) To prepare draft of the Memorandum of Association, Articles of Association Prospectus of the company and get them printed, Pa sii easa “CHAPTERS ~ PROMOTION AND FORMATION OF A JOINT STOCK COMPANY ” (7) To submit all the documents, required for incorporation with the Registrar (8) To arrange for advertisement of prospectus ‘of the company in the newspapers {9) To meet all the preliminary expenses for floating of a company tor of the (10). To make contracts with vendors, underwriters and managing direc : company finances and get the company going, the office of the company. (11) To raise the required (12) To make proper arrangement for ]1-Rights of promoters (1) Right to receive preliminary expenses. (2) Right to receive remuneration for'their services. (3). Right to rece {[I-Liability of the promoters (1) To disclose the liability and pay tion of contracts. or fraud in the prospectus. ment even after his death. ive the proportionate money from co-promoters. he secret profits if promoters have earned. 2) Liability is upto the comple! (3) Liability on statutory mistakes (4) His property becomes liable for pay! 2. FORMATION OF A PUBLIC COMPANY re of company formation is divided into four stages tion (3) Subscription of The whole process or procedu namely; (1) Promotion (2) Incorpora of business. ff capital and (4) Commencement Stages in the Formation of a Public Company svat (1) Promotion stage. \ iat the first stage in the formation of a company. Promotion embraces all the activities E oe bring into being a public company to run a business, Promotion starts with the ; ception of idea for the business to be involved ‘and continues down to the point at92 INTRODUCTION TO BUSINes. which the business is fully ready to begin operation as a going concern. The imponan, | steps in the promotion of a company are as follows: i ti) Discovery of business opportunity. Before, starting develop an idea to start a business, They think about the existing product to be produced (ii) Detailed investigations. Afier pre! investigations about the business as to how the ca the material, labour is to be collected, the market expected profit etc etc. rting a business. the promoters | and future demand of th. liminary investigations, they carry out detailed pital is to be realised. the place from where for the goods, the size of the business, the rying out detailed investigations, the its, They secure licence. copy right if financial needs and the demand for the (iii) Assembling different factors. After cat promoters start assembling various business element necessary, appointment of necessary employees. The product is estimated. j (iv) Capitalization. A company needs fixed and working capital for establishing and running a business. The promoters estimate the total amount of capital needed and then find out the types and sources of raising capital. They contact banks and underwriters for the issue of shares, debentures. (v) Preparation of essential documents. The promoters prepare all. the important documents for the promotion of the company like Memorandum of Association, Articles of Association and Prospectus. The promoters, after carrying out the various activities, give the company its physical form. The company however cannot start business at this stage. It requires legal entity. For this the company has to go for registration. The process of registration is called incorporation. (2) Incorporation stage f The second step for establishment of a company is to get the company incorporated or registered. The promoters have to prepare and file a number of documents with the Registrar for the incorporation of a company. These documents are.as under: (1) The memotandum of association signed by atleast seven persons. (2) The articles of association signed by atleast seven persons. (3) Promoters have to file a prospectus or a statement in lieu of prospectus with the register. (4)_A list of directors and their willingness to act, duly signed by each of them. (5) Notice of the address at which the registered office of the company will be situated. . (6) Original copies of the receipted challans i capital and the prescribed filing fee. EES SPOS of any (7) A statutory declaration by the secretary or a chartered accountant zs 5 ue provisions of the Companies Act with regard to registration hai bees nea we93 (8) Declaration of qualifying sha: A res. All i have to submit a declaration ce, the directors, whose dnd have paid tipthe siBley, tificate that they have taken up qualifying shares names are in the list. The ne ee eh, submitted must be accompanied with requisite filing fee The Regi tof all the documents will Scrutinize them. If he is satisfied that the requirements of law have been fully met with, he will register the company in the Register of Companies and issue a certificate of Incorporation. The certificate of incorporation is a Me echetin the Companies Act have been complied with. On obtaining the certificate, the company gets an independent legal entity. It can sue or be sued in its name, but it cannot start the business. (3) Subscription stage. A private company can commence business on receipt of certificate of ‘incorporation. » However, a public company has to fulfill another aware of this violation. 8. Legal status | Memorandum has more legal sanction than Articles. An agreement which is not permitted by the memorandum cannot be enforced by law. A, LONG QUESTIONS 1. Describe the role of promoters and their functions in floating of a public company (Ans.1) (Ans.2) 2. Describe the procedure of formation of a joint stock company in Pakistan. 3. What are the steps which need to be taken for the formation of a public company in Pakistan. (Ans.2) 4. Describe Memorandum of Association. What are its main clauses. (Ans.3) 5. Define Articles of Association..What are its main contents. (Ans.3(4) 6. The Articles of Association is a document second in importance to Memorandum of Association. Discuss. (Ans.3(ii) 7. What is prospectus of a company? Discuss its main sections. (Ans.3(ii). (Ans.4) 8. Describe in brief a statement in lieu of prospectus. 9. nt points of distinction between Memorandum of Association and (Ans.5) 10, Describe briefly the three important legal documents of a joint stock company. Ans.6 (for Details Q.3) B. SHORT ANSWER QUESTIONS 1, Name the main considerations which a prospective investor should take before going in for investment in a company are: (1) Study of the nature of business and its prospects of earning profit in the market (2) The objectives of the company to be achieved. (3). The standing of promotets and directors. (4). Scrutiny of the terms of agreement. (5) The capital structure of business. (6) Purchase considerations of property for the company. (7) Past history of similar concerns regarding assets, liabil (8) Standing of | underwriters and terms of underwriting. fies and profit.102 2. Write down the stages in the mited company. ages involved in the commencemen scommencement of business of a public company 4, private li a public compay, 1 of business: of ent of business, and two “egy i) Incorporation. ; ‘Ans. There are three st ion. (ii) Incorporation, (iii) Commence (i) Promotio’ t stock company: (i) Promoti in case of private limited company. (3) Name the basic logal documents, of a join Ans. There are three basic legal documents of a joint stock company: (a) Memorandum of Association (b) Articles of Association and (c) Prospectus statement in lieu of prospectus issued by the company? ‘Ans. When a public company having share capital decides to raise the required capi privately without inviting offers from the public, it is required to issue a statement in |j of prospectus. rs of a public company. conceive the idea of business (ii) make detail! d, (iii) organize the business (iv) get the neces: nge the filing of necessary documents with (4) Wher isa (5) Briefly describe important functions of promote ‘Ans. The promoters of a company investigation of the idea conceives documents prepared (v) and arrai concerned registrar of joint stock companies. C. OBJECTIVE TYPE QUESTIONS I. Multiple Choice . 1. A public company comes into existence when it gets (a) a certificate of incorporation. (4) a certificate of commencement. 2. A certificate of commencement is not necessary for a° . (a) private company, (6) public company. .. -, : 3. Articles of Association are subordinate to (a) Companies Act 1 iati , os na s Act only. (6) Memorandum of Association only (c).both. |. Ina private company the liability of members is (a) limited (6) unlimited 5. The scope of iu i pe of company’s business can be seen from: (a) Articles of Association (b} Memorandum of Association (Ani: 1. (a); 2. (a); 3. (a); 4. (a); 5: ;_qusTER-S ~ PROMOTION AND FORMATION OF A JOINT STOCK COMPANY 103 I, Point out the True and False statement from the following: Detailed investigation is the second stage in Company formation. A public limited company cannot start work after incorporation certificate. A private limited company does not need certificates of commencement. ‘A firm cannot be a-promoter. A promoter is an agent of the Company. 5 Memorandum of Association can supersede Articles of Association. Memorandum of Association contains bye-laws of the company. ent Nhe . Liability of directors can be made unlimited by passing a special resolution. 9. A prospectus is an invitation to the public of subscribing to capital. 10. Memorandum of Association can contain anything:contrary to articles of association. [Ans: True: 2 2,6.5.9, False: 1,4,5,7,10