Understanding the Essential Roles of Memorandum and Articles of Association in Corporate Governance

Key Takeaways

• The Memorandum of Association is a statutory requirement for company incorporation, which sets out the founders’ intentions in the objects clause and initial shareholding structure in the subscribers clause, while the Articles of Association govern the internal management and operation of the company.
• Different entities can tailor their Articles of Association to suit their specific operational needs or other objectives, including regulations for director appointments, voting rights, members liability, and entrenched provisions to protect minority shareholders’ interests.
• Amendments to Articles of Association in Hong Kong require a special resolution with 75% shareholder approval and must be filed with the Companies Registry. The Subscription Clause in the Memorandum cannot be altered after incorporation.

What Is the Memorandum of Association?

The Memorandum of Association is a fundamental legal document in the corporate world. At its simplest, it is a formal statement of intention to form a company and declares the initial shareholders as the company's first members. The memorandum must be signed by all subscribers and filed with the Companies Registry in Hong Kong along with the company's Articles of Association.

In the memorandum, the company must also specify the maximum authorised capital a company can raise in the capital clause, information of all initial members in the subscribers clause, with the option to state the main goals in the objects clause.

Under the Companies Ordinance, the Memorandum of Association is a statutory document binding agreement among the founders to form the company. Each subscriber takes at least one share, which means they own and are committed to the new company. This document not only marks the official formation of the company but also the first record of its shareholders.

The Company’s Memorandum of Association is very important. It’s a public document that sets the company's foundation and is the first point of reference for its operational framework. Without this document, the formation of a company is incomplete and not legally recognised.

What Are the Articles of Association?

If the Memorandum of Association is the foundation, the Articles of Association brings it to life. This important document outlines the internal management and administration of the company. It covers everything from share capital distribution to director responsibilities and general meetings.

The Articles of Association outline the roles and responsibilities of directors, member liability, and other regulations to comply with company law. They also set out the rules for voting and general meetings, so you have a clear map of the company’s decision-making process.

The Companies Ordinance (Cap. 622) has moved some provisions from the Memorandum of Association to the Articles of Association. For example, the object clause and any business restrictions are now usually found in the Articles. This shows how all-encompassing the Articles are and how important they are to any Hong Kong company.

Customising your company's articles

One of the best things about Articles of Association is their flexibility. Many entities simply adopt the model articles, but some limited liability companies may choose to tailor the articles to reflect specifics related to share capital, director appointment, remuneration, and members' responsibilities.

Tailoring the Articles can be especially useful for companies with specific operational needs or expecting to change direction. Some benefits of creating your own bespoke articles include:

• Avoiding inconsistencies
• Ensuring the operational framework matches the shareholders’ agreement
• Keeping shareholders and directors united and transparent

For example, a private limited company might tailor its articles to include specifics for main business goals and other objects. Different limited companies may also use different provisions to specify share capital, the liability of members, etc.

Entrenched provisions in the Articles of Association

Entrenched provisions in the Articles of Association add additional protection and stability to a company’s governance structure. They make it harder to pass certain resolutions than regular resolutions.

For minority members, the entrenched provision provides major protection in joint ventures where they have less than 25% of the votes. These provisions ensure certain critical decisions within a company cannot be made without a large consensus, hence protecting minority members.

Special resolutions are required to alter entrenched provisions, which need a higher percentage of votes. This higher threshold is a safeguard against:

• hasty or one-sided decisions
• decisions that can harm the company
• decisions that can harm its minority shareholders.

Including these provisions in the Articles of Association allows companies to make more balanced and fair decisions.

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Modifying the Articles of Association

Amending the Articles of Association is a big process that requires careful thought and compliance with Hong Kong laws. Any proposed changes must be approved by a special resolution with at least 75% of eligible shareholders to vote in favour. This is to ensure that changes are made with broad consensus and in the best interest of the company.

After the special resolution is passed, the company must document the changes and submit the required forms to the Companies Registry. Proper documentation is important to ensure the changes are legally recognised and reflected in the company’s records. Seek professional advice before altering the Articles after the incorporation to ensure compliance and efficiency.

The process typically involves:

1. Calling a board meeting to propose the resolution
2. Getting a quorum
3. A second board meeting to finalise the changes if the resolution is passed

This way is transparent and accountable.

Can You Alter the Memorandum of Association?

Unlike the Articles of Association, the Memorandum of Association in Hong Kong has some unalterable provisions. The Subscriber Clause lists all the subscribers and their share entitlements and cannot be amended or deleted once the company is incorporated. This clause specifies the ownership structure set up at the very beginning of the company establishment.

The Companies Ordinance allows for changes to the Memorandum of Association under certain circumstances, but the subscriber list is immutable. This immutability ensures the founders’ original intentions and commitments are recorded for historical purposes. Any changes to these fundamental parts would compromise the integrity of the company’s founding documents.

However, in some cases, such as relocating the registered office to another part of Hong Kong, changes to the Memorandum of Association may be required. The changes must receive board approval in a general meeting and then be registered with the Companies Registry. These changes are necessary to reflect significant operational changes while remaining compliant with the law.

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Keeping Records Up-to-Date with Companies Registry

Any existing company in Hong Kong must keep its records with the Companies Registry up to date. Any changes such as:

• director appointments
• company secretaries
• company name
• company structure (such as incorporation)
• registered office address
• accounting reference date
• 'people with significant control’ (PSC) updates
• share capital structure
• mortgage details

must be updated in the memorandum and the Registry. You may also need to modify the corresponding clause. For example, if a private limited company is switching to a public limited company, the liability clause, object clause, and the memorandum overall will all need to be updated to reflect the new structure. Since the Registry is viewable to the outside world, limited companies must keep their content up-to-date to stay compliant and accurately reflect the company formed.

You can update your records using the following methods:

1. Online: Using an online system that requires an email address, password and an authentication code sent by the Companies Registry. This method is quick and efficient and reduces paperwork.
2. Filing software: You can use filing software to notify multiple changes at once.
3. By pos t: You can also submit by post using forms mentioned on the correlating pages. Make sure to include any required fees in the mail.

Updating company records is not just a legal requirement but good practice for transparency and accountability. Public records help build trust with stakeholders and keep the company compliant. It is recommended to order a certified copy of your registry each time you make a change.

Summary

The Memorandum and Articles of Association are more than just legal documents; they are the foundation of corporate governance. From the founding intent of the company to the rules of internal management, these are essential for any company.

Knowing the purpose, customisation options, and legal requirements for amending these documents will help entrepreneurs and business owners make informed decisions that align with their long-term goals. Whether starting a new company or managing an existing one, ensure these documents are properly drafted and maintained.

In summary, mastering these documents will be the foundation of your company’s success. Follow best practices and seek professional advice, such as from Osome, a company formation and governance partner you can trust. Contact Osome today to get your company’s legal and operational framework in order.

Gabi Bellairs-LombardBusiness Writer

Gabi creates content that inspires. She's spent her career writing compelling website copy, and now she specialises in product marketing copy. As the voice of our products and features, Gabi makes complex business finance and accounting topics easy to understand. Her top priority is ensuring that her words impact and inspire her readers.

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