Companies Act, 2013: Incorporation, Prospectus, Share Capital and Membership
Scope
This domain covers incorporation, constitutional documents, prospectus, share capital and membership. Questions test thresholds, liability for misstatements and the meaning of membership.
Incorporation
A company may be public (minimum 7 members), private (2) or one person (1). The memorandum (s 4) states name, registered office, objects, liability and capital; the articles (s 5) contain internal rules. Incorporation requires name approval, documents, registered office and subscribers; the certificate of incorporation is conclusive evidence of incorporation. A company is a separate legal person with perpetual succession.
Prospectus
A prospectus is any document inviting the public to subscribe for securities. It must contain prescribed disclosures. A shelf prospectus allows repeated issues within its validity; a red herring prospectus omits price or quantum. A document offering existing securities for sale may be deemed a prospectus. Civil liability for misstatements lies under s 35 against directors, promoters, experts and others unless they prove due diligence; s 34 creates criminal liability.
Share capital and membership
Share capital includes authorised, issued, subscribed and paid-up capital. Equity shares carry voting and dividend rights; preference shares have preferential dividend and repayment but usually no voting. Shares may be issued at par or premium; private placement (s 42) and rights issue (s 62) have prescribed procedures. A member is a subscriber to the memorandum, a holder of shares, or a beneficial owner whose name is entered in the register. Transfers of listed shares are generally dematerialised.
Worked example
A company's prospectus states that it owns a factory site freehold, but the title is only a lease. An investor subscribes and later suffers loss. The statement is a misstatement of a material fact. Directors and promoters are liable under s 35 unless they show they had reasonable grounds to believe and did believe the statement true. The investor need not prove fraud for civil liability.
Traps
A prospectus is not limited to a formal brochure. Red herring does not mean a deliberately misleading document. Beneficial ownership and registered membership can differ. Private placement is not a public issue.