Corporate Law Corporate Accounting - I Chapter 2

law

1. 1
Corporate Law

2. 2
A Company’s Legal Identity
•It is an artificial person
•It has a legal personality separate from its
members i.e. owners
•It has perpetual succession i.e. it will continue to
exist regardless of changes in its members

3. 3
Companies may be:
1.Limited by Shares i.e. where the liability
of members is limited to the amount (if
any) unpaid on the shares held by them
2.Limited by Guarantee i.e. where the
liability of members is limited to such
amount as the members undertake to
contribute to the assets in the event the
company is wound up
3.Unlimited

4. 4
Types of Companies (Limited by Shares)
•Private
•Public-Listed
•Public-Unlisted
•Associated
•Holding/Parent
•Subsidiary
•Single Member
•Associations not for Profit

5. 5
Private Company
A Private Company means a Company
which by its articles:
•restricts the right to transfer its shares
•limits the number of members to fifty
•prohibits any invitation to the public to
subscribe for the shares

6. 6
Private Company
Advantages
•Not required to raise minimum subscription
•Can commence business immediately after incorporation
•Not required to convene Statutory Meeting
•No restriction is imposed for investment in associated
companies
Disadvantages
•Cannot invite subscription from the public
•Restriction on transfer of shares (right of first refusal to
existing members in proportion to their shareholding)
•Restricted number of members

7. 7
Public Company
Public Company is “a company that is not a
private company”

8. 8
Public Company-Listed
•Can invite subscription from the public
•No restriction on transfer of shares
•Should have at least 3 members
•Minimum number of directors should be 3
•No restriction on upper limit of members
•Requires certificate for commencement of business
•Needs to raise minimum subscription
•Needs to file Accounts with SECP & Registrar
•Needs to prepare Accounts in accordance with IFRS and
requirements of Companies Act
•Full time Company Secretary mandatory
•Mandatory compliance with Code of Corporate Governance
•Regulated by the SECP, Stock Exchange(s) (and SBP for banks)

9. 9
Public Company-Unlisted
•Can invite subscription from the public
•No restriction on transfer of shares
•Should have at least 3 members
•Minimum number of directors should be 3
•No restriction on upper limit of members
•Requires certificate for commencement of business
•Needs to raise minimum subscription
•Needs to file Accounts with Registrar only
•Needs to prepare Accounts in accordance with IFRS and
requirements of Companies Act
•Full time Company Secretary not mandatory
•Regulated by the SECP

10. 10
Associated Company
Associate relationship exists when:
•Owner, partner or director of a company or
undertaking holds more than 20% shares
or voting power in another company
•Companies under common management
or control
•One company is a subsidiary of another
company
•A modaraba management company

11. 11
Holding Company
A company is holding company of a
subsidiary company if it controls majority of
directors or has more than 50% shares in a
subsidiary company

12. 12
Subsidiary Company
A is a subsidiary of B if B controls more than
50% of A’s voting shares or otherwise has
power to elect and appoint more than 50%
of A’s directors

13. 13
Single Member Company
•Introduced in 2002.
•A single individual can form a company by
subscribing to its Memorandum of
Association.
•Member enjoys privilege of limited liability
•Mandatory to appoint company secretary
•SMC has all rights and privileges of a
private company

14. 14
Associations not for Profit
Formed under the Companies Act. Generally NGOs.
Two types of companies are issued licence:
1.Companies for the promotion of commerce, art, science, religion,
sports, social services, charity or other useful object.
2.Trade and commerce associations under the licence issued by
Ministry of Commerce.
Association registered as a company with limited liability without the
addition of the word “Limited” etc.
Enjoy all the privileges of a limited company

15. 15
Formation of a Company
Promoter/s conceives the idea of a business and is the person/s
responsible for bringing the company into existence by taking the
following steps:
•Decides a company’s name and applies to the Registrar of
Companies to check its availability and to ensure it is not
undesirable to the Registrar
•Gets the Memorandum of Association and Articles of Association
prepared
•Arranges for the nomination of directors, solicitors, auditors and
Secretary of the company
•Determines the location of the Registered Office of the company
•Gets the company registered and issuance of a Certificate of
Incorporation
•Arranges issue of prospectus (in case of public company)

16. 16
Memorandum of Association
•The Memorandum of Association of a company is its principal
document—its constitution.
•No company can be registered without it
•Defined as the company’s charter and the document which defines
the limitation of the powers of a company, the foundation on which
the structure of the company is based
•It states the name of the company, its objects, the address of its
registered office, whether the company has a share capital or not,
whether it is limited by guarantee or otherwise
•“The purpose of the Memorandum is to enable the shareholders,
creditors and those who deal with the company, to know what is its
permitted range of enterprise” Lord Macmillan
•It defines the company’s capacity to contract.
•An act of the company outside the scope of the activities as laid
down in the Memorandum is said to be ‘ultra vires’ and not binding
on it

17. 17
Articles of Association
•The Articles of Association of a company are the internal regulations of the
company. Articles usually contain rules and bye-laws on matters such as:
•Different classes of shares and their rights
•Procedure of making an issue of share capital and allotment thereof
•Procedure for transfer and transmission of shares
•Alteration of share capital
•Borrowing powers of directors
•Procedure for convening, holding and conducting different kinds of general
meetings
•Voting rights of members
•Payment of dividends
•Appointment, powers, duties and qualifications of directors
•Keeping of books of accounts and their audit
•Appointment and remuneration of auditors
•Board meetings

18. 18
Distinction between Memorandum and Articles
•Memorandum contains fundamental conditions
upon which the company is incorporated. The
Articles are internal regulations of the company
and are subsidiary to the Memorandum
•Memorandum defines the relation between the
company and outsiders i.e. creditors, buyers,
sellers etc. Articles govern internal relationship
between the company and the members and
generally have nothing to do with the outsiders
•The Memorandum cannot be easily altered while
articles are easily alterable

19. 19
Share
•“Share” means a share in the share capital of the
company
•A share has a nominal value, which is the amount the
holder is liable to contribute to the capital of the company
•It confers upon the holder a right to participate in the
company’s profits and its assets on its winding up
•Shares are moveable property, transferable in the
manner provided by the articles
•Each share must be distinguished by its distinctive
number
•A share involves rights and liabilities
•A share may be issued for cash or against transfer of
property or work or services or supply of goods

20. 20
Kinds of Share
•Preference Shares
•Ordinary Shares
•Deferred Shares

21. 21
Preference shares
•Those shares which carry some sort of
preference over other kinds of shares
•Preference is in the payment of dividends
•In the event of winding up, the holders of these
shares receive preference not only in the
payment of dividend but also in the repayment of
capital
•May be simple or non-cumulative preference
shares, cumulative preference shares,
participative preference shares or redeemable
preference shares

22. 22
Ordinary Shares
•These shares have no special rights as to dividend or capital
allocated to them
•Carries rights to the whole of the profits earned by the company
•No company shall issue partly paid shares i.e. only fully paid
shares may be issued
•Holders of ordinary shares are virtually the owners of the
company
•Carry the rights to the whole of the profits earned by the
company
•Dividends are not uniform and in one year the ordinary shares
may receive a very high dividend and in another perhaps no
dividend at all
•The rate of dividend payable to the holders of ordinary shares
is determined by the directors who have discretionary power
over the matter

23. 23
Deferred Shares
•Usually issued to promoters
•Also called founder shares or
management shares
•Holders of these shares usually receive no
dividend until the dividends to all other
classes of shares are paid up in full

24. 24
Bonus Shares
•When a company chooses not to distribute
its profits or extra profits in a particular
year, it may issue fully paid bonus shares
which are distributed to members instead
of dividend or in addition to dividend
•The amount represented by the issue of
bonus shares is in the nature of capital

25. 25
Prospectus
•After a company has been incorporated the promoters
and directors may have to approach the public with an
invitation to subscribe to its shares in order to secure
necessary capital for commencing business
•For this a prospectus is issued by a public company
•Prospectus is a medium through which a company
communicates with the investing public and explains to
them relevant facts and discloses the matters about the
company and the issue in a clear and logical manner
•A private company is prohibited from inviting the public
to subscribe for its shares. It cannot therefore issue a
prospectus for inviting public subscription

26. 26
Underwriting
•Before issuing a prospectus inviting public
subscription, the promoters make an arrangement
with brokers, financial institutions or consortium to
ensure that public response to the issue will be
encouraging
•The issuing company approaches the underwriters to
secure their undertaking to take up unsubscribed
capital
•Before accepting this arrangement, the underwriters
will satisfy themselves
•The underwriters will agree a commission to take up
shares that the public does not subscribe

27. 27
Allotment of Shares
•On receipt of subscription, the directors have to
decide within 10 days regarding acceptance of
the subscription or otherwise
•If it is accepted, the allotment is made and in
case of non-acceptance, the amount is refunded
within 14 days of the date of the decision
•The names of allottees shall be entered into the
Register of Members
•Share certificates shall be issued to
shareholders with 30 days of date of allotment

28. Issuance of Shares
•Issue of shares at nominal value (or par
value)
•Issue of shares at a discount (only after
3 years of commencement of business)
•Issue of shares at a premium (if
profitable record of at least one year, issue
is fully underwritten, justification of
premium fully disclosed in prospectus)
28

29. Shareholders’ Rights
•Right to the offer of shares by the company at the time of
further issue of shares
•Right to receive dividends
•Right to participate and vote in general meetings
•Right to elect and remove directors
•Right to contest election to the position of director
•Right to appoint auditors and fix their remuneration
•Right to receive residual assets at the time of winding up of
the company
•Right to receive various periodical reports
•Right to have access to certain information of the company
29

30. Dividends
•No dividend shall be paid by a company other than out of profits
•Recommendation/proposing of dividends is on the discretion of the
Board of Directors
•Shareholders approve the dividend in general meeting but they
cannot increase the amount from that proposed by the directors
•Dividends may be interim or final
•Interim dividends are proposed/declared/paid during the year.
Proposal to pay interim dividend shall only be considered if the
anticipated profits of the company for the whole financial year will be
adequate
•Final dividends are proposed/declared/paid after the close of the
company’s financial year
•Dividends are paid through ‘Dividend Warrants’
30

31. Directors
•A company can act only through its directors
•The relation of company with its directors is that of principal and agent
•Listed companies must have not less than 1/3
rd
. or three, whichever is
higher, of the total members of the board as independent directors. At
least one such independent director shall have relevant experience
•Listed companies must have not more than 1/3
rd
. or less than 2
executive directors (including the Chief Executive) on their boards
•Certain persons are ineligible for directorship i.e. minors, persons of
unsound mind, insolvents, persons convicted by a court for certain
offences, person who is not a member of the company (listed
companies have additional requirements for directors)
•Directors of a company having share capital are elected by the
members of the company in general meeting
31

32. Directors (cont.)
•A company may by resolution in general
meeting remove a director
•A director shall cease to hold office if he
becomes ineligible or absents himself from
3 consecutive board meetings without
leave of absence.
32

33. Duties of Directors
•To exercise their powers for the purpose for
which they were elected and for the benefit of
the company
•Not to let their personal interests conflict with
their duties to the company
•To take care of the company
•Ensure that the company’s funds are utilised
properly
•Act honestly and exercise such degree of skill
and diligence as would amount to reasonable
care

34. Board of Directors
•Directors of listed companies shall exercise their powers
and carry out their duties with a sense of objective judgment
and independence in the best interest of the company
•The Board shall adopt overall corporate strategy for the
company and formulate significant policies for different
aspects of the business including risk management, human
resource management, procurement of goods and services,
marketing, investments, borrowing of funds etc
•The Board shall establish a system of sound internal control
•Appointment, remuneration and terms and conditions of
employment of the CEO and other executive directors of the
listed company are determined and approved by the Board

35. Chief Executive Officer
•First CEO appointed by the directors within 15 days of date of
incorporation or commencement of business whichever is earlier
•First CEO holds office till first AGM
•Subsequent Chief Executive to be appointed within 14 days from
the date of election of directors
•Chief Executive is appointed for a period not exceeding three years.
On the expiry of his term of office, he is eligible for reappointment
•Terms and conditions of appointment of a Chief Executive are
determined by the directors of the company
•A minor, person with unsound mind, adjudged or undischarged
insolvent, person convicted by a court of law for certain offences, is
ineligible for the office of chief executive
•A chief executive may be removed from his office before expiry of
his tenure by directors (with ¾ majority) or by shareholders by
special resolution in general meeting
•Chief Executive not to engage in competing business

36. Company Secretary
•Every company shall have a Secretary
•Apart from performing his routine duties of
arranging meetings, maintaining registers,
ensuring compliance with provisions of the
Companies Act etc. and other secretarial
functions,, the Secretary acts as general
administrator and head office manager
•Company Secretary must have the requisite
professional/academic and other qualifications

37. Auditor
•The first auditor is appointed by the directors within 90 days of
incorporation and the first auditor holds office up to the conclusion of
the first AGM
•The remuneration of the auditor is fixed by the directors
•The first auditor stands retired on the conclusion of the first AGM
and the subsequent auditor is appointed by members in the same
AGM. He holds office till the next AGM and can be reappointed
•Remuneration of the auditor (other than the first) is fixed by the
members
•Members can remove the auditor through special resolution in
general meeting, The auditor is allowed to make representation
against his removal
•Auditor must hold qualifications laid down in the Companies Act

38. Company Meetings
•Statutory Meeting
•Annual General Meeting (AGM)
•Extraordinary General Meeting
•Board of Directors Meeting
38

39. Statutory Meeting
•Every company limited by shares (and limited by
guarantee having a share capital), shall within 180 days
from the date the company is entitled to commence
business, or 9 months from incorporation, whichever is
earlier, hold a general meeting of the members of the
company which shall be called “Statutory Meeting”
•The Companies Act requires a company to place before
the members a Statutory Report containing particulars of
allotment of shares, receipts and payments of cash,
preliminary expenses, underwriting agreements etc.
39

40. Annual General Meeting (AGM)
•Every company shall hold, in addition to any other meeting, a
general meeting, as its annual general meeting, within 16 months of
incorporation and thereafter once in every calendar year within a
period of 120 days following the close of its financial year
•For a listed company, the meeting will be held in the town nearest to
one where its registered office is situated
•The notice of the AGM shall be sent to shareholders at least 21
days before the date fixed for the meeting and in the case of a listed
company it shall also be published in at least one issue of a daily
English and Urdu newspapers having nationwide circulation
•Participation through video link
40

41. Business at an AGM
Ordinary Business
•Consideration of annual accounts of the company, the
directors’ report, and the auditors report
•Dividend declaration
•Election and appointment of directors
•Appointment of auditors and fixing their remuneration
Special Business
•Any business other than the above is Special Business and
may be transacted at the AGM provided proper notice has been
given
•Examples of special business are increase in authorised
capital, alteration of articles etc
41

42. Extraordinary General Meeting
•All general meetings other than Statutory Meeting and
AGM, are Extraordinary General Meetings
•May be convened by the company at any time when
such a necessity arises. Held for urgent business
•Examples of business transacted at an EGM may be
alteration of memorandum/articles of association,
reduction/reorganization of share capital
•An EGM may be called by the board of directors with or
without requisition by members (holding at least 10%
voting powers)
42

43. Board of Directors (BOD)Meeting
•The quorum for a meeting of BOD of a listed company shall not be
less than one third of their number or 4, whichever is greater.
Quorum is the presence of the minimum number for a valid meeting
•Directors of a public company are required to meet at least once in
each quarter of a year
•Although not necessary, agenda of business to be transacted is
provided in notice of the meeting
•The directors may elect a chairman of their meetings and determine
the period for which he is to hold office
•In order to strengthen and formalize corporate decision making
process, significant issues shall be placed for the information,
consideration and decision of the board of directors of a listed
company
7

44. Winding up of Company
Three types of winding up:
1.Compulsory (by the court)
2.Members’ Voluntary (when the company is
solvent)
3.Creditors’ Voluntary (when company
assets are used to pay company debts)
44

45. Compulsory (by the court)
For winding up of the company the court may consider
the following grounds:
•The object for which the company was
incorporated, has subsequently failed
•It is impossible for the company to carry on the
business except at a loss
•There is no reasonable hope that the object of
trading at a profit can be attained
•That the existing or probable assets of the
company are insufficient to meet the existing
liabilities
45

46. Compulsory (by the court)
For winding up of the company the court may also
consider the following grounds:
•If the company has made a default in filing financial
statements/annual returns for immediately preceding 2
consecutive financial years
•If the company is conducting its business in a manner
oppressive to the minority of members
•If a listed company suspends its business for a whole
year
46

47. Members’ Voluntary Winding Up
•Directors need to make a declaration of
solvency (affidavit that the company will be
able to pay its debts in full) and file it with
the SECP along with other documents
•Notice of winding up resolution to be
advertised in the Gazette and newspaper
•Company shall appoint one or more
liquidators whose consent has already been
obtained
47

48. Creditors’ Voluntary Winding Up
•EGM convened and resolution for winding
up passed
•Meeting of creditors summoned
•Creditors/company appoint liquidator
whose consent has already been obtained.
If company and creditors propose different
persons, the person nominated by the
creditors shall be liquidator
48