Question

E3

A) Mr. Zaheer has been longing to make his dream of starting a company a reality. For the purpose of floating a company it’s very much necessary to have an Articles of Association. Articles of Association is usually termed as the backbone of an organization. Think for instance you are Mr. Zaheer, in this situation how would you frame the Articles of Association for your company.

B) Mr. Ibrahim wants to start an oil refinery business in the form of a corporation and name it as Al Rabah Refineries. He decides to have the capital of about OMR 15 million. His cousin suggested him to start the business as a partnership venture. Mr. Ibrahim is much confused as he is not aware of the disadvantages of a company form of neither organization nor the types of capital, so he decides to ask his friends who are having knowledge about these aspects.   

As you are his friend, he is asking you to advise and suggest him the following aspects:

1.        Explain the important features and difficulties of “Societe Anonyme Omanaise Generale” form of organization appropriate to Al Rabah Refineries.
2.      Illustrate Mr. Ibrahim the different types of capital suitable for his company with justifiable reasons and proper examples.

Answer 1

A)

Meaning of Articles of Association -

Articles of Association (AOA) is the Company’s by-laws containing the set of guidelines and regulations necessary for the Company to function. It defines the Company’s purpose and the tasks it will accomplish internally.

Contents that a Company's Articles of Association (AOA) usually include -

DIRECTORS

AOA provides guidelines and procedures with respect to appointment of Directors', their remuneration and power of the Board in meetings.

GENERAL MEETINGS

AOA provides the framework for the manner in which General Meetings are conducted.

ACCOUNTING AND AUDITING

AOA provides guidelines with respect to the auditing of the accounting of the Company.

SHAREHOLDERS

AOA provides for the rights of shareholders, obligation of shareholders to pay the unpaid amount on each share on Company's demand by call.

TRANSFER AND TRANSMISSION OF SHARES

AOA provides the procedure for transfer of shares. Transmission takes effect from death or insolvency of the original shareholder.

FORFEITURE AND SURRENDER OF SHARES

The AOA provides for the procedure of forfeiture of shares if the shareholder is unable to pay the call money or allotment of shares. They may choose to surrender or voluntarily return their shares to the Company.

ALTERATION OF CAPITAL

AOA provides the rules to alter capital of the Company as and when necessary.

VOTING RIGHTS

The AOA notes down the specific Company matters which calls for voting by members as well as the procedure of voting whether by a poll or through proxies.

DIVIDENDS AND RESERVES

The AOA also provides the distribution of dividends amongst the shareholders of the Company.

WINDING UP

AOA provides for the procedure of winding up the company, manner of distribution of money left amongst the shareholders.

B.I)

Meaning of Societe Anonyme Omanaise Generale -

A Societe Anonyme Omanaise Generale means a Public Limited Company which offers shares of stock to the general public. The shareholders have limited liability. They are not liable for any business losses in excess of the amount they paid for the shares.

Features and difficulties of a Societe Anonyme Omanaise Generale -

High Costs

Starting a public company requires a lot of money since investment bankers, lawyers and underwriters are involved. The commissions and setting up costs runs into thousands of Riyal.

Public Books

The financial records of the Company are open to the general public. This feature allows the competition to find insights on the inner workings of the Company.

Greedy Shareholders

Shareholders usually buy shares in the hopes of receiving a fat dividend or to sell the stock upon appreciation. However, the Company has to have a long-term growth plan in place based on which it decides to pay dividend. Not all shareholders are patient.

Takeovers

A public company is always exposed to the risk of a takeover since anyone buy its shares. If a considerable amount of stock is taken over, the shareholder wields a strong voice on the Board of Directors.

Seperate Identity

A feature of a public company is that the owners are different from the company in itself. Sometimes, the founders who built the business no longer have any control and the controls ends up with the Board of Directors. This is not very good for management.

Decisions

In a Public Company, the Board of Directors represent the main shareholders. The decision making process turns out to be very slow and cumbersome.

B.II)

The three types of financial capital are Equity Capital, Debt Capital and Preferred Capital.

Equity Capital

The Equity Capital represents portion of the organization’s capital, raised in exchange for the share of ownership in the company. These shares are called the equity shares.

Some businesses are funded entirely with equity capital by the shareholders and have no liabilities.

Microsoft is entirely funded by Equity Capital and it generates high returns to ensure such a capital structure survives.

Debt Capital

Debt Capital represents money taken as a loan (typically from a bank, issuing bonds, etc) with the condition to regular interest payments for using the funds.

Debt capital does not dilute the company owner's interest in the firm. But it can be rigorous to pay interest until its loans are repaid.

Preference Share Capital

Preference shares are shares of a company’s stock with dividends that are paid out to shareholders before common stock (Equity Share Capital) dividends are issued. In essence, they have the characteristics of Equity as well as Debt Capital.