Joint Stock Company
Concept of Joint Stock Company
A stock company is an association of person for profit having legal existence perpetual succession and common seal. Capital of the company is generated by issuing transferable shares. It is managed by the representatives of shareholders. In Nepal, a joint-stock company must be registered in according to the provision of Nepal Company Act 206.
According to Prof. L. H. Haney – “A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”
According to James Stephens – “A company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss arising therefrom.”
Thus, a company may be defined as a legal and invisible artificial person, incorporated under an association of persons having an independent, separate legal entity along with perpetual succession and a common seal, whose liability is ordinarily limited, the capital is divided into transferable shares, held by shareholders in order to earn profit.
Characteristics of Joint Stock Company
The common features of a Joint Stock Company are as follows
- Association of persons: A company is a voluntary association of persons established for profit motive. A private company must have at least two persons and the public limited company must have at least seven persons to get it registered. The maximum number of persons required for the registration in case of private company is fifty and in case of public company there is no maximum limit.
- Artificial person: A company is an artificial person. It is created by law. Like that of the natural person, it can own property, incur debts, file suits, enter into contracts with others under its own name. It can be sued and fined but cannot be imprisoned.
- Separate legal entity: A company being created under law has a separate entity from its members. Any of its members can enter into contracts with others. A member cannot bind a company by his acts or dealings with the third parties. The company can file a suit against its members and its shareholders can also sue the company. Further, a shareholder is not liable for the acts of the company even though he may be holding all the shares of that company.
- Limited liability: The liability of the members or shareholders is limited to the extent of the value of shares held or the amount guaranteed by them. The shareholders are not personally liable for the debts of a company beyond that limit.
- Transferability of shares: The shares of a public limited company are freely transferable and can be purchased and sold through the stock exchanges. A shareholder of a public limited company can transfer his shares without the consent of other shareholders. But there are certain restrictions on transferability of shares in case of private limited company.
- Common seal: Since a company is an artificial person, it cannot put its signature on any document. Therefore, it is statutory for every company to have a seal on which the name of the company is engraved. Affixing of seal on any document signifies the signature of the company. Of course two directors have to sign as witnesses in such .cases.
- Separation of ownership from management: The shareholders are the owners of the company. They are heterogeneous group of people who are widely scattered throughout the country and abroad. The shareholders elect their representatives called directors to manage the company. Thus, the company is managed by directors rather than the shareholders. This results in separation of ownership from management.
- Perpetual succession: The company enjoys a continuous existence. Its existence is not affected by death, lunacy or insolvency of its shareholders or directors as the case in partnership or sole proprietorship. The company can only be dissolved by the operation of law.
- Investment facilities: A joint stock company raises its funds through issue of shares to general public. Due to the small denomination of the shares, the company provides investment opportunities to all sections of people who want to put their surplus money in the company’s share.
- Accountability: A joint stock company has to function as per the provisions of the Companies Act. The accounts are to be audited by qualified auditors. Such accounts and exports are published for the information of all stakeholders. Regular and timely reports are to be submitted to the Government.
- Restricted action: A company cannot go beyond the powers mentioned in the abject clause of the Memorandum of Association. Therefore, its action is limited.
- Publication of financial statements
- Complex for formation
- Relation with shareholders
- Collection of capital
Merits of Joint Stock Company
Some of the most important merits of Joint Stock Companies are as follows:
- Mobilisation of huge financial resources:
The biggest advantage of company organisation is that it has the inherent ability to mobilise huge financial resources. The second factor is that in order a company can issue shares of smaller denomination, thus, suiting the convenience issue shares of smaller denomination, thus suiting the convenience of small investors also. Besides, its shares and debentures may be issued with different features with regard to the sharing of risk, income, and control with the result that it can appeal to all sorts of investors — large, small, conservative, and speculative.
- Limited liability: Most of the joint stock companies are formed as limited liability concerns in which shareholders are responsible for the debts of the company only to the extent of the face value of their shares in the company. It is the factor of limited liability that has greatly contributed to the phenomenal growth of giant companies throughout the world with the resultant benefits of large scale production and distribution.
- Ease of transfer of ownership: It permits its member to easily transfer their shares and get out of the venture as and when they so choose.
- Perpetual and stable business life: A company is perhaps the only form of ownership organisation which enjoys perpetual existence and stability. The stability of company organisation permits it to undertake projects of long duration, and also offers a great attraction to the creditors and investors to put their resources in the business.
- Enormous possibilities of growth and expansion: Since a company has large resources at its command — which it has either built-up from internal sources or raised from external sources — it can undertake business activities on a large scale and in diverse fields. The business of company is conducted on a large scale; it brings the economies of scale, especially in the fields of production, marketing, and finance.
- Efficient management: The company organisation represents a situation in which ownership is distinct from its management. The expert, competent, and most modern services rendered by managers bring about efficiency and effectiveness in business operations. Professional managers are able to show better business results by adapting themselves to newer, better, unconventional, and even more risky methods of organisation and management.
- Public confidence: A company is under a statutory obligation to make public its activities through accounts and annual reports. Progressive and enlightened managements even voluntarily disclose to the public its activities in wider dimensions that what is required under the law.
- Positive social benefits: A company organisation brings the following social benefits also:
- Democratisation of ownership: It is a particular contribution of the public company that it divides its capital into a large number of small shares that can be conveniently bought by small investors. This certainly introduces an element of socialisation of business ownership.
- Source of government revenue: A company is an important and growing source of revenue to the government insofar as it has to pay tax on every rupee of its profit. The share of big companies in government revenue far exceeds the combined tax contributions of sole proprietorships and partnerships.
- Social Value
- Greatest Potentiality
Demerits of Joint Stock Company
The following are the basic disadvantages of joint stock company
- Difficult to establish
- lack of prompt decision
- separation of ownership and management
- lack of secrecy
- exploitation of general shareholders
- difficult for management
- reckless speculation
- excessive legal provision
- groupism for authority
- social abuse
Types of Joint Stock Company
Joint Stock company classified/divide on the basis of incorporation, liability, Numbers of Members and Ownership.
A. On the based of Incorporation:
- Chartered Company: These are the specific company directly established by the royal family (King/Queen) or the head of the Nation. These companies enjoy their own special policy and regulation that created only for that company. Royal Bank of Scotland, Bank of England are some example of this company.
- Statutory Company: Company which are established under the special act by parliament are known as a statutory company. These companies are directly accountable to the parliament of the nation.
- Registered Company: Company which are register under company act are known as register company.
B. On the based on liability:
- Unlimited Company: Company with unlimited liability are known as unlimited company.
- Limited Company: Company with limited liability up to the face value are known as the limited company.
- Limited by guaranteed Company: Those company where shareholders liability limited up to their agreement (Agreed to pay up to the certain amount which is more than their face value) for a certain amount.
C. On the based on Number of Members:
- Private Limited Company: Shareholders from 1 – 101
- Public Limited Company: Minimum 7 shareholders and the maximum is not mentioned.
D. On the based on Ownership:
- Government Company: Those company where there is more than 50% investment from government or its wings or subsidiary is known as a government company.
- Non-Government Company: Company, where there is less than 50 % or non-investment from Government, is known as a non-government company.
Difference Between Public and Private Limited Company
The difference between Public Limited company and Private limited company are listed below:
Main Documents of Joint Stock Company
Memorandum of association is the charter or constitution of the company. It contains all necessary contents for company formation and operation. All the activities of the company would be run on the basis of information contained in the memorandum of association. It is submitted to office of company registrar while applying for company incorporation duly signed by the required number of members. The common contents of it are as follows:
- name, address, objectives, and nature of business of the company
- amount of authorized and issued capital, numbers of shares company, and par value of each unit of share.
- Value of assets purchased and liability for expenses incurred etc.
Articles of association are documents of internal management of the company. It contains rules, regulations, and bye-law of the company which are necessary to maintain hierarchy of management and to maintain day to day operation of the company. It defines relationship between company and its members including employees to achieve defined objectives. The common contents of articles of association are:
- number of directors and their duties, responsibilities and remunerations
- procedures of convening company meetings
- right and duties of managing director
- matters mentioned in the memorandum of and remuneration association etc,
Prospectus contains past history, present position, and also reflects future prospect. It is known as profile of public limited company and draws the attention of public towards the company. It is published at the time of issue of shares and debentures
Incorporation of Joint Stock Company in Nepal
A company must be registered in the Company Registrar Office under Department of Industry and Commerce of Government of Nepal. A private company can commence its business after getting certificate of incorporation. Whereas a public limited company can start its business only after getting certificate of commencement. Generally, the following are the procedures of company incorporation:
- Submission of application
- Submission of registration fees
- Registration of company
- Certificate of commencement
The company meeting is broadly classified into two shareholders’ meeting and board of directors meeting. Shareholders’ meeting consists of
- preliminary general meeting,
- special general meeting, and
- annual general meeting.
Section 67 of the Company Act 2063 mentioned about the provision of board of directors.
Agenda and Resolution
Agenda: Agenda is the subject matter or program of the company meeting. It is prepared for the systematic conduction of meeting of shareholders. According to company act, it is essential to deliver agenda of discussion to shareholders alone with notice for meeting.
Resolution: A proposal when accepted for discussion and decision with the majority of the consent of members is resolution. It is the beginning step of decision in meeting. On the basis of situation, resolution may be general or special.
Winding-up of Joint Stock Company
In general, the existence of Joint Stock Company is perpetual. However, in Nepal a joint-stock company may be dissolved in any of the following reasons:
- Voluntary liquidation
- Cancellation of registration by the company Registrar Office