Change in Object Clause
The object clause in a contract mainly discusses the primary purpose for which the contract was entered. In today's world, where businesses work in a very fast-paced environment, the business structures and the area of business keep changing with time after it has been incorporated with a particular purpose.
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What is an object clause?
A contract contains various clauses, one of the clauses is an object clause. An object clause may be used as a specific clause, as a part of the contract. The following is the purpose of object clauses in a contract:
1. Defining the purpose of the contract
2. Scope, Obligation and the limits of the contract
3. Prevents ambiguity in understanding the purpose of the contract
4. Provides the scope of interpretation in the contract
Change in Object Clause
Legal Significance of Object Clause
Following are the legal significances of the object clause in a contract:
1. Defines the scope of the company’s work
2. Limits the unlimited corporate power
3. Determines the legal validity
4. Protects the interest of the shareholders
5. Prevents unauthorised activities of anyone related to the company by making them liable
6. Helps in defining the legal intent of the parties involved
7. Gives clarity for legal regulatory
Reasons for changing the object clause
Following are the reasons why businesses might consider a change in the object clause of their contracts, or the Memorandum of Association(MoA) which acts as the Constitution of the Company, can also be defined as the document to which the operations of the company must adhere and it contains multiple clauses like object clause which have their purpose of defining certain things in the MoA. MoA’s object clause changes when there is a change in a huge thing that affects the business and a contract’s object clause change happens when a company has entered into a contract with third-party for some project, supply of material or any other purpose, and the MoA of the company changes.
1. Expansion or change in business terms: Whenever a business comes into existence there, it changes, which occurs in terms of expansion, change in terms of the business, feeling the need to change in the MoA. With expansion comes change in terms of the business methodology, the team that operates the business, and important members of the team. There is a high probability, that a change in the object clause might be needed.
2. Product/Service shift: With the change in times, businesses might consider a change in their product/ services which acts as their selling point, this constitutes the main objective or the main part of the business. When the product changes, the objective for which the company was formed also changes or the objective for which a person or a third party enters into a contract changes. Hence, another scenario where a change in the object clause might be considered.
3. Strategy change: With changes in times, businesses might change the strategy on which they are operating. Strategy change mostly comes out of a situation of need, whenever there is business change. Hence, in these cases, businesses might need to change in object clauses in their MoA and the contracts the company have entered into their third parties.
4. Change in members: Change in normal members of the company does not affect the company in a major way, in those cases, change in object clauses cannot be considered. But with business changes, there is a probability that members, key managerial persons or important people, and decision-makers of the business change. The addition or removal of partners might also be considered. Hence, changes in important members related to the company can lead to changes in the object clause of the company,
5. Change in the laws, which leads to change in compliance: Laws are ever-changing, so the compliance related to it changes. The compliances the company must adhere to also might change drastically due to changes in the laws. In huge compliance changes, the object clause in the MoA of the company might also be changed.
6. Dispute Resolution or Restructuring: Disputes are not anticipated by businesses, in most cases they happen due to the rise of certain circumstances when everyone is in the race to protect their interests. In cases of huge disputes within the company, or of the company with someone else to an extent that changes the course of business of the company or leads to a restructuring of the company in terms of shareholding pattern, business structure, the strategy of conducting the business, product/service change then this might lead to a change in object clauses.
7. Rebranding: The brand gives the identity of the company, with changes in the business or any important aspect related to the company. With any changes related to the important aspect of the company, the company may be rebranded and its identity, identity is one of the most important factors related to the company in the digital age. With the change in branding or rebranding, there might be changes in the object clause of the company’s MoA or there might be changes in the IP-related clauses of the contracts, mainly trademarks entered into by the company with third parties.
8. Periodic Contract Review: There are multiple things in a company that get reviewed annually. All the important aspects of the company, be it annual filing, turnover, business methodology and many other things that key managerial persons related to the company may consider and this might lead to certain changes in the company, to make the change official as well as make it legally binding upon the members associated with the company.
Process of changing an object clause:
There is a formal procedure that needs to be followed for changing the object clause of the company, it cannot be made merely it has a formal procedure and all the steps in this process need to be documented properly
1. Approval from Board Meeting: First and foremost, any stakeholder related to the company, when feels that there needs to be approval meaning at least 51% of the people who are stakeholders need to feel the same. Hence, a change in the object clause in the MoA needs to be approved by a majority of the shareholders at least, in the case when there is a change in the object clause that impacts in multiple ways or changes the trajectory of the company entirely it needs to be approved at least 3/4th majority of the shareholders. The decisions that would need a mere more than half majority and the decisions that would need 3/4th majority are clarified in the MoA of the company.
2. Drafting the amendments: The amendments that have been decided upon need to be drafted precisely and carefully protecting the interests of the stakeholders, these changes would be reflected in the MoA which acts as the Constitution of the Company.
3. Filing with the authorities: The changes need to be made in the official documents of the company, mainly the Mou, and the changed MoU needs to be submitted to the RoC(Registrar of Companies) and be uploaded on the MCA(Ministry of Corporate Affairs) website, in the information section related to the company. There might be some publication requirements depending on the jurisdiction, where the company is registered.
4. Legal Requirements: One of the most important factors related to the companies is legal compliance with the process of change, if there is any failure of compliance, the change of the object clause then all the changes may be considered invalid and unenforceable. Hence, while making these changes legal compliance is one of the important factors that companies need to comply with. One needs to be careful and make sure everything complies with the law while making the changes in the object clause of the contract.
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