COMPANY PROMOTION

Definitions of a promoter

This is conducted by persons who come up with the idea to form a company. They
are legally referred to as promoters.

The Companies Act provides that a promoter means:

“… A promoter who was a party to the preparation of prospectus or on the

particulars thereof but doesn’t include any person by reason of his acting in a
professional capacity for persons engaged in procuring the formation of the
company”

This definition however does not identify a promoter for his relationship with the
company.

In the words of Cockburn C.J in Twrycross V Grant (1879)

“A promoter, I apprehend, is one who undertakes to form a company with

reference to a particular project and set it going and who takes the necessary steps
to accomplish that purpose”

This explanation fails to capture the role of a person must play to qualify as a
promoter. In the words of Lindley J in Emma Silver Mining Co. V Lewis:

“As used in connection with companies, the term promoter involves the idea of
exertion for the purpose of getting up and starting a company (floating it).”

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This explanation also fails to identify the role of a promoter.

A promoter demystified

It has been observed that a promoter is a person who carries up with the idea of
enterprise and participates in transforming the idea into a company.

He is said to be the person who prepares the documentations, registers the co. and
meets its preliminary expenses.

A promoter is any person who has taken some part in bringing a company into
existence or in procuring persons to join it as soon as it is technically formed.

The role of a promoter may be active or passive e.g. the advocate engaged to form
a company becomes a promoter thereof if he agrees to become a director or
provides a director. Otherwise, the Companies Act excludes him from the
definition.

The question as to who a promoter is one of fact and varies from case to case. In
the words of Bowen L.J. In Whaley bridge Calico printing Co Ltd V Green:

“The term promoter is a term not of law but of business it usefully sums up in a
single word a number of business operations familiar to the commercial world by
which a company is generally brought into existence. Although company law
recognizes the role played by a promoter the term still remains ill-defined and so is
the promoter’s relationships with the company in formation. He is therefore
described as an illegitimate child of the law; actively known but formally ignored.”

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The legal position of a promoter

A promoter is not an agent of the company in formation as it does not legally exist.
This is because at common law, a person cannot be an agent for a non-existing
principal as it was held in Kelner V Baxter.

A promoter is also not a trustee of the company in formation as the beneficiary

does not exist. This was so held in Omnium Electric Palaces Ltd V Baines.

Promoters thus stand in a fiduciary position with regard to the company in

formation. In the words of Lord Cairns in Erlanger V Sombrero propahte Co Ltd
(The Sombrero case):

“They stand in my opinion, undoubtedly in a fiduciary position [as] they have on

their hands the creation and molding of the company. This is an equitable
relationship based on trust confidence and good faith; it imposes upon the
promoters certain equitable or fiduciary obligations”

Duties and obligations of promoters

Promoter’s duties fall into 2 broad categories; fiduciary and common law

Fiduciary duties

a. Duty to act bonafide: Promoters are bound to act in good faith in what they
consider to be the best interest of the company and all actions must be
guided by the principles of utmost good faith and fairness.

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 b. Proper accounting: Promoters are bound to explain the application of monies
or assets which come to their hands from the date they become promoters.
The account must be complete and honest.

c. Disclosure: As fiduciaries, promoters are bound to disclose personal interest

in transactions to avoid conflict of interest. Any secret profit made must be
disclosed failing which the promoter is liable to account for the same and the
contract may be rescinded by the company. Such disclosure may be made to
an independent board of directors or to all members in the prospectus.

In the Sombrero Case, persons who were in the process of forming a company
bought a lease in the West Indies for £55,000 so as to mine phosphate deposits.
They sold the lease to the company for £110,000 a fact that they did not disclose.
The facts came to light 8 months later and all the directors were removed from
office. The company sought to rescind the contract for the non-disclosure and it
was held that it was entitled to do so.

Whereas disclosure to the general body of shareholders is sufficient, disclosure to a

few persons who constitute the initial membership of the company is insufficient.
It was so held in Gluckstein V Baines (1900) where the plaintiff and 4 others
bought certain premises for £140,000 and sold it to a company they were forming
for £180,000. The company had no independent board of directors. Although the
prospectus disclosed the £40,000 profit, it did not disclose a further £20,000 the
promoters had made on the premises. In liquidation, the liquidator sought to
recover £6,341 from Gluckstein as his share of the secret profit. It was held that he
was liable to account for the non-disclosure. In the words of Lord Mc Naugten:

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“Disclosure is not the most appropriate word to use when a person who plays many
parts announces to himself in one character what he has done or is doing in
another..to the intended shareholders there was no disclosure at all an elaborate
system of deception was practiced on them.”

Common law or General Duties

a. Determine and settle the company name.

b. To request or cause the registration of a company.

c. To prepare or cause the preparation of the constitutive documents.

d. To meet the preliminary expenses.

e. To secure the services of directors.

f. To prepare the prospectus if necessary.

g. To ensure that the company has an independent BOD

h. To acquire assets for use by the company.

i. To enter into business contracts on behalf of the company.

Remuneration of promoters

A promoter is neither entitled to remuneration for incorporating the company nor is

he entitled to recover the expenses incurred.

This is because there is no contractual relationship between the promoter and the
company.

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Such a contract cannot exist at the company has no legal existence or capacity to
contract.

However in practice promoters recover their expenses in accordance with the

Articles. For example, Article 80 of table A provides inter alia:

“The business of the company shall be managed by directors who may pay all the
expenses incurred in promoting and registering it.”

However this article is unenforceable by reason of the act as the promoter is an

outsider and would be seeking to enjoy rights accruing to him in a capacity other
than that of a member.

However promoters may be rewarded in other ways as follows:

a. Upon disclosure, a promoter is free to sell overvalued assets to the company

in formation in return for a profit.

b. By disclosing, a promoter is free to sell overvalued assets to the company in

return for fully paid shares.

c. A promoter may act as an agent to enable the company acquires an

undertaking from a third party in return for a commission which ought to be
disclosed.

d. Promoters may be afforded the opportunity to take up extra shares at par

value after the market value has risen.

e. Traditionally, promoters have been rewarded by being offered either

deferred, founders or management shares.

f. Promoters may also be appointed as the initial directors of the company

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PRE-INCORPORATION CONTRACTS/PRELIMINARY CONTRACTS

These are contracts entered into by persons purporting to do so on behalf of the

company before its incorporation.

Under section 16 (2) of the Companies Act, a company comes into existence on the
date of incorporation. Before then it is not a legal person and has no capacity to
contact or have agents.

At common law, a pre incorporation contract is generally unenforceable by or

against the company.

Rules governing pre-incorporation contracts

1. Before incorporation, a company has no legal existence it can neither

contract nor have agents as held in Kelner V Baxter.

2. At common law, a person who purports to contract as an agent where he has

no principal existing at that particular time is personally liable on the
contract.

This was so held in Kelner V Baxter where 3 persons who were forming a
company ordered a large quantity of wine from plaintiff and signed the

contract as follows: “On behalf of Gravesend Royal Alexander Hotel Ltd”

The wine was supplied and consumed by the hotel business which
subsequently collapsed. The plaintiff sued the promoters in question and the
issue was who the contracting parties were. It was held that even though the
defendants had contracted as agents, they had no principal and were thus
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 personally liable on the contract. The Court was of the considered view that
it was necessary to hold the defendants liable to give effect of the contract
by stating:

“Where a contract is signed by one who professes to be signing as an agent,

but who has no principal existing at the time and the contract would be
altogether inoperative unless binding upon the one who signed it, he is
bound thereby and a stranger cannot, by a subsequent notification, relieve
him from such responsibility”

3. At common law a contract purportedly entered into by a nonexistent person

is void. This is because for a contract to come into existence there must be at
least two parties.

In Newborne V Sensoid (GB) Ltd, the plaintiff who was in the process of
forming a company contracted to supply the defendant company with a large
quantity of ham. He signed the contract as follows:

“Leopold Newborne London Ltd

Leopold Newborne, Director”.

Due to a drop in demand for ham, the company did not wish the same
supplied and Newborne sued. It was held that the purported contract was
void as one of the parties did not exist. In the words of Lord Goddard:

“This purports to be contract by the company; it doesn’t purport to be a

contract by Mr. Newborn. He does not purport to be selling his goods. The
only person who had any contract here was the company and Mr. Newborne
signature merely confirmed the company’s signature.”

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 4. At common law, a pre-incorporation contract cannot be ratified by the
company after incorporation as the company did not exist when the contract
was entered into. It was so held in Price V Kelsal (1959).

In Natal Land Co. Ltd V Pauline Colliery Syndicate where the respondent
company applied for specific performance of a contract entered into before
its incorporation, it was held that the contract was unenforceable as it was
incapable of being ratified by the company.

5. At common law, the mere adoption or confirmation by directors of a

contract entered into before incorporation creates no relationship whatsoever
between the company and the party. It was so held in North Sydney
Investments and Another V Higgins and Another.

6. At common law, a pre-incorporation contract is enforceable by or against the

company if after incorporation the company has entered into a new contract
similar to the previous agreement. It was so held in Howard V Patent Ivory
Manufacturing Co Ltd.

The new contract by the company may be express or implied by the conduct
of the company after incorporation.

In Mwawagola farmers and Growers Ltd V Kayanja and Others, the

appellant company had 500 shares of 20 UGShs each. Before incorporation,
its promoters held many meetings in many parts of Uganda soliciting
subscribers for the shares. Some of the respondents bought shares from the
promoters while others bought them from the company after incorporation.
No shares were allotted to them. The returns of the company showed that all
the shares had been allotted, the company shares had been consolidated and
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 the company’s capital had been increased. The respondents applied to the
High Court for rectification of the register of members to include their
names as members and the High Court ordered the rectification on the
ground that the company had entered into new contract after incorporation.
The company appealed. The Court of Appeal upheld the decision on the
ground that there was evidence a new contract by the company. In the words
of Moustapha JA:

“I agree. In order that the company may be bound by the agreement entered
into it before its incorporation, this contract may however be implied to the
previous agreement. This contract may however be implied or informed
from the acts of the company when incorporated.”

Remedies against promoters for breach of duty

The company or a third party may pursue any of the following remedies against the
promoters where appropriate for breach

i. Recession.

The company or third party who has dealt with a promoter in breach of his
fiduciary obligations may rescind the contract in question.

The essence of the remedy is to restore the parties to the position they were before
the contract.

Its grant or refusal is dictated by the principles of equity. The remedy is

unavailable where.

 The party entitled to it has slept on its rights for too long.

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  The party entitled to it has expressly or impliedly affirmed or accepted
the contract.

 Third party rights have arisen on the contract.

 Restitutio in integrum is not possible.

In the Samborero case, it was held that the company was entitled to rescind the
contract for non-disclosure by the promoters.

ii. Account / recovery of profit.

The company is entitled to recover any secret profit made by a promoter in his
promotional activities without disclosure.

The same is recoverable under an action for money had and received as held in
Gluckstein V Barnes (1900) where Gluckstein was ordred to account for £6,341
which was a secret profit he had made as a promoter.

iii. Damages.

The company has an action in damages against a promoter for breach of duty
which is sustainable notwithstanding the absence of fraud. This action is an
alternative to an account.

In Re Leeds and Hanley Theater of Varieties Ltd, where a promoter had made a
secret profit of £12,000 and the company sued, the Court of appeal awarded the
same as damages. In the words of V. Williams:

“I am clear that there is a remedy in the shape of damages”

iv. Compensation.

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A third party who has suffered loss or damage by reason of subscribing for shares
or debentures of a company on the faith of a prospectus containing any untrue
statement is entitled to compensation for loss or damage by among others, every
person who was a promoter of the company.

v. Public examination.

Under the Companies Act, if after the winding up order is made, the official
receiver makes a report to the Court to the effect that fraud has been committed in
the promotion or management of the company, the Court may, after examination of
the reports, appoint a date in which the promoters or any other persons involved
will be examined in Court on the matters relating to the promotion or management
of the company. The examination is under oath. The Court has jurisdiction to
assess the damages payable by any person found to have acted fraudulently.

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