TOPIC 2
PROMOTION OF A COMPANY
Company Law
Presentation by SK
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Definition
Promotion refers to the entire process by which a company is
brought into existence
It starts with the conceptualization of the birth a company
and determination of the purpose for which it is to be
formed.
The persons who conceive the company and invest the initial
funds are known as the promoters of the company.
However, a person who merely acts in his professional
capacity on behalf of the promoter (e.g. lawyer, CA, etc) for
drawing up the agreement or other documents or prepares
the figures on behalf of the promoter and who is paid by the
promoter is not a promoter.
Promotion process
In Whaley Bridge Calico Printing Co. v Green (1879) 5 QBD 109,
Bowen J explained that, ‘the term promoter is a term not of law,
but of business, usefully summing up in a single word a number
of business operations familiar to the commercial world by which
a company is generally brought into existence’.
The promotion process generally involves the following activities.
Conceptualization of idea
Registering the company with the Registrar of Companies
Entering into pre-incorporation contracts
In case of public companies, issuing a prospectus
Appointing directors and finding shareholders wishing to
invest in the new company.
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THE FIDUCIARY POSITION OF PROMOTERS
1. Not to make any profit at the expense of the
company- Promoters shouldn't profit at company's
expense; must surrender secret profits.
2. To give the benefit of negotiations to the company-
Promoter must offer company best deal; selling
property at inflated price is forbidden.
Case; Erlanger v New Sombrero Phosphate Co, [1878] 3
App.Cas. 1218.]
3. Consequences of non-disclosure of interest or profit-
Company can sue promoter for damages due to undisclosed
profit breach, recovering losses.
THE FIDUCIARY POSITION OF PROMOTERS
4)Not to make unfair use of position
The promoter must not make unfair or unreasonable use of
his position and must take care to avoid anything which has
the appearance of undue influence or fraud.
Duties & liabilities of a promoter
In Erlanger v New Sombrero Phosphate Co, a syndicate sold a mine
to a company they formed without disclosing their interest. The
company later sued to rescind the sale due to unprofitability,
succeeding. Gluckstein v Barnes refined disclosure duties, stating
full disclosure is needed if the board isn't independent. Lack of
disclosure renders the contract voidable, but the right to rescind
is lost if the company affirms or delays.is designed to defraud he
investing public.
Where full disclosure is not made by the promoters the contract is
voidable at the company’s option. However, the right to rescind
will be lost where:
The company affirms the contract
The company delays in exercising its right to rescind the contract
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PRE-INCORPORATION CONTRACTS
Pre-incorporation contracts are agreements made by individuals or
entities on behalf of a company that has not yet been formally
incorporated
Authority: Individuals acting on behalf of the future company
must have the authority to do so, often as promoters.
Ratification: Once the company is incorporated, it may choose to
ratify or adopt pre-existing contracts.
Liability: Until ratified, the individuals who entered into the pre-
incorporation contract are personally liable.
Disclosure: Any contracts made and any interests of the
promoters should be fully disclosed to the company's
shareholders.
Rescission: The company can choose to rescind pre-incorporation
contracts if it so desires, particularly if they are disadvantageous
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PRE-INCORPORATION CONTRACTS
The issue herein is that an agent cannot bind a non-existent
principal to contracts.
The privity doctrine operates to prevent rights and liabilities
being conferred or imposed on the company. If any preliminary
arrangements are made, these must therefore be left to mere
gentlemen’s agreements or otherwise the promoters might have
to undertake personal liability.
A promoter can avoid personal liability if the company, after
incorporation, and the third party substitute the original pre-
incorporation contract with a new contract on similar terms.
(novation)
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Position of promoters as regards preliminary contracts
1.Company not bound by preliminary contract
A company, when it comes into existence, is not bound by a
preliminary contract even where it takes benefit of the contract
entered into on its behalf.
2.Company cannot enforce preliminary contract
The company cannot, after incorporation, enforce the contract
made before its incorporation.
3.Promoters personally liable
The promoters remain personally liable on a contract made on
behalf of the company not yet in existence. Such a contract is
deemed to have been entered personally by the promoters.
.
Ratification of a preliminary contract
A company cannot ratify a contract entered into by the
promoters on its behalf before its incorporation.
Therefore, it cannot by adoption or ratification obtain
the benefit of the contract purported to have been
made on its behalf before the existence as ratification
applies only if an agent contracts for a principal who is
in existences and who is competent to contract at the
time of the contract by the agent.
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Functions of a Promoter
a) Identification of business opportunity:
b) Feasibility studies
Technical feasibility: good ideas may be technically not
possible to execute.
Financial feasibility: Every business activity requires
funds. The promoters have to estimate the fund
requirements for the identified business opportunity.
Economic feasibility: Sometimes project is technically
viable and financially feasible but the chance of it being
profitable is very little
c) ) Name approval
Functions of a Promoter
d) Fixing up Signatories to the Memorandum of
Association:
e) Appointment of professionals:
f) Preparation of necessary documents:
Thank You
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