OUTCOME:
At the end of the Lesson, students would be able to:
- State the relevance of promotion activities, who is a promoter, duties and liabilities of a promoter, legal relationship of a promoter with the company, and remuneration of a promoter.
- Discuss the incidences, types and features of pre-incorporation contracts (Joint Venture and Shareholders Agreement.).
- Discuss the relationship between Memorandum & Articles and Pre-incorporation Contract.
- List the contents of Shareholders Agreement, Joint Venture Agreement and Commercial Memorandum of Understanding.
- Draft Pre-incorporation Contracts.
- Identify ethical issues involved in pre-incorporation matters.
PRE-INCORPORATION MATTERS
Who is a promoter?
Section 61 CAMA –
“Any person who undertakes to take part in forming a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose, or who, with regard to a proposed or newly formed company, undertakes a part in raising capital for it, shall prima facie be deemed a promoter of the company”
Promotion is the act done by a promoter with the aim of bringing the company into existence. However where a professional rendered his service gratuitously for the purpose of setting the company going, he shall not be a promoter of the company. A promoter is not an agent of the company but he occupies a fiduciary relationship. Once a person is involved in the process of setting up a company they’re a promoter.
The promoter shall be liable to compensate the company for any loss incurred. S62
There are two types of promotion activities: before the company is incorporated and after incorporating the company (e.g. raising additional capital).
Whether someone is a promoter or not is dependent on the circumstances and the facts, being a promoter is not just a nomenclature. Being a promoter comes with certain duties and liabilities.
See Garba v Sheba International (Nig) Ltd
Once you’re a first director or subscriber you’re a promoter.
Read s 135,136,137 CAMA
Excluded persons
Any persons acting in a professional capacity for persons engaged in procuring the formation of the company are not promoters. (S 61 CAMA) e.g. lawyers, accountants, financial advisers – see Re Great Wheal Polyglot ltd.
However if the professional did more than render professional advice then the person becomes a promoter.
- Assist in engaging employees
Promotion activities
In determining who a promoter is, the law looks at the facts and circumstances
- Incorporating/ registering the company and getting relevant permits and licences
- Instructing a lawyer to prepare relevant documents for incorporation of a company is a promoter
- Assisting with putting together a management team (directors and other key employers)
- Entering into contract in behalf of the proposed company
- Purchasing property as a trustee for a proposed company, such person is a promoter
- Assisting with raising capital (proposed or newly incorporated company) – this could be equity or debt capital
- Promotion activities can happen post-incorporation of the company
Duties of a promoter
- Duty to account for money or property received in the course of the promotion
- Duty not to make secret profit. Where made it must be returned to the company
- Duty to disclose conflict of interests with transactions of the company
- Duty not to expose the company to loss
Traditionally promotion activities are pre-incorporation
The relationship between a promoter and the company
Is it agency?
- In agency relationship there must be an agent and a principal with capacity to enter into such relationship. Also the agent must be acting on the instruction of the principal.
- An unincorporated entity does not have legal personality so it cannot be a principal.
- If incorporated, companies only act through its officers and shareholders
Trust?
No
Section 62(1) CAMA – the promoter stands in a fiduciary relationship to the company.
What is a fiduciary relationship?
- Promoters are in an advantage position
- They have information that the company does not have
- This demands greater responsibility and duty
- Act in utmost good faith
DUTIES OF A PROMOTER
- Duty to account for property acquired on behalf of the company (including money received on behalf of the company) duty to account extends beyond profit and loss – section 62(2)
- Duty not to make secret profits (disclosure- so you can make profit, but you have to disclose any material facts)– section 62 (2)
- Duty not to use confidential information obtained in the course of acting as a promoter to his own advantage – s 62(2)
- Duty to avoid conflict of interest and disclose material facts if any conflict of interest arises – s62(3)
- Duty of care, skill and diligence – he can be culpable on grounds of negligence to the company
- Duty to act in utmost good faith
Liabilities of promoter/ remedies availableto the company
- Where a promoter breaches his fiduciary obligations/duties - there will be liability and the company can take any of the following steps
- Action for money damages for exploitation of confidential information: e.g. if there is a breach of duty to account, or use of confidential information
- Refusal to ratify the pre-incorporationconflict of interest contracts
- Action to rescind contracts, unless entered into or ratified after full disclosure as clearly spelt out in s 62(3)
- Action to render account for money or property received: for breach of duty of account
Tip: In a problem question narrow the liabilities down to the scenario, don’t just mention all the remedies rather state only the ones that are relevant to the scenario.
Remuneration of promoter – s 62 & 72 CAMA
They are not meant to be remunerated they act pro bono. Exception: 1) Where the articles of association allow the directors to pay the promoter of the company, 2) where the promoters enter into a pre-incorporation contract with the company that the promoter will be remunerated. 3) Promoter can also enter into a personal contract with person who instructed them to float the company such that those person would be bound to pay
Examples of pre-incorporation contract
- Director service contract
- Contract to take over a business
- Contract to purchase a property
- Contract for conversion of partnership into company
Suspension of a promoter - S254(1) CAMA
Beyond civil claims that can be brought, some criminal charges can also be brought against the promoter. Where a promoter is convicted by the high court of an offence in connection with the promotion or formation of the company, the promoter will not be a director of or in any way, whether directly or indirectly, be concerned or take part in the management of a company for a specified period not exceeding 10 years.
Where a promoter is suspended he may be barred from being a director or being in the management of the company or for a period not exceeding 10 years or as specified by the court.
The period of limitation does not apply to proceedings brought by the company to enforce any of its rights against a promoter – s 62(4). However the court may relieve a promoter of any liability. So the court has discretion.
Contracts between company and promoter
Ratifying contracts entered into by the promoter and the company – section 62(3). Ratification takes place after the incorporation of the company.
- There must be full disclosure of all material facts
- Ratified by either of the following:
- Thecompany’s board of directorsindependent of the promoter (a board of director independent of the promoters influence)
- All members of the company (by a written resolution for private companies) s62(3) b – the use of all the members does not exclude promoters, this may not make sense but its what the law says
- The company at ageneral meeting at which neither the promoter nor the holders of any shares in which he is beneficially interested shall vote on the resolution.
Remuneration of promoters
Promoters have no right to remuneration including cost incurred.
InGarba v Sheba Int (Nig) ltd, the court held that:
- A promoter has no right against the company for payment of services rendered before the incorporation of the company (the company had no legal personality/capacity) and that a promise to pay him by the company is not binding and is not enforceable against the company because the consideration is past consideration.
Pre-incorporation contracts
Contracts entered into before the incorporation of the company.
- Usually entered into on behalf of the company with the aim that the company will take over the contract upon incorporation
Examples of pre-incorporation contracts
- Promotion agreements
- Shareholders agreements (SHA): this is usually between shareholders and the pre incorporated company.
- Joint venture agreement (JVA)
- Note that in practice SHA can be entered into after incorporation of the company – this is usually the case when there is a new equity investor (local or foreign)
Legal effect/status of pre-incorporation contract
Position at common law
- At common law it was very rigid. The company is not bound by such contract whether entered on its behalf or in its name
- No legal personality before incorporation and could not have entered into such contract
- Kelner v Baxter. Signed as agent of the proposed company – the court held that the contract is binding on those who signed it and are personally liable
- Newborne v sensolid (Great Britain) Ltd – signed as the company, the court held that the contracts is a nullity as the company was not in existence at the time of the contract.
- The company after incorporation cannot ratify such contract
- Deed of novation or novation agreement can be used to circumvent the common law position
- The promoters can transfer its right and obligations under the pre-incorporation contract to the company upon incorporation. Newborne’s case.
At common law the company before incorporation had no power to enter into pre-incorporation contract EDOKPOLOR v SEM-EDO WIRE
Under CAMA
Section 72(1) CAMA:
“Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract or other transaction and had been a party thereto.”
Under CAMA a company can ratify a pre-incorporation contract
- The Supreme Court in Societe Generale Bank (Nig) Ltd v. Societe General Favouriser etc.
- Garba v sheba International (Nig) Ltd
CAMA provides that a pre-incorporation contract can only be binding upon formation of a company and ratification. The company cannot ratify an oral contract, there must be a formal contract executed to that effect for the company to be able to ratify it. Promoters who are directors of the company are excluded from the meeting to ratify pre-incorporation contracts.
Condition which pre-incorporation contracts must fulfill before it can be ratified
- It must be reduced into the writing
- Full disclosure must be made to the board of directors and shareholders
- All the members at general meeting must agree to ratify it – unanimous resolution
- The company must insert contract in the object clause of its memorandum of association
Content of shareholders agreement
Rescission of pre-incorporation contract
A company has a right to rescind any contract entered into in before its incorporation. This right is exercised where the promoter breaches its fiduciary relationship. However where there is full disclosure of all material facts known by the promoter and the company has ratified they may not be able to rescind
Note section 72(2) of CAMA
“Prior to ratification by the company, the person who purported to act in the name of or on behalf of the company shall, in the absence of express agreement to the contrary, be personally bound by the contract or other transaction and entitled to the benefit thereof.”
When should there be pre-incorporation contract:
- Remuneration of promoters
- Joint venture between either Nigerians or between Nigerians and aliens
- Converting partnership business into a company
- Taking over of an existing business or property/asset
Basic terms and clauses of Joint venture agreement &shareholders’ agreement
Shareholders agreement
- Parties
- Management of the company
- Board composition
- Company secretary
- Company business
- Dividend policy
- Rights of members/shareholder
- Information rights
- Voting rights
- Pre-emptive rights/ rights of first refusal)
- Admission of new members/ shareholders
- Transfer of shares
- Allotment of shares
- Governing law/dispute Resolution
- Exit by members/shareholders
- Registered office
- Name of the company
Paragraphs in shareholders agreement include: Commencement clause, parties, what laws govern, how to raise capital, testimonium, attestation.
Joint venture agreement
- Parties
- Object/purpose/scope of the JV
- Nature of business of the JV
- Term (commencement and duration)
- The proposed JV company/ entity
- The management structure of the JV company
- Board of directors
- Board committee
- Capital contribution
- Mode of property acquisition
- Rights/ powers /undertaking/ covenants
- Non-compete clause
- Admission of new party/ members
- Governing law
- Dispute resolution/ resolution of deadlock
- Exit of a party
- Duration of the JV
- Winding up/dissolution of the JV company/entity
- Capital contribution
- Debt
- Equity
Pre-incorporation contracts and memorandum and articles of association
- Pre-incorporation contracts are private documents that are not registered with the CAC
- They are not part of the constitutional documents of a company as provided in CAMA
- Memorandum and articles of association are public documents
- Section 35(2)
- The memorandum and articles are the principal document that regulates the affairs and management of the company.
S41(1) of CAMA
After incorporation of a company, its memorandum and articles, have the effect of contract under seal between:
- The company and its members and officers
- The members and officers themselves
N.I.B Investments (West Africa) Ltd v Omisore
A shareholders agreement & Joint Venture Agreement are personal contracts that are binding on parties thereto:
- Commercial practices to ensure the provisions on SHA & JVA are binding on the company
- Include the provisions of the agreement as object clauses. Edokpolo & Co. ltd v Sem-edo wire Ind. Ltd & ors
- The object clauses are not more than a list of objects the company may lawfully carry out, not compulsory for the company to execute them.
Putting pre-incorporation contract in object clause is not effective however where you put your intentionin the article it will be binding. This is because the object clause is just a statement of mere intention. However not doing anything on the object clause can be a ground for winding up on just and equitable grounds.
There are different types of share capital which are: authorised share capital, issued share capital, called up share capital, uncalled up share capital, paid up share capital, and reserved share capital
Ordinary shareholders are called risk bearers and they are only entitled to dividend when its been declared. In the event of winding up they can only be paid after everyone else has been paid and there’s something left, they don’t have priority. As opposed to preference shareholders, who are a hybrid between equity shareholders and creditors. They have more priority and will be paid before the ordinary shareholders.
Draft the authorised share capital clause of ABC ltd.
“The authorised share capital is one million naira divided into one million ordinary shares of 1 naira each.”
Alternatively “the authorised share capital is one million naira divided into two million ordinary shares of 50 kobo each” OR
“The authorised share capital is one million naira divided into five hundred ordinary shares of 2 naira each.”
Ethical issues
Rule 17 of the RPC
Types of company
S 21 CAMA
Draft a memorandum of association for ABC group ltd.
Note the order of it, it has to be according to the order. They stop marking once you get the order wrong. Also state the title
Answer
MEMORANDUM OF ASSOCIATION OF ABC GROUP LTD
- The name of the company is “ABC GROUP LTD”
- The registered office of the company is situated in Nigeria.
- The business for which the company is established is the conveyance of passengers and goods in ships or boats between such places as the company may from time to time determine.
- The company is a private company.
- The liability of the members is limited by shares.
- The share capital of the company is N10,000 divided into 10,000 shares of N1.00 each.
We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company, in pursuance of this memorandum of association, and we respectively agree to take the number of shares in the capital of the company set against our respective names.
Don’t forget to add the date, attestation, signature
Description of
Names and addressesNo of shares
Subscribers
...................................
Number of shares Taken by each customer
5,000
1,000 1,500
8,500
- John Alabi of
- Issa Kano of
- Caleb Okocha of
Businessman
................................... ................................... Businessman
Total shares taken
Witness to the above signatures
- B., No. 13 Araba Street, Lagos
Draft ABC limited by guarantee, they are all guaranteed by 10,000 naira each
- The name of the company is "ABC limited by Guarantee”
- The registered office of the company is situated in Nigeria.
- The objects for which the company is established are the carrying on of schools for boys in Ikot Ekpene and in such other places within the State as the company hereafter decide upon.
- The company is a private company.
- The liability of the members is limited by guarantee.
- The income and property of the company shall be applied solely towards the promotion of its objects, and no portion of the income or property shall be paid or transferred directly to the members of the company except as permitted by or under the Companies and Allied Matters Act.
- Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year afterwards, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves, such amount as may be required not exceeding N10,000, so however that the total amount to be so contributed by all the members shall not be less than N30,000.
Names, addresses and descriptions of subscribers
John Bassey Okon of ................................... Schoolmaster
John Itam of ................................... Schoolmaster
Ekanem James of ................................... Schoolmistress
DATED the.......................................... day of............................... 20........................
Witness to the above signatures
- B., No. 13 Duke Street, Ikot Ekpene
Attestation
17th February
Documents required in company formation
Where there is a conflict between the provision of MEM-ART and pre-incorporation contract, the provisions of MEM-ART would prevail. This would be the same even where there is a supremacy clause in the pre-incorporation contract. s41(1)
Ethical issues
- Act within the bounds of the law
- Duty to advice the client candidly
- Avoid conflict of interest
- Duty of confidentiality
- Duty to give full disclosure
- Duty to render proper account
- Duty not to misappropriate client funds