PROMOTERS

INTRODUCTION

1. OBJECTIVES
2. MAIN CONTENT
3. CONCLUSION
4. SUMMARY
5. TUTOR MARKED ASSIGNMENT
6. REFERENCE/FURTHER READING

INTRODUCTION

In this unit we turn our attention to an important aspect of company law. There are some set of people referred to as promoters who actually perform an important role in the company but prior to its formation. They represent different things to different people. In many cases they are sometimes regarded as fraudulent people who only take advantage of an yet to be incorporated company to make money and to the detriment of the company. This is because, they stand in an advantageous position and the members of the company may not have any option than to accept whatever the promoters pass to them. Here, we will look at the definition of a promoter and their duties to the company.

OBJECTIVES

At the end of this unit the student must be able to explain the meaning of the word promoter and their duties.

MAIN CONTENTS

MEANING OF “PROMOTER”

The word promoter was first used in the Registration Act of 1844 to describe those engaged in the formation of companies. In the modern context however, the word is not only used to mean those engaged in the formation of companies, the promoters work does not end with formation of company alone. The courts have refused to define the term “promoter”, they merely describe it occasionally to fit the facts of the case before them, in order words, there is no fixed judicial definition of promoter.

However, in the case of Twycross v Grant (1877) 2 CDD (36TCR 812) 469 at 541, Cockburn C. J. explained the term thus, “A promoter I apprehend is one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.” In that case, plaintiff sued to recover the amount paid on shares by him in the company on the ground of fraud of the defendants (promoters of the company) in omitting from the prospectus two contracts entered into by them as promoters. One, is a contract between the defendants and one person for the purchase of certain foreign concessions for the construction of a tramway, the other, a contract between the defendants and G. as to certain payment to be made by G. & P to G. in consideration of his obtaining for them a contract from the company for the construction of the tramways by means of which fraud the plaintiff had been induced to take the shares which proved worthless. The jury found that these contracts were material and should have been disclosed to the intended shareholders of the company. It was held, that the contract ought to have been specified in the prospectus and that the defendants were liable. That the shares taken by the plaintiff being worthless he was entitled to recover the amount paid by him to them.

In view of the very many avenues for a promoter to defraud the company he is promoting, the courts have actually deemed it fit to leave the definition as elastic and flexible as possible in order to “catch the next ingenious rogue” (L.S. Seally, 1992, Cases and Materials in CompanyLaw, 5^th ed. Butterwoths, London. P. 22).

A ‘promoter’ is the person responsible for forming the company. , in most cases however,, only one individual may not single handedly form the company, he needs others including professionals to assist him, the world may therefore be limited to those who take active role in forming the company. This brings to fore the individual roles played by each person in order to determine who actually took active role in the promotion . A typical promotion process involves incorporation of the company with the Corporate Affairs Commission (CAC), thus of course will entail instructing lawyers to prepare all the necessary documents of incorporation, paying for their services and incorporation costs, negotiating pre-incorporation contracts, appointing the initial directors, and shareholders, in the case of public company, the promoter will be responsible for the preparation, registration and issuing of prospectus. The promoter will also be involved in introducing vendors, agents etc and the raising of the initial capital of the company. The lawyers or accountants and other professionals engaged by the promoter are not regarded as promoters merely on that account. Re Great Wheel Polgooth Co. (1883) 53 LJCH. 42.

Obviously, their work is quite enormous, this is why Bowen J declared in the case of Whaley Bridge Calico Printing Co v Green (1880) 5 QBD 109 that,

“they 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 courts reluctance in not formulating a general definition of the term is as a result of the old cases where the promoters are largely fraudulent persons with only one intention, and that is, to create schemes to defraud unwary investors. This was done by a person selling to a new company that is being floated his own property or property acquired for the purpose at a grossly inflated price, in return  for fully paid up shares. Therefore, it is better to leave  the definition flexible in order to include as many fraudsters as possible.

What constitutes a promoter is a question depending on the facts of each situation. In the case of Emma Silver Mining Co. Ltd v Lewis (1878-79) LR 4. C.P.D. 396, Lindley J at page 407 explained that, ‘with respect to the word ‘promoter’ we are of the opinion that it has no definite meaning.” As used in connection with companies, the term ‘promoter’ involves the idea of getting up and starting a company or what is called floating, and also the idea of some duty towards the company as posed by or arising from the position which the so-called promoter assumes towards it. The courts have also developed a range of specific fiduciary duties aimed at setting exemplary standards of behavior for promoters.

In England, the word promoter has not been judicially defined apart from the above instances. Also, the legislature has not deemed it fit to offer a solution as well, except in section 762(1) (c) of the Company Act 2006 U.K. in relation to obtaining a trading certificate, where they are required to be named. However, in Nigeria, the Companies and Allied Matters Act 1990 has offered a solution by simply adopting the description of Cockburn CJ in Twycross v Grant (supra). Section 61 of the Act states ‘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.” The proviso to the section exempts persons acting in professional capacity engaged as such persons engaged in procuring the formation of the company shall not be thereby be deemed to be a promoter. We should note that the section adds the words, “who, with regard to a proposed or newly formed company, undertakes a part in raising capital for it”. It is not clear whether the words added by the Act is of any use, or may only create further confusion to the law. The issue of who raises capital for the company may not be too clear, does it include the Bank or Finance house that grants credit for the company, or creditors who supply goods to the company on credit, or exactly what is capital,it would have been better to retain the definition given by Cockburn C.J without any addition thereto. This is the first time promoter is defined in the Act, it was not defined in the Companies Act 1968, we will still await judicial interpretation in Nigeria.

SELF ASSESSMENT TEST

Define The Term ‘Promoters’

DUTIES OF PROMOTERS

Promoters occupy a unique position in the formation of a company which position can be used to secure for themselves some benefits at the expense of the investors and creditors. Their position can be easily abused because the promoters have a fore knowledge of the company, and can decide the nature, constitution, object and founding members of the company. Pre-incorporation agreements are entirely in the hands of the promoters. Lord Cairns inErlanger v New Sombrero Phosphates Co. Ltd (1878) 3 A.C. 1218 explained the position thus: Promoters have in the their hands the creation and moulding of the company, they have the power of defining law, and when and in what shape and under what supervision it shall start into existence and begin to act as a trading corporation.” In view of their very important position in the company, the law regards the promoters as standing in a fiduciary relationship to the company. Land Cairns LC made the point in Erlanger case. This is so because a promoter, being a person who ‘undertakes to act for and on behalf of another in some particular matter, is viewed as a fiduciary and therefore subject to the severity of a number of fiduciary duties. Generally, fiduciary duties are obligations ‘owed to a third party to act with loyalty and good faith in dealings which affect that person.” (see Penner, 2008,  The Law of Trusts, Butterworth, London). As Penner points out, the duty to act with loyalty and good faith means more than just acting honestly or fairly but rather the fiduciary must act solely with the interests of his principal in mind; the fiduciary must act to secure his principal’s best interests and must not allow his own self-interests, or the interests of others, to govern his behavior in any way that could conflict with the principals interests.

We may therefore safely conclude that the promoter stands in a fiduciary position to the company, and the duty starts immediately the promoter commences the preliminary steps towards the incorporation of the company and throughout the incorporation process.

FIDUCIARY DUTIES OF PROMOTERS

Due to their position in the company as we discussed above, the promoters may easily use their position to benefit themselves to the detriment of the company. These can be done in the following ways;

1. They may for instance decide to form a company, simply to sell their own property to it at a price highly in excess of its value or the price they paid for it (See Salomon v Salomon & Co. supra).
2. A secret bargain may be made with vendors of property of the company to pay them back part of the purchase price which had been inflated for this purpose
3. The promoters may inflate the promotion expenses and demand to be paid for by the company.
4. Investors may be misled into subscribing for bubble companies as we saw before the Bubble Act

Some of the usual fraudulent activities have been judicially summed up by Cockburn CJ in Twycross v Grant (supra) when he said.

But in this vast undertaking caused on by United Enterprise and capital of hundreds perhaps thousands of shareholders. The individual shareholder is more or less at the mercy of those who invite him to join the company, as the facts on which he may be led to invest his money, experience has shown that shareholders may be induced, not only by being led to invest in bubble companies, but also where the undertaking is intended to be carried out from the resources of the company being impoverished by clandestine agreements from which failure of the enterprise results or by the company being made to pay more than the real value of their shares largely in excess of the value of what it gets by the capacity of those who set it going, and that shareholders may be victimized by being made to pay more than the real value of their shares owing to dishonest or improvident bargaining made at the inception of the undertaking and not disclosed in the prospectus.

The fiduciary duties applicable to promoters principally arise from the nature of the transactions entered into by them in the cause of bringing the company into existence. The duties may be divided into two.

• where the promoter has recovered reward or commission from the vendors of the property by inflating the price of the property sold to the company
• Where the promoters reaps excessive profit by selling the property at an excessive sum.

The two situations are treated as secret profits made by promoters. The court treats promoters as fiduciary of the company so it is easy to compel them to restore to the company any gain made from any of the two ways. Where the promoter sells property to the company in which he has a personal interest and so the law requires promoters to make a  full disclosure of any profit derived therefrom (see Re Lady Forest (Muchinson) Gold Mine Ltd(1901) 1 Ch. 582. In the case of Hudson v Congrave(1828) 4 Russ, 562. The vendor agreed to sell for £10,000 property to the company, but the promoter asked that the  agreement should state £25,000. It was held on discovery by the company. That the company is only bound to pay the actual price. It is possible for the promoter to argue that in spite of the inflated price, the price is fair, if it can be proved that it is lower than the market value. This argument will not be accepted because a trustee is not supposed to profit from the trust. The reason is that once it is established that the promoters from the purchase price, the court will accept that the promoter has acted to the detriment of the company. (See Re Hereford &South (1876) Ch. 62).

Where a promoter offers a secret reward, the company has a right to recover the secret reward and the company has the right to rescind the contract.See Bagnall v Carlton(1877) 6Ch. 371. In the case, the court recognized the double remedy of rescission of the contract and also, an action for money had and received to the use of the company. It is not necessary that the contract should be rescinded before the promoter is made liable. It was held in Emma Silver Mining Co. v Lewis40 LTR 749 that the defendants were in a fiduciary relation to the company and they were liable to refund the secret profits even though the contract of sale was rescinded. The right to recover the profit made is not a condition precedent for rescission of the contract. In the case of Lindsay Petroleum Company Ltd v Hurb (1874) LR 5 P. Ch. 243,A and Bown parcels of land which was supposed to contain crude oil. They formed company with C and sold the land to the company. A and B did not disclose their interest. They made substantial profit. The plaintiff company that bought the land having discovered the fraud sued for rescission of the contract, it was held, that the contract must be wholly rescinded, the price repaid and the land reconveyed.

Where the reward has not been paid, it can be recovered straight from the third party. The third party cannot say that because the transaction is fraudulent, it is void and cannot be enforced against him. You may see Grant v Gold Exploration Development Syndicate Ltd(1900) 1 QB. 233. In this case, the plaintiff owner of a mine agreed to give X 10%commission if he sells it unknown to him, X was the director of the company buying the mine. The director arranged for a sale to the defendants but before the contract was entered into or the commission payable, the plaintiff became aware of the director’s position with regard to the transaction with the defendant. Held, that the plaintiff having completed the contract without disclosing the defendants as purchasers, the agreement to pay commission  to the agents, or any part of the agreed commission remaining in the hands of the plaintiffs could be recovered from him by the defendants.

LEGISLATIVE INTERVENTION

For the first time, the Companies and Allied Matters Act, 1990, by virtue of section 62 made provisions on the duties of the promoters. The sections states,

• A promoter stands in a fiduciary relationship to the company and shall observe the utmost good faith towards the company in any transaction with it or its behalf and shall compensate the company for any loss suffered by reasons of his failure so to do.

• A promoter who acquired any property or information in circumstances in which it was his duty as a fiduciary to acquire it on behalf of the company shall account to the company for such a property and for any profit which he may have made from the use of such property or information

The law is far more encompassing than the common law position. The law now includes use of corporate information and is no longer restricted to a financial or property transactions. Where the opportunity was not utilized by the promoter or where it was utilized for the benefit of the company, he incurs no liability. He will not also incur any liability where he discloses his interest to the company. Full disclosure is required by the promoter before he can escape liability. This will be our focus in the next unit.

CONCLUSION

The promoter stands in a precarious position to the company. He is recognized as the person who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose: while the courts also recognized the term promoter as … 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. See Bowen J in Whaley Bridge Calico case, supra. The fact is that a businessman is more interested in profit and ought not to be penalized for making profit. But the position of the law is clear, that is if the promoter is allowed to escape with ill-gotten gains in the name of business, the company will be put to serious disadvantage.

SUMMARY

The promoter is the person responsible for forming the company. He is the one that plans, organizes and sets in motion all the necessary steps to ensure that the company comes into being. In doing all these, the law regards the promoter as standing in a fiduciary relationship to the company. The fact that we do not have any accepted definition for the  term shows the reluctance of the common law courts to close the ways by which the fraudulent promoters may be caught. The Nigerian CAMA, has however, defined the term,  by slightly expanding the definition of Cockburn CJ in Twycross v Grant (See section 61). The promoter being a fiduciary is not allowed to make any secret profit from his promotion, he must not use his position to benefit himself by either obtaining commission or any advantage.

TUTOR MARKED ASSIGNMENT

Define the term promoter, and examine the duties of the promoters

 REFERENCES/FURTHER READING

Renner, 2008, The Law of Trusts, Butterworths, London