Before a company can be formed there must be some persons who have an intention to form a company and who take the necessary steps to carry that intention into operation. Such persons are called promoters. The word promoter has not been defined in the Act; though some English judges have tried to define it as follows:-
“A promoter 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.
Bowen simply put it as one who generally brings a company into existence”.
(i) Preparation of the memorandum and articles of the proposed company.
(ii) The appointments of first directors.
(iii) Preparation of the prospectus.
(iv) Negotiating preliminary contracts.
(v) Paying the preliminary expenses.
Duties of a Promoter
Given that a promoter is in a judiciary relationship with the company, the promoter has the legal duty to disclose to the company any profits which he makes from the promotion. He can make a profit but the profit must not be a secret profit. If he makes a profit but does not disclose it, he must account to the company for it as follows:-
(a) Where the promoter purchased the property before he began to act as promoter his non-disclosure of the fact that the property was his own would entitle the company to repudiate the contract of sale and restore the original position, that is, return the property to the promoter and recover the purchase price.
For example, if A acquired some piece of land in the year 2000 for Sh. 100,000 with the intention of using it for farming but changed his mind in the year 2001 and promoted a company to which he sold the land for Sh. 120,000 without disclosing his interest, the company may:-
(i) Rescind the contract.
(ii) Keep the land. It cannot recover sh 20,000 profit which A made.
(b) Where he purchased the property after he began to act as a promoter the company may:-
(i) Rescind the contract.
(ii) Keep the property and recover the secret profit made by the promoter. In the above case, it is deemed that the promoter had an intention of reselling it to the company and A’s position would be regarded as “an agent” and the company’s rights at common law would be the same as those of the principal.
The remedy of rescission is subject to the general restrictions on its availability. If the company has resold the property to a third party the remedy would not be available against the promoter since restitution integrum is not possible and the only remedy would be limited to recovery of the profit made, or damages at common law if it can be proved that the promoters’ conduct had been fraudulent.
Payment for Promotion
A promoter has no legal rights against the company he promotes. This is so because:-
(a) The company did not ask him to promote. There is no contract between him and the company which would entitle him to sue for his expenses or professional fees.
(b) The company could not after its incorporation enter into a contract to pay him for his services because no consideration to support such a contract would be furnished by him. This would be “past consideration”.
Article 80 empowers the directors to pay promoters their promotion expenses. It is however a power given to directors and confers no legal rights on the promoter. This situation has led Gross to state that the promoter is the “illegitimate child of the law – actively known, and formally ignored”.
Case Law: Erlanger vs. New Sombrero Phosphate Co. Ltd (1878)
A syndicate of which E was the head purchased an island containing mines of phosphate for £ 55,000. E then formed a company to buy this island. A contract was made better X a nominee of the syndicate and the company for its purchase at £110,000. The details of the sale were not disclosed to the shareholders or independent Board of Directors. The company now sought to rescind the contract of sale. It was held that as there had been no disclosure by the promoters of the profit they were making, the company was entitled to rescind the contract.
A promoter who wishes to sell his own property to the company must make a full disclosure of his interest in the transaction. The disclosure may be made:-
(i) To an independent Board of Directors.
(ii) In the Articles of Association.
(iii) In the prospectus.
(iv) To the shareholders.
Lord Cairns observed that:-
“I do not say that an owner of property may not promote and form a joint stock company and then sell his property to it but I do say that if he does, he is bond to take care that he sells it to the company through the medium of board of directors who can exercise an independent and intelligent judgment on the transaction”.
Pre-incorporation contract is an agreement which is entered into, usually by a promoter on behalf of a company at a time when the company’s formation has not been completed by its registration. Such contracts may relate to property which the promoters wish to purchase for the company or they may be made with persons whose know-how is vital to the success of the company. The promoters may perhaps have arranged for the company to take over an existing business, and therefore need to make a contract with the vendor for its sale or purchase.
Before its incorporation, a company has no capacity to contract. A contract entered into by promoters on behalf of a proposed company is void in so far as the company is concerned. The promoters cannot be agents for a principal which has not yet come into existence. In such cases the company cannot sue or be sued on it. The company has no legal existence until it is incorporated. It therefore follows:-
(i) That when the company is registered, it is not bound by pre-incorporation contracts.
In a Case Law, it was stated that a solicitor prepared the memorandum and articles of association and paid all the necessary registration fees on the instructions of persons who later became directors. He claimed his fees and expenses on the liquidation of the company. The court of appeal held that the company was not liable to pay the solicitor cost, though it had taken the benefit of its work.
(ii) That the company when registered cannot ratify the agreement. The company was not a principal with contractual capacity at the time when the contract was made. A contract can be ratified only when it is made by an agent for a principal who is in existence and who is competent to contract at the time when the contract is made.
Case Law: Natal Land Co. Ltd vs. Pauline Colliery Syndicate Ltd (1904)
N company agreed with Mrs. Carrey an agent of a syndicate before its incorporation that N company would grant a mining lease to the syndicate. The syndicate was incorporated as Pauline Colliery. Pauline Company discovered coal whereupon Natal Land Co. Ltd refused to grant the lease.
It was held that there was no binding contract between Natal Land Co. Ltd and Pauline Company as the latter was not in existence when the contract was signed.
If the company were allowed to ratify the contract it would mean that it contracted on the date the contract was formed. This in effect would mean that the company contracted before it was formed. If the company wishes to revive the abortive contract it must make a fresh offer and if the offer is accepted by the other party, a contract will come into existence from the moment of acceptance.
(iii) That if the agent undertook any liability under the agreement he would be personally liable notwithstanding that he is described in the agreement as an agent and that the company may have attempted to ratify the agreement.
Case Law: Kelner vs. Baxter (1866)
An agreement was made between K& B. B was acting on behalf of the proposed hotel company. Wine supplied under the contract was used by the company which had “ratified” the agreement after incorporation. The company went into liquidation before paying the debt.
It was held that B was personally liable and no ratification could release him from his liability.
The promoters of a company, before its incorporation entered into an agreement with P to buy a plot of land on behalf of the company. After incorporation the company refused to buy the said land. Has P any remedy either against the promoter or against the company?