Notes on the process of promotion - the starting of a company

1. CHAPTER II : PROMOTION
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) 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.
A person who takes the necessary steps to form a company is called a ‘promoter’. 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.
 Registering the company with the Registrar of Companies
 Entering into pre-incorporation contracts
 Incase of public companies, issuing a prospectus
 Appointing directors and finding shareholders wishing to invest in the new company.
At common law the best definition is that by Chief Justice Cockburn in the case of Twyfords v
Grant (1877) 2 CPD 469
Cockburn says “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….”
The fiduciary position of promoters
Fiduciary obligations are obligations owed to a principal to act with ‘loyalty and good faith in
dealings which affect that person’. This duty entails more than just acting honestly and fairly.
Fiduciaries must act solely in the interests of the principal and must not allow their own self-
interests to dictate their behavior in a way that might conflict with the principal’s best interests.
The fiduciary position of the promoter may be summed up as follows:
1) Not to make any profit at the expense of the company
The promoter must not make, either directly or indirectly, any profit at the expense of the
company which is being promoted. If any secret profit is made in violation of the rule, the
company may, on discovering it, compel him to account for and surrender such profit.
2) To give the benefit of negotiations to the company
The promoter must give to the company the benefit of any negotiations or contracts into which
he enters in respect of the company. Thus where he purchases some property for the company, he
cannot rightfully sell that property to the company at a price higher than he got it. if he does so,
the company may, on discovering it, rescind the contract and recover the purchase money.
[Erlanger v New Sombrero Phosphate Co, [1878] 3 App. Cas. 1218.]
3) Consequences of non-disclosure of interest or profit
If the promoter fails to make full disclosure of the profit that he makes the company may sue him
for damages for breach of his fiduciary duty and recover from him and secret profit made even
though rescission is not asked for or is impossible. The measure of damages is the actual loss
suffered by the company as a result of the transaction in question.
4) Not to make unfair use of position

2. 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 and Liabilities
As seen above,
I) the core duty of a promoter is that of loyalty and good faith. Because the promoters
often undertake various activities in bringing the company into existence, and some
of these activities may invariably necessitate acquiring property for the yet unformed
corporation,
II) the other main core duty of the promoter is a prohibition against making secret
profits from such transactions. The law would thus try and forestall a situation where
the promoters sell property in which they have a personal interest in for a profit.
Therefore, the promoters are required to make a full disclosure of any such profit to
an independent board of directors once the company comes into existence.
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
Pre-incorporation contracts
For a company to come into existence, the promoters need to complete the registration
requirements and be issued with a certificate of incorporation. Prior to this time a company
cannot be bound by contracts entered into in its name or on its behalf. The promoters will need to
contract with third parties for such things as a lease of premises, business equipment, etc. The
problem in this case is whether promoters will be personally liable for these 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.
Kelner v Baxter (1866-67) LR 2 CP 174.
The promoters of a hotel company entered into a contract on its behalf for purchase of wine.
When the company formally came into existence it ratified the contract. The wine was consumed
but before payment was made the company went into liquidation. The promoters, as agents, were
sued on the contract. They argued that liability under the contract had passed, by ratification, to
the company. It was held, however, that as the company did not exist at the time of the
agreement it would be wholly inoperative unless it was binding on the promoters personally and
a stranger cannot by subsequent ratification relieve them from that responsibility.
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. This is called novation. However, novation is ineffective if the company adopts the
contract due to the mistaken belief that it is bound by it.

3. 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.
English & Colonial Produce Co. Ltd., Re (1906) 2 Ch. 435
A solicitor prepared the Memorandum and Articles of Association and paid the necessary
registration fees and other incidental expenses to obtain registration of a company. He did this on
the instruction of certain persons who later became directors of the company. Held, the company
was not liable to pay the solicitor’s costs, although it had taken the benefit of his work as “the
company could not be sued in law for those expenses inasmuch as it was not in existence at the
time when the expenses were incurred and …ratification was impossible.”
2. Company cannot enforce preliminary contract
The company cannot, after incorporation, enforce the contract made before its incorporation.
Natal Lan Co. Ltd. v Pauline Colliery Syndicate Ltd., (1904) A.C. 120
The N Company agreed with an agent of the P Syndicate Ltd. before its formation to grant a
mining lease to the Syndicate. The Syndicate was registered and discovered a seam of coal. The
N company refused to grant lease. Held, there was no binding contract between N company and
the Syndicate.
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.
Kelner v Baxter, (1866) L.R. 2 C.P. 174
The promoters of a hotel company entered into a contract on its behalf for purchase of wine.
When the company formally came into existence it ratified the contract. The wine was consumed
but before payment was made the company went into liquidation. The promoters, as agents, were
sued on the contract. They argued that liability under the contract had passed, by ratification, to
the company. It was held, however, that as the company did not exist at the time of the
agreement it would be wholly inoperative unless it was binding on the promoters personally and
a stranger cannot by subsequent ratification relieve them from that responsibility.
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.
END