Law of Corporation

Before trying to explain the duties of a promoter, I would need to expand on the term “promoter” itself. There is no legal definition in law apart from the one given in a case Twycross v Grant (1877): “A promoter is a 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”. So it seems very obvious that a promoter is person, who sorts out all documents to be completed and registered, who buys capital for the new company, who chooses appropriate professionals to complete accounts and legal documents and who also arranges finance. So all of these are the actions a promoter can do to receive promoter’s status before the company is legally formed, because after that moment director(s) will be in charge and they will make required decisions.

This brings us to promoter’s duties that could be described by two words: transparent & fiduciary. It is quite clear, that promoter acts as a director in a pre-incorporpotion period and he must also be interested in company’s future proving his loyalty and good faith as a real guardian. From a more pragmatic point of view, promoter must disclose to an independent board of directors or intended shareholders any (potential) profit he might gain or possible conflict of interest. If this disclosure is not made, the company can: rescind contract. That is exactly what happened in world famous Erlanger v New Sombrero Phosphate Co [1878]. After promoter has hidden the fact that promoted company is buying an island for the price that was double of the original, new board of directors sued him and achieved permission to void the contract, thus leaving the promoter without his profits. This case established a precedent: if a person, who purchase property (assets) and then try to sell it to a company promoted by himself, will not disclose the fact that property belongs to him and he’ll make a profit on this transactions, the contract might be rescinded. This of course would not affect a company, where the promoter will be the sole director or (major) shareholder. So rescission is one of the consequences after promoter has not fulfilled his duties.

The other way would be simply account for profits (or in other words return the profits to the company) as it happened in the following case - Gluckstein v Barnes [1900]. Again certain amount of money was earned and this wasn’t known to the board of directors and to the public. After this came to light, money had to be given back to its righteous owner. And the final solution is illustrated by the next case Re Leeds & Hanley Theatre of Varieties [1902]. This time the promoter was sued for the breach of fiduciary duty and he had to pay for the occurred damages. These are the most commonly used remedies of punishing promoters for breaching their duties, but it should also be said, that in a case where promoter has committed a serious crime in connection with promotion, formation and management of the company he might be punished even harder – up to 15 years without any direct or indirect promotional activity.

There are several ways of overriding promoter’s liability, but I will only mention the most simple one – buying “off-the-shelf” company and changing name and memorandum & articles.

Let us start with the very chronological beginning..

Bert acted as a promoter of his own Bertico company and under his fiduciary duties he decided that is best for the company to buy a cheap computer. And he concluded a contract on behalf of the company, thus forming pre-incorporation agreement. It would have been pretty straight forward, if Bert would have incorporated his business and bought the computer following earlier signed agreement. Until this moment Bert is the only person who is responsible for fulfilling agreed terms with Craft & Co, because even though the company is already formed, it cannot adopt or ratify the contract signed by the promoter in pre-incorporation period (based on Re Northumberland Avenue Hotel Co [1886]). And even if the company was not incorporated Bert would still