Summary
Summary LAWS10083 Corporate Capacity
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LAWS10083 Corporate Capacity
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Corporate CapacityPromoters and Their duties
There is a slight period of time between when the company is created and when the whole
process of creating the company starts and to the actual incorporation. There could be some
people in this time intending to bind the future company, or to do things for the company for the
benefit of the company.
What is the liability of this individual to the shareholders of the future company and are those
pre-incorporation contracts binding?
People involved in the incorporating the company are promoters and they are fiduciaries who
have quite extensive duties.
What are they?
No legal definition, but they help form the company.
Someone who is involved in making the company but not a promoter: Solicitor/Accountant -
they are in a ministerial role. They are simply carrying out a specific but not considered
promoters because they do not decide on the future aspects of the company.
People who have discretional power of the business are promoters and fiduciaries. Examples
from cases; People buying an asset - people undertaking to buy something and sell something -
people looking for directors to be shareholders for this company.
They are undertaking to form a company with reference to a given project, and to set it going and
to accomplish that purpose - Tycross v Grant
Not a purely ministerial role, but don’t necessarily have to hold shares.
The duties of a company promoter
,What are the consequences of being a fiduciary?
1. Disclosure of any profits they make; the no profits rule. Very important for promoters.
They cannot make a profit out of this office. If they do make a profit they have the
possibility to disclose it to the future company.
Who must the disclosure be towards for it to become valid?
Disclosure of the profit or accounting for the unauthorised secret profit.
Erlanger v New Sombrero Phosphate co
- A contract between the promoter and the company is voidable at the company’s option unless
the promoter has disclosed all material facts relating to the contract to an independent board,
and the company has freely agreed to the terms.
- There was a large secret profit, the contract was rescinded. The profit remained secret. The
board was not independent. The board members were not independent from the promoters. So
there was no disclosure to an independent board of directors (independent from the promoter) so
therefore the profit was unauthorised. There was a duty to account for it to the company.
`
- Extract from the judgement;
o “The promoter stand undoubtedly in a fiduciary position. They have in their hands the
creation and moulding of the company”
o “The Privilege given to them for promoting such a company for such an object, involved
obligations of the utmost good faith, the completest truthfulness and a careful regard to
the protection of the future shareholders”
o “The promoters in this case failed to remember the exigencies of their fiduciary position,
when they appointed directors who were in no way independent of themselves, and who
did not sustain the interests of the company with ordinary care and intelligence. “
o “If the directors had been nominated merely to ratify any terms the promoters might
dictate, they discharged their function; if it was their duty to protectant shareholders (it
was) they never seem to have thought of doing it. The transaction must not stand.”
What happens though if no independent board could be stablished?
, Gluckstein v Barnes
- Promoters, as fiduciaries, may not make a seret profit while acting in that capacity. Any profits
so received must be accounted for to the company.
- Extracts from the judgement;
o “IT is too absurd to suggest that a disclosure to the parties to this transaction is a
disclosure to the company of which these directors were proper guardians and trustees.
They were there to cheat the shareholders. This can’t be treated as disclosure when they
were really there to hoodwink the shareholders and so far from protecting them, were to
obtain from them the money and the produce of their nefarious plans.”
Disclosure could be made to existing and potential members as a whole - but disclosure has to
be complete and explicit. They also have to disclose to the public in the prospectus. Potential
members as a whole refers to whoever could buy the shares - so the disclosure had to be part of
the prospectus. They didn’t disclose the total profits, and there was no explicit reference to the
exact amount to the exact contracts; it was not proper disclosure for this particular amount.
Because promoters are fiduciaries, there are legal consequences - one option is recession -
everything is undone - everyone gets their original contribution.
If recession is no longer possible because the promoter sold something to the company and the
company sold it to a third party, the question arises as to what happens to the profit the promoter
obtains by selling the asset to the company. Here there are some controversies - the mainstream
view is that if the profit was made lawfully - the promoter having purchased the asset before
acting as a promoter and then sold the asset at a higher price - this would be lawful profit the
promoter made. The court will not rewrite this price - no accounting for it - because the asset was
acquired before the capacity of the promoter. If the asset was acquired as the promoter was in his
capacity - there is an accounting for it. There could be other avenues for liabilities; deceit,
negligence, misrepresentation of fid duties.
Pre-incorporation Contracts
Contracts and arrangements are made before the company has incorporated to allow it to trade as
soon as it incorporates.
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