Summary
Summary LAWS10083 Company law Notes The Corporate Capacity Authority of Company Agents
- Module
- LAWS10083
- Institution
- The University Of Edinburgh (ED)
LAWS10083 Company law Notes The Corporate Capacity Authority of Company Agents
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Company Law Notes Week 4The Corporate Capacity: Authority of Company Agents
Promoters
In the 19th Century, there were no restrictions on inviting the public to subscribe for shares in newly
formed companies, and the caricature company promoter from that era is an individual of dubious
repute whose profession it was to form bogus companies and foist them off to the general public, to
the latter’s detriment and to his own profit- it is perhaps a tribute to the law that we definitely
picture him as coming to a sticky end- per Lord MacNaghten in Gluckstein v Barnes. A grocer turning
his business into a company could be a promoter, but the difference between a grocer and a
professional promoter is of degree rather than kind. Both are well placed to take advantage of their
position by obtaining a recompense grossly in excess of the true value of what they are selling.
The word promoter would thus entail to cover a wide range of persons. Both the grocer and the
professional promoter are promoters to the fullest extent that each undertakes to form a company
with reference to a given project, and to set it going and… takes the necessary steps to accomplish
that project- Twycross v Grant.
A person who has taken a less dominant role may also be promoter, the expression may cover any
individual or company that arranges for someone to become director, places shares or negotiates
preliminary agreements. Nor does the person need to be involved in the original formation of the
company, one who subsequently helps to arrange the floating off of its capital will be equally
regarded as a promoter- Lagunus Nitrate Co v Lagunus Synidicate.
Who constitutes as a promoter in any case is therefore a question of fact. The promoter’s role
continues until the particular function of promotion comes to an end – Tywcross v Grant.
Duties of promoters
Current legislation is largely silent on the issue of promoters, merely imposing liability for untrue
statements in listing particulars or prospectuses to which they are parties- FSMA 2000 s. 90.
Legislation also protects against the risk that promoters will seek to offload their property to the
company at inflated prices, by way of the Second Company Law Directive. But it is a rule that can be
avoided by promoters ceasing to be members of the company prior to re-registration.
Most of the main duties of promoters have been formed by case law- generally promoters are
subject to the general laws on fraud, misrepresentation, negligence, unjust enrichment, and so on. It
has now been found that promoters owe a fiduciary duty to the company, with all the duties of
disclosure and accounting which that implies; in particular, promoters must not make profits out of
the promotion without the fully informed approval of the company.
The main difficulty with promoter’s fiduciary duties had been deciding how to effect proper
disclosure to, and obtain approval from the company- the company being an artificial entity.
Erlanger v New Sombrero Phosphate Co suggested that it was the promoter’s duty to ensure that the
company had an independent board of directors and to make full disclosure in it. Lord Cairns said
they have in their hands the creation and the moulding of a company, they have the power of
, defending how and when , and in what shape, and under what supervision, it shall start into
existence and begin to act as a trading corporation… I do not say that the 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 bound to take care that he sells it to the company through a medium of board of directors who
can and do exercise an independent and intelligent transaction on the transaction.
However, an entirely independent board would be too restrictive, especially due to the rise of one
man companies since Salomon, and therefore it has never been doubted that disclosure to the rest
of the members would be equally effective. In the Salomon case it was held that the liquidator of the
company could not complain of the sale to it and no obvious over valuation of Salomon’s business,
all members having acquiesced therein.
But the promoter cannot escape liability by disclosing to a few cronies, who constitute the initial
members, when it is the intention to float off the company to the public or to induce some other
dupes to purchase the shares. This is emphasised in Gluckstein v Barnes, where Lord Halsbury said it
is too absurd… to suggest that the disclosure to the parties to this transaction is a disclosure to the
company. They were there by the terms of the agreement to do the work of the syndicate, that is to
say, cheat the shareholders, and this forsooth is to be treated as a disclosure to the company, when
they were really there to hoodwink the shareholders.
The position there can be said to be that disclosure must be made to the company either by making
it to an entirely independent board or to the existing and potential members as a whole. If the 1 st
method is employed the promoter will be under no further liability to the company, albeit directors
liable to subscribers if the info has not been passed to them, indeed if the promoter is a party to the
invitation then he too will be liable to the subscribers. In the 2 nd method, disclosure must be made in
the prospectus in order to allow (potential) members to have full information about the transaction
to which the promoter was acting as such. Gluckstein disclosure must be explicit, partial disclosures
will not do.
Remedies for breach of promoter’s duties
The company may bring proceedings for the recovery of any secret profits the promoter has made or
call for the rescission of contracts it has with the promoter, if the promoter breaches fiduciary duties
it has towards the company.
Promoters are not entitled to make a secret profit. A promoter is likely to derive profits from the sale
of over priced property to a newly formed company, if a profit has been made on an ancilliary
transaction this may be recovered too as illustrated in Gluckstein. In this case, a syndicate had been
formed for the purpose of buying and reselling Olympia, owned by a company in liquidation. They
first bought certain charges on the property and then bought the freehold interest for £140,000.
They then promoted a company of which they were directors and to it they sold the freehold
interest for £180,000 raised by a public issue of shares and debentures. In the prospectus the profit
of £40,000 had been disclosed. In the mean time, the promoters had had the charges on the
property repaid by the liquidator out of the original £140,000 sale price making a further profit of
£20,000 (undisclosed in the prospectus though reference to a contract was made which would
reveal the profit made). The company went into liquidation and it was held that the promoters must
account to the company for the secret £20,000 profit. The same facts allow the company to sue the
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