PROMOTION OF A COMPANY

INTRODUCTION

In Nigeria, a company is a separate legal entity when duly registered and incorporated with
corporate contracts and it can own properties in its own name. The company can raise money
for its own business, either by sale of shares to the public or to private persons if it is a private
company, the proceeds realized will be the share capital or by borrowing money. The shares
and debentures are known as the company’s securities. The affairs of a company are managed
by a group of people known as the board of directors. All the affairs of the company are
regulated by the Company and Allied Matters Act. The Companies and Allied matters Act
(CAMA) is the principal law of organization, administration and management for corporate
business.

The Act provides for promoters of companies and their duties, nature of shares and other
things relating to the formation of a company whether it is a private or public company. A
company is an artificial person that is a creation of law. There are processes which must be
fulfilled before a company can be said to be in existence. In other words, there are different
activities involved in the formation of a company. There are persons behind these activities and
such persons are known as promoters.

Who is a Promoter?

A promoter is defined as any person who undertakes to take part in forming a company with
reference to a given project and to set it going and who takes the necessary steps to accomplish
that purpose, or who with regard to a proposed or newly formed company, undertakes a part in
raising capital for it, shall prima facie be deemed a promoter of the company; provided that a
person acting in a professional capacity for persons engaged in procuring the formation of the
company shall not thereby be deemed to be a promoter. This is the definition by virtue of
Section 61 of the Companies and Allied Matters Act 2004.

The Black’s Law Dictionary (8thedition 2004, at page 1250), defines a promoter as a founder or
organizer of a corporation or business venture; one who takes the entrepreneurial initiative in
founding or organizing a business or enterprise.

In Twycross v. Grant (1877) 2 CPD [469 at 541]; Cockburn CJ, observed that 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’. Also in the Nigerian case of Adeniji
v. Starcola Lt (1972) 1 SC [202]; Kazeem J, described a promoter as a person who undertakes to
take part in forming a company or who with regard to a proposed or newly formed company

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undertakes a part in raising capital for it is prima facie a promoter of a company provided he is
not acting in a professional capacity.

From the foregoing, it is inferred that a promoter is a person involved in promotion activities for
a proposed or a newly formed company. Promotion activities involve the following:

1. Raising capital for a proposed or newly formed company

2. Finding directors for a proposed company
3. Acquiring properties on behalf of a proposed company
4. Preparing prospectus for a proposed company
5. Personality shopping for the proposed company
6. Obtaining requisite permits.
7. All other activities towards incorporating a company

Also, it could be said that the Promoter undertakes and goes through all the necessary &
incidental requirements of the proposed company in order to bring it into existence as an
incorporated company.

Duties of a Promoter

1. A promoter is duty bound to act in good faith on behalf of the company he is setting up
as he has a fiduciary relationship with the company. Thus, any secret profit made must
be returned. The rule is that the promoter should not make secret profit. They can make
profit but it should not be secret
2. The promoter must account for any profit made or acquired in the course of his duty to
the company.
3. Duty not to exploit confidential information obtained on behalf of the company in
course of promotion activities for personal use (Section 62(2) CAMA)
4. Duty to disclose any conflict of interest in transaction with the company. As part of his
fiduciary relationship with the company, once a promoter has any interest in the
transaction, he should give full disclosure to the company.
5. Duty not to expose the company to loss. The promoter is expected to scrutinize every
transactions on behalf of the company and ensure that there is due compliance to the
law so as to avoid any loss resulting from failure to perfect transactions during
promotion activities
6. Duty to be diligent and honest in its dealings on behalf of the company.

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Liabilities of Promoters

Where the above duties that are owed to the company are breached, there are liabilities for its
breach. Thus, the breach of any of the duties would result in the company upon incorporation
taking any of the following actions;

1. Action to render account: the company can bring an action for the promoter to render
account for properties and money received on behalf of the company in the course of
incorporation.
2. Action to account for proceeds of secret profit: When a company discovers that a
promoter has made secret profits in the course of his duties, an action for recovery of
proceeds of secret profit can be made.
3. Action for damages for wrongful exploitation of confidential information obtained in
the course of promotion activities.
4. Refusal to ratify pre-incorporation contract tainted with conflict of interest and abuse
of fiduciary duties.
5. Action to rescind contracts or transactions which are yet to be perfected by the
promoter, and damages where rescission becomes impossible because of third party
interest.

Limitation of Action

There is no limitation period for a company to sue its promoter, but the court may give relief
from liability to the promoter if it deems it equitable to do so as provided by Section 62 (4) of
the Companies and Allied Matters Act.

Remuneration of Promoters

Promoters like all workers are entitled to be paid. Promoters under the common law position
have no right to sue for their remuneration since they entered into contract with a non-legal
entity. The current position of the law in Nigeria is that the promoter can sue for his
remuneration by virtue of Section 72 of the Companies and Allied Matters Act as long as his
contract is ratified once the company becomes legally in existence.

What are Pre-incorporation contracts?

It has already been said that a promoter enters into pre-incorporation contracts to help his
objective of bringing the company into existence along with other duties. The question that
flows from this line of thought is this, what then are pre-incorporation contracts? Pre-
incorporation contracts just as the name implies are agreements (contracts) entered into by the
promoters of a new company who form the company by filing its Articles of Incorporation.

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In Kelnar v. Baxter (1867) L. R. 2 CP [174], it was held at common law that a pre-incorporation
contract was not binding on the (prospective) company because there was no principal who
was legally in existence on behalf of whom an agent could have contracted. This was also the
decision in Edokpolor & co. Ltd. V. Sam Edo Wire Industry Ltd. It should be noted from Kelnar
v. Baxter Supra, that where the promoter enters into the contract using the proposed name of
the company then there is no contract all.

By virtue of Section 72 (1) of the Companies and Allied Matters Act 2004 which provides thus,
any contract or other transaction purporting to be entered into by the company or by any
person on behalf of the company, prior to its formation, may be ratified by the company after its
formation and thereupon the company shall be bound by and entitled to the benefit thereof as
if it has been in existence at the date of such contract or other transaction and had been a party
thereto.

This means that once the company becomes legally in existence, ratifies the pre-incorporation
contracts, the company then becomes bound by the terms of the contract as if it was the one
who signed such contract. It is only after ratification that the company becomes bound as seen
in Garba v. KIC Ltd. Section 62(3) of the Companies and Allied Matters Act 2004, is to the
effect that if the company is to ratify a transaction between it and a promoter, there must be
full disclosure and any of the following can ratify it on behalf of the company. Ratification is
usually by a formal resolution which is passed by the company. The resolution must show in
clear terms what was ratified. Thus, where the company ratifies the contract, it will remunerate
the promoter but if the company does not ratify the contract, then is not bound by the contract
and thus the promoter is not entitled to remuneration.

The following are examples of pre-incorporation contracts;

1. Directors Service Contract

2. Shareholders Agreement
3. Joint Venture Agreement