PROMOTION AND FORMATION OF THE COMPANY

Promotion:

A business cannot come into existence unless someone thinks of the idea and
attempts to translate it into business. The process of conceiving and translating the
business opportunity is what is called promotion.

Definition of Promoters:

A promoter is defined in TWYCROSS VS GRANT (1877) as “any person who

undertakes to form a company, or who, with regard to a proposed newly formed
company, undertakes part in raising capital for it. A person is prima facie a
promoter of the company, if he has taken part in setting a company formed with
reference to a given object.”

Thus a promoter is someone whose profession it is to take part in setting up a

company. A typical example would be a village grocer who converts his business
into a limited company. He of course is in no sense a professional company
promoter but he would be the promoter of his little company and the difference
between him and a professional promoter is basically one of degree rather than of
kind. Both create or help to create the company. The only difference is that the
grocer is less likely than the professional to abuse his position since he will
probably continue to be the majority shareholder in his company whereas the
promoter if a shareholder at all, will intend to offload his holdings on to others as
soon as possible.

Thus the expression “promoter” covers a wide range of persons. Both the
professional promoter and the village grocer are promoters to the fullest extent, in
that each undertakes to form the company with reference to a specific object and to
set it going and takes the necessary steps to accomplish that purpose. Thus, a
person may be a promoter though he has taken a comparatively minor part in the
promoting proceedings. However those who act in their professional capacity such
as solicitors and accountants will not be classified as promoters because they
undertake their normal professional duties.

Therefore, who constitutes a promoter in any case is therefore a question of fact.

Duties of a Promoter:

1.Disclosure and accountability

A promoter stands in a fiduciary relationship to the company and consequently

owes it certain fiduciary duties i.e. duties of disclosure and accounting and this
implies that they must not make any secret profit out of the promotion without
disclosing it to the company. This was illustrated in the case of ERLANGER VS
NEW SOMBRERO CO LTD (1978) 3AC 1218. Members in a syndicate bought
the lease of an island containing a phosphate mine at £55,000. The members of the
syndicate then promoted a company and appointed themselves its directors. They
sold the lease to the company for £110,000. This was unfortunately not revealed in
the prospectus inviting the public to subscribe for its shares but was subsequently
discovered. The company instituted an action to recover profits from the promoters
who in turn argued that they had made a disclosure of their profits to a board of
directors. Nevertheless, the BOD was: -

i. Appointed by the promoters themselves,

ii. The first director could not attend meetings because of his state in life (ill
health)
iii. The second director was not present when the profits of the promoters were
approved.

iv. The third director was one of the promoters themselves.

v. The fourth and fifth directors were ignorant of the subject matter.

The issue was whether there was a disclosure. It was held that the company was
entitled to rescind the contract. That the promoters must repay the purchase price
and the company in turn must convene the lease to the promoters so as to restore
the status quo (original position)

A promoter cannot escape liability by disclosing to a few friends who constitute

the initial members of the company especially if their intention is to float the
company to the public and hoodwink shareholders. This was illustrated in the case
of GLUCKSTEIN Vs BARNES (1900) AC 240 Lord Harlsbury stated that: “it is
too absurd to suggest that a disclosure to the parties to this transaction is a
disclosure to the company.”

Mode of Disclosure

Thus a 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 first method is employed the promoter will be under no further liability to
the company although the directors will be liable to the shareholders if the
information has not been passed on in the invitation to subscribe (prospectus) and
if the promoter is a party to the invitation to subscribe he too will be liable. If the
second method is employed, the veil of incorporation will be ignored.
Disclosure must be made in the Prospectus, or in the Articles of Association so that
those who are or become members have full information regarding the promoters’
transactions.

A partial or incomplete disclosure will not do, the disclosure must be full or
explicit.

2. Duty of skill and care:

In the process of promotion, a promoter must carry out his work with great care
and skill and due diligence expected of a reasonable man.

3. Duty to act in the best interests of the company.

Consequently, a promoter may do any or more of the following activities: -

4. Solicit capital.

5. Prepare a prospectus.

6. Solicit directors for the company.

7. Arrange the preparation of the Memorandum and Articles of Association

8. Obtain premises

9. Obtain whatever equipment is necessary for the running of the business

Remedies for Breach of Duty:

1. A promoter can be made to account for any secret profit made.

2. Damages for misrepresentation where the promoter has made an actual
misrepresentation and cannot prove that he had reasonable ground to believe
 and did believe up to the time the contract was made the facts represented
were true.
3. Damages for failure to disclose
4. Rescission: Since the promoter owes a duty of disclosure to the company,
the primary remedy against him in the event of breach is for the company to
bring proceedings of rescission (termination) of any contract with him.
5. Damages for negligence in allowing the company to purchase property at an
excessive price since they are to act with skill and care.

Remuneration of a Promoter:

Promoters do not possess an automatic right to receive remuneration from the

company for their services from the company unless there is a valid contract
enabling him to do so between him and the company. Without such a contract, he
is not even entitled to recover his preliminary expenses. This is so because until a
company is formed, it cannot enter into a valid contract and the promoter has to
expend the money without any guarantee that he will be repaid.

However, in practice, the company’s articles may allow directors to pay

preliminary expenses from the company’s funds.

However, the promoter will not be content merely to recover his expenses and if he
is a professional promoter, he will expect to be handsomely remunerated. In the
case of TOUCHE Vs METROPOLITAN RAILWAY WAREHOUSING
COMPANY (1871) LR 6 CH.APP 671 Lord Hatherly said: “the services of a
promoter are very peculiar, great skill, energy and ingenuity may be employed in
constructing a plan and in bringing it out to the best advantages.”

Hence, it is perfectly proper for the promoter to be rewarded provided he fully

discloses to the company the rewards which he obtains. The remuneration must be
fully disclosed not only by the promoter to the company but also by the company
in the prospectus.

Pre-incorporation Contracts.

In promoting a company, promoters usually enter into contracts with third parties
and when they do so, they purport to do so on behalf of the unincorporated
company. Such contracts are not binding on the company because it is not yet in
existence and consequently has no capacity to contract.

However, such contracts bind the promoter and can be adopted by the company
once it is incorporated. Upon adoption by the company, the liability of the
promoter ceases. (S. 52 of the Companies Act Cap 106)

Formation of a Company

A company is formed by registering it with the registrar of companies in Kampala

and obtaining a Certificate of Incorporation.

(S. 20) to register a company, a number of procedures and documents must be

presented and these include;

1) Propose a desired Company name.

A promoter should have fronted the proposed desired names. This is because the
business is still in the idea form and it must get identity and members come up
with various options desirable and he picks the best 4 names for reservation.

2) Reservation of a name.

The promoters forming the company or their advocate must write to the Registrar
of companies requesting him to search the register of companies and reserve its
name. S.34)
The search is aimed at ensuring that there is no other name already registered that
is similar to that of the company. However for the registrar to reserve the said
name, the following must be satisfied. The name will be reserved if;

i) It has not already been registered previously

ii) It desirable
iii) It is not identical with the one that has already been registered so as to
confuse the public.
iv) It is not illegal or has abusive connotations.
v) Its not misleading

3) Memorandum of Association.

This is the most important document of a company because it determines the

powers of the company, i.e, it lays out the various activities or nature of businesses
the company has been formed to engage in.

In Guiness V Land Corporation of Ireland (1882) 22 Ch. D 349, it was

established that the Memorandum contains the fundamental conditions upon which
alone the company is allowed to be incorporated.

They are conditions introduced for the benefit of the creditors and the outside
public as well as the shareholders.

It also mentions several other aspects which define the company as shown
hereunder;

i) Name of the company.

Where it is a limited liability company, the name of the company must end
with the word “Limited”.
ii) Situation/location of registered office of the company.
It must state that the registered office of the company is situated in Uganda.
The actual address of the company must be communicated to the registrar
within 14days after incorporation or from the day it starts business
whichever is earlier
iii) Objects clause;
This entails the objectives or activities the company has been set out to deal
in.
iv) A statement as to the nature of the company
(whether it is a private / public or any other kind of company) Note that the
inclusion of the objects clause in the Memorandum is discretionary
according to S.6 (1)(C).
v) If the company is limited by shares,
The amount of share capital and division thereof must be stated.
vi) If the company is limited by guarantee,
The amount each member undertakes to contribute to the assets of the
company in the event of winding up must be stated.
vii) The names, addresses and descriptions of the subscribers who must be at
least 2 for a private company and 7 for a public company.
viii) It must bear stamp duty.i.e, a tax called stamp duty must be paid.
ix) It must be signed by each subscriber/member in the presence of at least a
witness who must attest to the signature.

OBJECTS CLAUSE

This is the clause/term which lays out the objectives/powers or activities the
company has been formed to engage in. The objects must be lawful and should
include all the activities which the company is likely to pursue.
According to section 6(1)(C), the insertion objects clause in the Memorandum of
Association is discretionary. This means that a company may or may not include
an objects clause in its Memorandum of Association.

More importantly, Section 49 of the Companies Act provides that the

Memorandum of Association does not limit the capacity of a company. As such, a
company is bound to honour a transaction entered into even if it is not authorised
to enter into such transaction by the Memorandum of Association.

In case a company intends to deal in general commercial business, the Companies

Act Cap 106 provides for a general object; that is, “the object of the company is to
carry on any trade or business whatsoever and the company has power to do all
things incidental to carrying on any business by it”.

LIABILITY OF MEMBERS

i) If the company is limited by shares, the memorandum of association should

state so.
ii) If limited by guarantee, it should state how much each member intends to
contribute to the debts of the company in the event of winding up of the
company.
iii) If unlimited, the members act as guarantors in respect of the company’s
obligations. While a creditor has no right of action against the member
himself, his action being against the company, he in turn looks to the
members to discharge it’s debts by providing the necessary funds.
Alteration of the memorandum (S.10)

A company may by special resolution alter the provisions in it’s memorandum to

enable it,

i) carry on business more economically or more efficiently

ii) enlarge or change the local area of its operations
iii) attain any of its objects by new or improved means
iv) Carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the
company.
v) Restrict or abandon any of the objects specified in the memo
vi) Sell or dispose of the whole or any part of the undertaking of the company.
vii) Amalgamate with any other company or body of persons.

Note;

The Memorandum of Association is a public document; therefore any person who

wishes to deal with the company must first look at the document to acquaint
himself with the major details of the company particularly the nature objects of the
company, the liability of the members among others.

The statutory form of memorandum of association is provided for in Tables B, C

and D of the 3rd Schedule to the Act.
Articles of Association (S.11)

These contain regulations for managing the internal affairs of the company. They
are applied and interpreted subject to the memorandum of association in that they
cannot confer wider powers on the company than those stipulated in the memo.

According to Section 12 of the Act, in the case of an unlimited company, the

articles must state the number of members with which the company proposes to be
registered and, if the company has a share capital, the amount of share capital with
which the company proposes to be registered.

In the case of a company limited by guarantee, the articles must state the number
of members with which the company proposes to be registered.

Where an unlimited company or a company limited by guarantee has increased the

number of its members beyond the registered number, it shall, within fourteen
days after the increase was resolved on or took place, give to the registrar notice of
the increase and the registrar shall record the increase.

Section 13 of the Companies Act provides that the Articles of Association of a

company may adopt all or part of the regulations contained in Table A of the Act

According to Section 14, a public company upon registration must adopt the code
of corporate governance provided for in Table F of the Companies Act.

A private company may or may not adopt Table F

A company may by Special Resolution alter or add to its Articles.

A Special Resolution which is passed by majority of not less than three-fourths of

such members, as being entitled to write in person, or where proxies are allowed,
by proxy at a general meeting of which not less than 21 days notice specifying the
intention to propose the Resolution as a special area has been given. (S.16)

For an unlimited company and a company limited by guarantee, it is a requirement

to register this document. But for a company limited by shares, it is optional. If
such company does not register one, the Articles contained in Table ‘A’ of the
Companies Act are presumed to apply as the Articles of Association of the
company.

NB: The statutory Declaration of Compliance is no longer a legal

requirement in practice for Company Registration.

Statement of Nominal Capital

This is the document in which the directors of the company state the capital of the
company with which the company is starting to operate with upon its registration
and the amounts into which it is to be divided.

For a public company, the following additional documents must be presented

1. List of Names and Particulars of Directors and Secretary

In this document, the names of all the directors and secretary must be stated as
well as their occupations, addresses etc. the document must also contain on
undertaking by the directors to take and pay for their qualification shares in the
company in case the director is required to hold such. However, it is not a must for
a private company to file this document on its formation. It can file it even long
after the company has been formed. However for a public company to be
incorporated, this document must be filed together with the other documents.
2. Prospectus

This is a document setting out the nature and objects of a company and inviting
the public to buy or subscribe for its shares. It sets out the numbers of founders of
the company, share qualification of director, names, description and addresses of
directors, number of shares offered to the public for subscription, company
property etc. The purpose of the prospectus is to provide the essential information
about the position of the company when its being launched so that those interested
in investing in the company can decide whether not to invest. This document is
only a requirement for public companies and private companies do not file it
because they are not allowed under the law to invite members of the general
public to come and buy its shares.

3. Stamp Duty Must Be Paid

The higher the figure of nominal capital registered, the higher the charge for stamp
duty, which stamp duty normally varies as a given percentage of the nominal
capital.

4. Registration Fees

The necessary registration fees must also be paid to the registrar on presenting the
documents for registration. Registration form Section 18 provides that a company
is registered by filling in the particulars contained in the registration form in the
second schedule to this Act.

Effect of Registration and the role of Registrar (S 20)

If the Registrar is satisfied that the documents are in order and that stamp duties
and fees have been paid, he enters the name of the company in the register of
companies and issues a certificate of incorporation. The issue of the certificate of
incorporation is conclusive evidence that all registration requirements have been
complied with and that the association is a company authorized to be registered
and is duly registered under the Act. The basic role of registrars is to ensure that
business entities are not formed without proper documents, ensure compliance
with the law in the process of registration and thereafter. Where the registrar is not
satisfied with the documentation, he/she can decline to register the
business/company. However, where he declines without a reasonable excuse, an
order of Mandamus can be obtained from the High Court compelling him/her to
perform the duty.

The issue of a certificate of incorporation is conclusive evidence that all the

registration requirements have been complied with and that the company is duly
registered under the Act. It is then that the company comes into existence and the
certificate of incorporation is deemed to be the birth certificate of the company.
The company then enjoys the characteristic of being a legal person i.e, it becomes
a separate legal entity from its members capable of enjoying various advantages
like a natural person (Consequences of Incorporation).

THE CONTRACTUAL EFFECT OF THE MEMORANDUM AND

ARTICLES OF ASSOCIATION

S.19 (1) of the Companies Act provides that subject to the provisions of this Act,
the memorandum and articles shall when registered bind the company and the
members thereof to the same extent as if they respectively had been signed and
sealed by each member and contain the warranty on the part of each member to
observe all the provisions of the memorandum and articles.

Thus, registration gives a legal effect i.e. the company is now bound by the
provisions of the memorandum and articles in other words a contract is created
between the company and the members of the company. A member need not have
signed the document but once they become members then they are deemed to have
signed the contract and therefore they have to observe all the provisions of the
memorandum and articles i.e. it’s the memorandum and articles that form the
terms of the contract. The memorandum and articles form three contracts and
these are:

1. The memorandum and articles constitute a contract between the company and
each member. S. 21 (1) provides expressly that the contract is subject to the
provisions of the Companies’ Act and the companies’ Act include sections which
permit alterations of the Memorandum and Articles by way of special
Resolution. Thus, the shareholder is making a contract on terms which are
alterable by the other party (the company) by a Special majority voting at a
General meeting.

2. Secondly, the contract under S.21 (1) is between the members (members
themselves). Thus, a direct action between members is possible where one of the
members breaches the contract in the Memorandum and Articles. This was
illustrated in the case of A. O. OBIKOYA Vs EZEWA & ORS (1964) 2 ALL
NLR 133 the applicant and respondents were the permanent directors of a limited
liability company by virtues of Article 28 of their Company Articles. Article 32 of
their Act provided that a permanent director shall not vote for the removal from
office of another permanent director. In breach of both articles 28 & 32, the
respondents purported to alter article 28 by a special resolution and inserted article
86 of Table A which voted for the removal of the applicant from office as director
of the company and the applicant sued for damages against the respondents
personally and for breach of the contract in article 32 and for an injunction to
restrain the respondents from further preventing the applicant from acting as
director of the company. Held that when the 3 members of the company who are
also the 3 permanent directors agreed by virtue of article 32 not to vote for the
removal of each other from office, they were agreeing between themselves as
members in which capacity they exercised their voting rights not to vote. A
contract did exist between them and the applicant was within his right to sue
because the respondents were in breach of Articles 28 & 32. 3.

Thirdly, S.21 (1) creates a contract a contract between the company and the
members only in their capacity as member and not in some other special
capacity. If therefore an Article provides that someone shall be the company’s
solicitor, he can not rely on that as a contract to enforce his right to be the
solicitor, even if he is infact also a member, for the Article concerns him in his
capacity as an outsider not as member. Nor will a provision that disputes between
the company and its members must be referred to arbitration avail a person whose
dispute is between the company and himself as a director, even though he happens
also to be a member. This was illustrated in the case of HICKMAN Vs KENT
(1915) 1 CH 881 Ashbury J stated that: “ an outsider to whom rights purport to be
given by the articles in his capacity as such outsider, whether he is or subsequently
becomes a member, cannot sue on those articles treating them as contracts
between himself and the company to enforce those rights…No right merely
purporting to be given by an article to a person whether a members or not, in a
capacity other than that of a member as for instance as solicitor, promoter,
director, can be enforced against the company…”
ACTIVITIES AND SAMPLE QUESTIONS TO BE DONE BY THE
PROMOTERS

(a) Promoters should be able to discuss the concept

of legal personality as used in company.
(b) They should discuss the different types of
companies that exist.
(c) They should differentiate between limited and
unlimited companies.
(d) Discuss elements of a private company and a
public company.
(e) Discuss the duties of promoters and the remedies
available to the company for the breach.
(f) Discuss the liability of a company in regard to
pre-incorporation contracts.
(g) Explain in detail the promoter‘s duty of
disclosure towards the company.
(h) Different rights and entitlements of promoters.
(i)Writes short notes on novation and amalgamation.
(j)Discuss the cases in promotion and the principles

INSTRUCTIONS;
1. Members in the group are required to read the notes
and they discuss in class they should be ready to
answer any questions asked in the above topic.
2. The group leader is in charge of choosing a particular
member to discuss any question.