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21032018-C4E-Promoters: Their Position, Powers, Duties And Liabilities
This document provides an overview and objectives of a lecture on promoters, their position, powers, duties, and liabilities. The lecture discusses promoters' activities like conception of an idea, incorporation, capital raising, and pre-incorporation agreements. It examines the legal position of promoters as fiduciaries and outlines their key duties like the duty not to make secret profits and the duty to disclose any conflicts of interest.
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21032018-C4E-Promoters: Their Position, Powers, Duties And Liabilities
- 1. Lecture 3 Promoters: TheirPosition, Powers, Duties And Liabilities
- 2. Overview • This lecturefocuses on the promoter and talks about intricacies and legal issues involved in promotion. • This lecture also deals with duties and liabilities of promoters. • In doing so it chalks out the liabilities of promoters who are promoting company for their vested interests. • The lecture provides for remuneration and ways of remuneration to promoters. • The Lecture analyses the role of pre-incorporation agreements in promotion. • The lecture clears the interlinkage of promoters with pre-incorporation agreement.
- 3. Objectives • The objectivesof this lecture is to acquaint the students with the concept of promoter and their role in promotion. • The lecture also aims to give a glimpse about the range of activities that a promoter shall be doming in promotion of a company. • Promotion of company is not a piece of cake as it brings accountability.
- 4. • The lecturehighlights the duties of liabilities of promoters. • The lecture also wants to inform the prospective readers about pre-incorporation agreements and its function in promotion. • Lastly the lecture deals with remuneration and discusses various ways thorough which promoters can be remunerated for their work of promotion. Objectives
- 5. 1.1 Introduction • Promoteris the person who comes first in the chronological order of company incorporation process. • Promotion of company is tiring work as it comprises variety of activities. • Promoters of the company are like parents of the company who give birth to the company as a child. • Promotion includes conception of idea, incorporation, floatation and commencement of business. • Promoters are deeply involved in the incorporation process and almost do everything for making a company.
- 6. • Formation ofcompany is work related with compliance of laws, regulators and authorities which involves an integrated team work by various people led by promoters. • Company is a mode of doing business which is run of the motive of profit maximization. • Entrepreneurship depends on modus operandi chosen by businessmen from sole proprietorship, firm, Limited Liability Partnership and Company. • We know that a company is the best suited legal device • for running business and commerce because • of separate legal existence, limited liability, wealth management and corporate financing. 1.1 Introduction
- 7. • As weare aware that we have a fundamental right to do business which results in a fundamental right to form a company as well. • But if promotion is done for fraudulent activities or if promotion scams are committed or position is misused • the law has to come in action. • In this lecture we shall discuss about all dimensions related with promoters and promotion of company. 1.1 Introduction
- 8. 1.3 Promotion &Promoters
- 9. 1.3.1 Promotion • Promotionof companies is a hydra-headed task. Promotion generally means forming a company. • In Cyprus we have seen promotion generally is done by individuals who are entrepreneurs as ‘occasional promoters’. • In case of promotion of private companies the intended promoters sign a ‘Prior Agreement’ wherein they lay down • the terms and condition and • the way they want to establish a company • This is followed by a ‘Promoters’ Agreement’ subsequently after incorporation wherein they record their contributions in terms of pooling of capital.
- 10. • In publiccompanies entrepreneurs are supported by Public Financial Institutions which as ‘institutional promoters’ promote Major enterprises. • Especially investment companies like Goldman Sachs, Bank of America, Morgan Stanley, Merrill Lynch, Citigroup, UBS, Deutsche Bank promote companies on professional basis as ‘professional promoters’. 1.3.1 Promotion
- 11. • Stages ofPromotion • Conception of idea • Incorporation • Flotation • Commencement of Business 1.3.1 Promotion
- 12. 1.3.2 Definition ofPromoter • In Whaley Bridge Co. v. Green • Bowell LJ while defining the term promotion held that • ‘promotion’ is not a term of law but of business operations familiar to the commercial world, by which a company is generally brought in to existence. • Promotion includes wide range of commercial activities which include many technical and non-technical operations. • Amongst the technical include project planning, feasibility study, looking for technical cooperation and collaboration and locational studies. • Non-technical activities include assembling required number of signatories, obtaining advice on different legal requirements, appointing key people like company lawyer who make documentation and enter into all types of pre-incorporation contracts.”
- 13. • Promoters playa crucial role in founding the company. • They assemble required number of subscribers, • prepare the Memorandum and Articles of company, • apply for incorporation, • arrange capital via IPO, private placement, public deposits and debentures and external commercial borrowings, • appoint first director of company, • establish registered office, corporate office, • sign all pre-incorporation agreements on behalf of company for • making production conducive such as buying land for manufacturing unit, • singing technology transfer agreement with foreign counterparts, suppling of raw materials, hiring proper work force etc. 1.3.2 Definition of Promoter
- 14. • In thisthey enjoy enormous powers to do such things which • are intra vires which means that • promoters are competent to do all such things for founding an enterprise which is warranted by terms of incorporation. 1.3.2 Definition of Promoter
- 15. • Generally theyare the persons who are involved in the process of conception, planning during the formative stages of company. • Whether a person is promoter or not is a matter of fact. • Undischarged insolvent can’t be promoter. • Natural as well as juridical person can be promoters. • Person providing technical services/assistance in lieu of money to a person who is involved in abovementioned activities is not a promoter 1.3.2 Definition of Promoter
- 16. 1.3.4 Promoters’Activities • Apromoter does a range of activities comprising the following: • i. Conceiving the scheme of forming co./suitable company for the business • ii. Assembling the required number of subscribers; • iii. Applying for Corporate Identity Number; • iv. Getting documents of company i.e. Articles and Memorandum prepared, executed and registered;
- 17. • v. Findingbankers, brokers and legal advisors; • vi. Preparation and circulation of prospectus; • vii. Raising capital via Initial Public Offering (IPO), private placement, debenture or public deposits or external commercial borrowing; • viii. Vetting and due compliance of laws and regulations relating to corporate financing and disclosures via annual and periodic returns to Registrar of Companies, CySEC, • ix. Settling the terms and conditions of pre-incorporation agreements. 1.3.4 Promoters’Activities
- 18. 1.4 Legal Positionof Promoters • Promoters are deeply involved in incorporation process of company so a pertinent question arises as to what the legal position of the promoters in the company is. • Promoters are not agents as before incorporation the company is non est (does not exist) in the eye of law so there can be no principal. • They are also not trustees, as company is not a beneficiary.
- 19. • They arein fiduciary capacity as in Erlanger v. New Somrero phosphate co. Ltd. Cairns LJ said that, • “The promoters undoubtedly stand in a fiduciary position. • They have in their hand the creation and moulding of the company. • They have the power of defining how and when and in what shape and under whose supervision it shall come in to existence and begin to act as a trading corporation.” 1.4 Legal Position of Promoters
- 20. 1.5 Duties ofPromoters • A promoter stands in fiduciary capacity to company because he owes certain duties to the company. • Promoters’ duties are the same as a person who acts on behalf of another person without a contract of employment, and • fundamentally undertakes not to deceive and to exercise reasonable care and skill. • He may be made liable for misrepresentation and fraud in prospectus.
- 21. 1.5.1 Fiduciary Duties •The Companies Laws, impose liability for untrue statement in prospectus and for fraudulent trading. • In particular two duties in fiduciary position are: • 1. Duty not to make secret profit • 2. Duty to disclose to the company any interest in a transaction
- 22. 1. Duty NotTo Make Secret Profit • A promoter enjoys an advantageous position in relation to • access to information, enjoyment of business opportunities and opportunity to sell during the company’s formation process. • He may sell his own land, intellectual property, professional services at reasonable rate to companies and in that respect he may make disclosed profits but • he is not allowed to make secret profits.
- 23. • In casesof public companies in the first Annual General Meeting • all dimensions of promotion and all types of pre-incorporation agreements are • investigated so as to check whether or not • promotion was done meticulously and honestly • If promoter is found to make secret profit • he may be made accountable for that. • However a promoter is allowed to make profit if the same is disclosed. 1. Duty Not To Make Secret Profit
- 24. • In Glucksteinv. Barnes a syndicate of persons bought ‘Olympia’ (an amphitheatre) and sold this to • a company promoted by them making a secret profit of £20,000, that was not disclosed in prospectus. • It was held profit of £20,000 is a secret profit and promoters are bound to pay it to the company because the disclosure was not sufficient. 1. Duty Not To Make Secret Profit
- 25. • Again in,Erlanger v. New Sombrero Phosphate Co. • a syndicate of which Erlanger was a member, • purchased an island consisting phosphate mines for £5,000. • A nominee of syndicate sold the property to a company • formed by Erlanger for £110,000. • However, details of sale were not disclosed to the directors. • It was held that the company can rescind the contract as there had been no disclosure of the profit which was made. 1.1 Duty Not To Make Secret Profit
- 26. 1.2. Disclosure ToWhom • A pertinent question arises as to whom and how such profits should be declared to. • In this regard it may be submitted that such disclosures of personal profits may be made to following: • i. Independent board of directors or • ii. Articles of association or • iii. Prospectus or • iv. To existing and intended shareholders
- 27. • Generally allsuch disclosures are made in detail in prospectus or offer document. • Details of property, including price purchases from promoters within two years must be disclosed according to Issue of Capital & Disclosure Requirements Regulation of CySec. • But in certain circumstances it is impossible to find independent board of directors. • In such circumstances the real truth should be disclosed to those who are invited to become shareholders (prospective investors) and not merely to first few shareholders. 1.2. Disclosure To Whom
- 28. 2. Duty ToDisclose Interest In A Transaction • In addition to his duty not to make secret profit, • a promoter is also duty bound to disclose to company any interest which • he has in a transaction entered into or proposed to be entered in to by it. • This is even then when he sells his own property to the company raised by him because he acquired the property before the promotion began. • Such disclosures must be made to the company and in full.
- 29. • After incorporationof company • if a property is received by promoters • he is trustee of such property and • all must be handed over to company in due course • otherwise the promoter may be liable for conversion or misappropriation or breach of trust of property. • Generally a company is a baby child of promoter so he does not dispose off, such properties which are worthless. • Where a promoter may try to wash off his hands from bad properties by selling them to a company promoted by him as he has a better access to it, • this would amount to failure of duty to disclose. 2. Duty To Disclose Interest In A Transaction
- 30. 3.5.2 Remedies toCompany • In cases of breach of duties the following remedies may be claimed by • the company against • the promoter who • stands in fiduciary capacity to company: • 1. Rescission of Contract • 2. To Recover Secret Profit
- 31. 3.5.2. 1. Rescissionof Contract • The company can rescind all such pre-incorporation agreements where • promoter has made a secret profit and • has not disclosed his material interests in the transactions. • The company must do nothing to show an intention to • ratify the agreement after • finding breach involving nondisclosure & misrepresentation.
- 32. • The companyis not precluded from rescinding by the fact that • the property has been transferred to it under a contract, • nor by the fact that promoter has been allotted shares under the contract. • The right to rescind will be lost • if the company fails to exercise such right within reasonable time. 3.5.2. 1. Rescission of Contract
- 33. 3.5.2.2. To RecoverSecret Profit • If the promoter has made a secret profit by selling his own property to the company in return for allotment of shares in it, • the company may recover from him the difference of the price at which it sold the shares and the price at which it bought the property. • But this remedy depends on two situations: • (a) if promoter is in fiduciary position as only seller, profit can’t be recovered; which means if the property on which the profit was made was acquired before the promoter became a promoter, there can be no claim for the recovery of the profit as such. • (b) the acquisition and selling of property both should be in fiduciary capacity as a promoter then contract may be rescinded and property may be retained at actual cost depriving the promoter of his claimed profit.
- 34. 2.5.3 Termination ofDuties • A pertinent question regarding the duties of promoters may be how long he remains duty- bound. • Generally a promoter’s duty starts from • the day of conceiving an idea about making a company and • terminates with the appointment of Board of Directors or with the incorporation of company. • In reality it continues until the company has acquired the property and raised its initial share capital.
- 35. • Even afterfloatation or corporate financing in Cyprus the promoters fail to separate themselves from the affairs of the company. • They actively participate in corporate governance, management and operation of corporate affairs. • They keep controlling shares in their hand and with the help of person acting in concert work as head and brain in the company which runs on the rule of majority. • They actively participate in future expansion of company, merger and acquisitions, takeover, buyback, portfolio management, reduction of capital etc. 1.5.3 Termination of Duties
- 36. 1.6 Liabilities ofPromoters • A promoter holds a better position in corporate governance and • has access to crucial and sensitive information which, • if undisclosed, • he can misuse such information for personal interests (insider trading). • A promoter may be generally liable for furnishing wrong information and credentials for incorporation of company (market manipulation) • He may also incur civil and criminal liability for misstatement in prospectus, and he should disclose of interests in periodic annual return filed to Registrar and CySec.
- 37. 1.6.1 Liabilities RelatedWith Prospectus • Prospectus is a document which presents the general information, financial information and general share issue information to • prospective investors so as to help them • make decision regarding share subscription of the particular company. • if the prospectus includes any statement which is untrue or misleading or • where any inclusion or omission of any matter is likely to mislead • then promoters of the company are likely to incur civil and criminal liability
- 38. • William Derryv. Henry Peek is a case in point. In this case a company applied to British Board of Trade for license for running tramways by steam power. In expectation that they will get the license issued • a prospectus was issued to raise capital stating that the company has already been licensed to run tramways by steam-power which promoters did not actually get at that time. • The directors of the company were not held guilty of fraud. Lord Herschell held that, “I think they were mistaken in supposing that the consent of the Board of Trade would follow as a matter of course because they had obtained their Act. It was absolutely in the discretion of the Board whether such consent should be given. The prospectus was therefore inaccurate. • But that is not the question. If they believed that the consent of the Board of Trade was practically concluded by the passing of the Act, has the plaintiff made out, which it was for him to do, that they have been guilty of a fraudulent misrepresentation? • I think not. I cannot hold it proved as to any one of them that he knowingly made a false statement, or one which he did not believe to be true, or was careless whether what he stated was true or false. In short, I think they honestly believed that what they asserted was true, and I am of opinion that the charge of fraud made against them has not been established.” 1.6.1 Liabilities Related With Prospectus
- 39. 1.6.2 Remedies toSubscribers against Promoters • Subscribers can repudiate the contract and require the money passed under it. • In case of untrue statement in prospectus an action may be taken against directors and promoters of the company. • If there is failure or omission in prospectus Subscribers may make directors as well as promoters liable. • In addition to promoters and directors all officers of co. who authorize the prospectus with untrue statement may be made liable.