Company Law

Topics: Stock, Companies Act 2006, Company Pages: 9 (1877 words) Published: February 28, 2012
Lecture 2:
PROMOTERS & PRE-INCORPORATION CONTRACTS James Mendelsohn BS3/16 01484 473607

• • • • •

Corporate personality Artificial, separate legal personality Registration at Companies House Limited liability


• Issues arising from separate, artificial legal personality

• Background • Definition
- no statutory definition - 2 common law definitions

• Twycross v Grant (1877) 2 CPD – someone

who “undertakes to form a company with reference to a given project, and to set it going and… takes the necessary steps to accomplish that purpose” (Cockburn CJ)

• Whaley Bridge Calico Printing Co v Green (1880)

5 QBD 109 – “the term promoter is a term not of law but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence” (Bowen J)

• NB not a professional adviser (solicitor, accountant) not deemed to be a promoter solely because of actions he does in a professional capacity (Re Great Wheel Polgooth Co (1883) 53 LJ Ch 42)

• The historical problem (C19)

• C20 – legal regulation & Stock Exchange
Listing Rules for public companies

• Still relevant for private companies

Promoters’ fiduciary duties
• Erlanger v New Sombrero Phosphate Co (1878) 3
App Cas 1218):

• “[Promoters] stand, in my opinion, undoubtedly in a

fiduciary position [to their companies]. They have in their hands the creation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation.” (Lord Cairns)

Promoters’ fiduciary duties
• “Good faith, fair dealing, full disclosure” • • Promoter may not make a secret profit • • Must declare any interest or profit in any transaction involving the company

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218):

• If the company enters into a transaction in
which the promoter was interested then it is voidable if it was not properly approved by the company after full disclosure.

• The court can order the transaction to be

• Mr E sets up a syndicate, which buys an island from the liquidator • • •

• •

of insolvent company for £55,000 Island said to have phosphate mines E prepares to set up a company to take over the island and its mines from the syndicate. 5 people names as directors and subscribers: 2 abroad; 2 entirely under his control; the 5th (Mr D) is entirely uninformed. Syndicate sells island to the company for £110,000. The three directors who weren’t abroad, including Mr D, accept the purchase of the island on the company’s behalf, without making any enquiries. i.e. Mr E does very nicely out of the transaction!

• • • • • • •

A prospectus for shares in the company is issued V favourable about the scheme - true circumstances not disclosed Many members of the public purchased shares. Phosphate mining business struggles Shareholders discovered the true circumstances Shareholders remove original directors and elect new ones

The new directors apply to the court to have the original sale rescinded

• The court orders rescission • The court said that the promoters should have appointed

independent directors and should have made full disclosure of the circumstances

• “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 the medium of a board of directors who can and do exercise an independent and intelligent judgment on the transaction, and who are not left under the belief that the property belongs, not to the promoter, but to some other person.” (Lord Cairns LC)

• Lord Blackburn said the purchase was
voidable “because there was not the

exercise upon it of the...
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