CORPORATE LAW WEEK 7: PRE-INCORPORATION MATTERS (PROMOTERS AND PRE-INCORPORATION CONTRACTS)
WEEK 7
PRE-INCORPORATION MATTERS.
:: PROMOTERS: A promoter is one who takes part in forming a company. provided that a person acting in professional capacity (like lawyer engaged to do the documentations) would not be deemed to be a promoter-Garba v Sheba Int. (Nig) Ltd, Twycross v Grant. Section 61 CAMA.
:: NATURE AND RELEVANCE OF PROMOTION ACTIVITIES: fiduciary. Relevance is to float the company.
:: DUTIES AND LIABILITIES OF A PROMOTER:
Duties: Duty to account for money received during promotion: Duty to return secret profits (they may keep it after telling the company). Duty to disclose all property and information gotten for the company; duty to reveal conflicting interest and to ensure the company is not exposed to loss or they will be personally liable Garba v Sheba Ltd.
Liabilities: the company may institute an action for the promoter to render account of money and property received during promotion, and to return secret profits. The company may claim damages for exploitation of confidential information and fraudulent misrepresentation; it can refuse to ratify pre-incorporation contracts showing conflict of interest Section 62 CAMA. As once ratified (by general meeting after disclosure of relevant facts by promoter), it may be estopped from going back but rather should sue promoter for damages. There is no time limit to sue a promoter. a promoter who committed an offence while breaching his fiduciary duty shall be suspended from being director or manager of any other company for 10 years maximum Section 254 CAMA.
:: REMUNERATION OF PROMOTER.
Not automatic unless: – Authorised by Articles; – Mandated in Pre-incorporation contract[1]; – Fees/agreement to be paid by the person instructing promoter to form the company; – Receives commission on sales (if he is not a lawyer, R.7 RPC).
Promoter may also; resell the property; be given the option to subscribe to the company’s shares; etc.
:: TYPES OF PRE-INCORPORATION CONTRACTS.
– Joint Venture Agreement.
– Memorandum of Understanding.
– Shareholder’s Agreement.
– Promoter’s/Directors Service Contracts.
– Payment of Promoters Expenses.
– Formation Agreement.
– Takeover agreement.
– Appointment of first Directors by Subscribers?.
:: FEATURE OF PRE-INCORPORATION CONTRACTS.
A pre-incorporation contract is not binding upon the company unless it ratifies it upon incorporation through its members in general meeting and after the promoter has disclosed relevant facts to them.
Until ratification, the promoter(s) is personally liable on the contract. Section 72 CAMA[2] Garba v Sheba International (Nig) Ltd.
:: LEGAL RELATIONSHIP OF A PROMOTER WITH THE COMPANY.
He is not an agent or trustee but rather; he is a fiduciary.
Note that the State High Court presides over pre-incorporation matters.
:: RELATIONSHIP BETWEEN MEMORANDUM & ARTICLES WITH PRE-INCORPORATION CONTRACT: Edokpolor Ltd v Sem-Edo Wire Industries (1984) NSCC 553; (1984) 7 S.C. 119. The MEMO prevails over the ARTICLE which in turn prevails over a pre-incorporation contract although pre-incorporation contracts can be inserted in the company’s object clause in Memo to show a strong desire (rather than bindingness) that the company should after incorporation execute/ratify the agreement so included.
:: ETHICAL ISSUES INVOLVED.
[1] This is risky because the ‘company’ does not yet exist in the eyes of the law
[2] At Common law, there could not be ratification at all since the company was a non-entity during the time of contracting-Kelner v Baxter (1878) 8 Ch.D3 88, Newborn v Sensolid [1954] 1 Q.B. 45, Societe Generale Bank v Societe Generale Favouriser etc. [1995] 3 NWLR (Parrt 384) 497.
