A company as it is known 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.

Promotion activities are usually more evidenced when a foreigner is involved in the incorporation of a Nigerian company. Under the Nigerian law, a promoter is determined by promotion activities, that is, it is only when promotion activities relating to a company can be identified before such person can be called a promoter. S. 61 of CAMA provides that 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.

From the foregoing, it means 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 activities towards incorporating a company, although CAMA did provide for raising funds/capital for a newly formed company

Thus the necessary determination of who a promoter is, is to ask the question WHAT DID HE DO, if the person was involved in promotion activities, then he is a promoter. It is pertinent to note that a company can be a promoter of a proposed company. Also a person who took no active part in the formation of a company nor raised capital for it but left others to form the company on the understanding that he would profit from the formation of the company would be a promoter.

Emma Silver Mining Co ltd v. Lewis - a lawyer who incorporated the company at CAC and in lieu of his professional fees decides to buy shares in the company is a promoter of the company. All subscribers to the memorandum and articles of association are promoters of the company. Note NOT SHAREHOLDERS BUT SUBSCRIBERS. However, the proviso to s. 61 CAMA is to the effect that a person acting in a professional capacity for person engaged in procuring the formation of the company is not a promoter. For instance, a legal practitioner acting in his professional capacity in relation to a proposed company is not a promoter- Re Great Wheal Polygot Ltd. Should the legal practitioner be a subscriber to the memorandum and articles of association, then he is a promoter. Also, a lawyer who negotiates property for the proposed company at a profit is promoter of that company. Twycross v. Grant.

  • N.B professional capacity for a legal practitioner would include preparation of necessary documents like memo and articles and registration of company at CAC.

Legal relationship between promoter and the company
The legal relationship which exists between a promoter and a company is neither an agency relationship nor is it a trust relationship as held in GARBA V SHEBA INTERNATIONAL (Nig.) Ltd. This is because as it relates to agency, there is no principal in existence and ordinarily, the act of an agent binds the principal, thus a promoter is not the agent of the company. In agency, the contract is between the principal and third parties. As it relates to trust relationship, a promoter is not the trustee of the company because in trusteeship, the legal title is vested in the trustee.
The legal title of any property acquired by a promoter is not vested in the promoter to hold in trust for the company. Hence, the legal relationship between the promoter and the company is FIDUCIARY RELATIONSHIP. This is because fiduciary relationship entails the concept of utmost good faith. It is pertinent to note that prior to incorporation of company, both investors and those running around for the incorporation of the company are promoters of the company. It should be noted that a person becomes a promoter from the very moment he begins to take part in forming a company or in setting it going. The fiduciary relationship between the promoter and the company implies certain duties and liabilities of the promoters - s. 62(1)&(2) of CAMA.

Actually, it is the promoter that stands in fiduciary duty towards the company. Section 62(1) CAMA. In a fiduciary relationship, there is always a presumption that one party is superior to the other. In this case, it is the promoter.

Duties of a promoter

  1. Duty to account to the company for money or properties received in the course of promotion activities.
  2. Duty not to make secret profit:. This is based on utmost good faith underlying fiduciary relation. 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.
  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 a fiduciary, once a promoter has any interest in the transaction, he should give full disclosure to the company. The law did not say promoter should not trade with the company, only requires full disclosure.
  5. Duty not to expose the company to loss. As a fiduciary, 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.

Liabilities of promoters
The above duties are owed to the company and not any individual investors, also the duties are not for decoration as where there is a duty there is liability for its breach. Thus the breach of any of the above duties would result in the company upon incorporation taking any of the following action.

  • 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.

  • Action to account for proceeds of secret profit: upon discovery by the company that a promoter has made secret profit an action for proceed of secret profit can be made.

  • Action for damages for wrongful exploitation of confidential information obtained in course of promotion activities. Note the following:
    (1) This kind of action is an hybrid between general and special damages
    (2) This is done because the extent of exploitation of confidential information is not yet known.
    (3) Once a breach is established, then liability will be determined by the court
    (4) Extent can then be sorted out

  • Refusal to ratify pre-incorporation contract tainted with conflict of interest and abuse of fiduciary duties.

  • Action to rescind contracts or transactions which are yet to be perfected by the promoter, and damages where recession becomes impossible because of third party interest.

It is pertinent to note that s. 62(4) CAMA provides that period of limitation does not apply to proceedings brought by the company to enforce any of its right relating to breach of fiduciary duties. However the court can in part or whole grant relief to the promoter from liability. Because of activities involved in promotion activities, promoters can enter into contract with the proposed company with the option to ratify such contract upon fulfilment of certain conditions or rescission of the contract, with regard to remuneration for expenses incurred by the promoter in the course of promotion activities. This kind of contract falls under pre-incorporation contract and subject to rules regulating same.

RATIFICATION- Section 62(3) and 72 of CAMA

Prior to Ratification: The promoter cannot maintain an action against the company for any expenses or remuneration incurred in the course of promoting the company. However, the promoter can maintain an action for breach of contract in damages against any person who purported to act in the name of or on behalf of the company and in the absence of express agreement to the contrary, such persons shall be personally bound by the contract or other transaction and entitled to the benefit thereof. Section 72(2) CAMA.

Implicit in this is that the persons can exclude liability to be personally bound. Such person is entitled to the benefits of the contract where the person is personally bound.

RATIFICATION: However, where the company ratifies the company will remunerate the promoter. Section 72 CAMA. If the company does not ratify cannot claim the benefits of the contract.

WHO RATIFIES:
Section 62(3) CAMA 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:

  • The Board of directors of the company independent of the Promoter
  • All members of the company(present and voting in practice)
  • By the company at a general meeting at which neither the promoter nor the holders of any shares in which he is beneficially interested shall vote on the resolution to enter into or ratify that transaction.

Ratification is usually by a formal resolution which is passed by the company. The resolution must show in clear terms what was ratified.

Terms Used:
CAMA: Companies And Allied Matters Act