PROMOTION OF COMPANIES AND PRE-INCORPORATION CONTRACTS PROMOTERS

Promotion activities deals with Promoters of a company. This can be found under section 61 of CAMA.

The idea of forming a company is usually conceived by a person or group of persons who in furtherance of this idea, will begin to take necessary steps to incorporate the company. For example, they may have to source for funds, find directors, acquire properties, prepare the prospectus and may also have to pay for the printing and all other expenses incidental in bringing the company into the world.  The law regard such persons as promoters of the company. 

The provisions of section 61 of CAMA provides thus:

“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:

Provided that a person acting in a professional capacity for persons engaged in procuring the formation of the company shall not thereby be deemed to be a promoter.”

What this proviso means is that a solicitor or valuer does not become a promoter merely by acting in a professional capacity to a promoter. The only exception is where a solicitor negotiates property for the proposed company at a profit. In Twycross v. Grant (1877) 2 CPD 469 at 541, Cockburn C.J said that:

In “a promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.  They framed the scheme; they not only provisionally formed the company but also were to the end its creators. They found the directors and qualified them. They prepared the prospectus, they paid for the printing and advertise the undertaking before the world….”

Adeniji v. Starcola Ltd. (1972) 1 SC 202, Kazeem J. described a promoter as:

“Any person who undertakes to take part in forming a company or who with regard to a proposed or newly formed company undertakes a part in raising capital for it is prima facie a promoter of the company provided he is not acting in his professional capacity.”

It should be noted that a promoter is also someone who instructs a solicitor to prepare a Memorandum and Articles of Association and register a company for him. In Spicer (Keith) Ltd. v. Mansell (1970) 1 WLR 333, the Court held that a person who purchased a property expressly as trustee for an intended company would by so doing be deemed a promoter.

A person may become a promoter of a company even after registration of a company.  For example, if he had assisted in procuring capital for the company to pay promotion expenses when the company was newly formed. 

It should be noted also that an existing company may be a promoter for another new company.

However, a solicitor who prepared the Articles and Memorandum of Association and registered a company for his client who paid him (the solicitor) his professional fees is not a promoter. In RE: Great Wheal Poolgooth Ltd (1883) 53 LJ CH 42, the Court said inter alia that a solicitor who drafts the Memorandum and Articles of Association in line with the promoters instructions and the accountant who values the assets of a business to be purchased are only giving expert or professional assistance to the promoters and will be paid for their services; they are not promoters.

If, however, the solicitor and accountant did more by way of helping his client to obtain directors for the company, they would be regarded as promoters. The law looks at the facts in determining whether or not a person is a promoter.  In the case of GLUCKSTEIN V. BARNES (1900) AC 240 the court held that a person who purchased property for his own use and later decided to form a company to acquire the property became a promoter only from the time when he took steps to form the company.

A promoter cannot be regarded as an agent or trustee of a company but he occupies a fiduciary relationship with the company – Garba v. Sheba International (Nigeria) Ltd. [2002] 1NWLR (Pt.748) 372 at 401.

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.

CONTRACTS OF PROMOTERS

In contrast to the Common law rule, Section 72 of CAMA provides that a contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract or other transaction and had been a party thereto.

Section 72(2) of CAMA provides that:

“Prior to ratification by the company, the person who purported to act in the name of or on behalf of the company shall, in the absence of express agreement to the contrary, be personally bound by the contract or other transaction and be entitled to the benefit thereof.”

DUTIES AND LIABILITIES OF PROMOTERS

Because promoters stand in advantage position as against the company, the law imposes a duty on promoters. Lord Cairns said in Erlanger v. New Sombrero Phosphate Company (1878) 3 AC 1218 at 1236 that:

“Promoters 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”.

1)      Duty of fiduciary relationship – The promoter stands in a fiduciary relationship to the company and must observe utmost good faith in transaction entered on behalf of the company. Section 62(1) of CAMA provides that a promoter stands in a fiduciary position to the company and shall observe the utmost good faith towards the company in any transaction with it or on its behalf and shall compensate the company for any loss suffered by reason of his failure so to do.

2)      Duty of accountability – The promoter must account for any profit made from the use of information on property acquired in the course of his duty to the company. Section 62(2) of CAMA provides that a promoter who acquired any property or information in circumstances in which it was his duty as a fiduciary to acquire it on behalf of the company shall account to the company for such property and for any profit which he may have made from the use of such property or information. In Jubilee Cotton Mills v. Lewis (1924) AC 958, it was held that a promoter who received, by way of a secret reward for his part in promoting a company, an allotment of shares which had been allotted before a statement in lieu of prospectus, which was then required by law, has been filed was liable to account for the profit made on the resale of the shares.

The transaction between the promoter and the company can be rescinded by the company except where after full disclosure by the promoter, such transaction is ratified on behalf of the company by either an independent Board of directors (that is, independent of the promoter) or at a General Meeting at which such promoter cannot vote – section 62(3) of CAMA. In ERLANGER’s case (supra), a syndicate of which he was the head, purchased an island in the West Indies said to contain valuable mines of phosphate for 55,000 pounds. He formed a company to buy this island and a contract was made between “X”, a nominee of the syndicate, and the company for its purchase at 110,000 pounds. It was held that there had been no disclosure by the promoters of the profit they were making. Therefore, the company was entitled to rescind the contract and recover the purchase money from him and other members of the syndicate.

LIMITATION PERIOD

There is no limitation period for company to sue promoter under this section but the court may give relief from liability to the promoter if it deems it equitable to do so – section 62(4) of CAMA.

REMEDIES FOR BREACH OF DUTIES

Basically, there are three major remedies:

1.      The company may sue the promoter for damages for breach of his fiduciary obligation to the company – Re: Leeds And Hanley Theatre Of Varieties Ltd (1902) 2 CH 809.

2.      The company may rescind the contract and recover the purchase money paid where the promoter sold his own property to the company.  In Erlanger v. New Sombrero Phosphate Ltd. (supra), the Court held that the law requires the promoter to disclose such fact before he can be relieved of any liability for failure to disclose. Where he discloses such facts, it will no longer be regarded as secret profit and he may be allowed to keep it.  Disclosure must be made to:

(a)    The Board of Directors who must be independent of the control of the promoters; or

(b)   Where no such Board exists then disclosure must be made to the shareholders either in a General Meeting or in a circular or prospectus issued by the promoters on behalf of the company.

3.      The promoter may be compelled by the company to account for any profit he made – Gluckstein v. Barnes (supra).

REMUNERATION OF PROMOTERS

The services of promoters are very peculiar, and a great skill, energy and ingenuity may be required and employed in the promotion exercise. Though, a promoter has no right against the company to payment for his promotion services and expenses unless there is a valid contract for him to do so – Re English and Colonial Produce Company (1906) 2 CH. 435 CA. And, since pre-incorporation contracts are not binding on, or enforceable by, or against the company, it may be difficult for promoters to have an enforceable contractual right to remuneration for their services and indemnify for their expenses. In Re National Motor Mail Coach Co.Ltd., Clinton’s Claim (1906) 2 Ch 515 CA , it was held that the promoters were not entitled to prove or recover the expenses they incurred in incorporating the company. This difficulty is more real in theory than in practice because recovery of preliminary expenses and remuneration does not present much difficulty. Usually, the Articles of Association will contain a provision authorising the directors to pay them though it does not go to the extent of constituting a contract between the company and the promoter(s).

The reward of a promoter may take many forms. He may purchase an undertaking and promote a company to repurchase it at an enhanced price, thus, making profit. Alternatively, he may receive commission on a sale to the company from a vendor (it should be noted that all this is subjected to the rule of full disclosure as a duty of the promoter). Also, he may be given an option to subscribe for shares at a particular price within a specified limit. Where this happens, it is very significant that there is full disclosure of same by the promoters to the company and also by the company in the prospectus.

Unlike the common law position, a promoter can now recover remuneration by action against the company if the contract is ratified or adopted by the company after incorporation since by section 72 of CAMA, such a contract or transaction may now be ratified. In Garba v. Sheba (supra) at 401, the court held that it has always been the case that a promoter has no right against the company for payment of services rendered before the incorporation of the company and that a promise to pay him by the company is neither binding nor enforceable against the company because the consideration is a past consideration. 

PRE-INCORPORATION CONTRACTS

Pre-incorporation contracts are contracts purported to be made usually by promoters on behalf of a company before it is incorporated – Sparka Electrics Nig. Ranor v. Ponmile (1986) 2 NWLR (Pt. 23) 519 at 525. That is, before a company is formally registered, a promoter may have entered into some contracts on behalf of the company before incorporation.

In Kelnar v. Baxter (supra), it was held that at Common Law, a pre-incorporation contract was not binding on the company because there was no principal on behalf of whom an agent could have contracted and that the company was not permitted to ratify or adopt it. This was also the decision in Trans Bridge Co Ltd. V. Survey Int’l Co. Ltd (1986) 17 NSCC 1084; Edokpolor and Co. Ltd v. Sem-Edo Wire Industry Ltd (1984) 7 SC 119; Re English Colonial Produce Co. Ltd (supra); Kelner v. Baxter (1886) LR 2 CP; Enahoro v. Bank of WA Ltd (1971) 1 NCLR 180.

The only way in which the company could be party to the contract was to enter into a new contract in terms of the one purportedly entered into on his behalf. The reason for this is that such a company is not yet a person in the eyes of the law. A pre-incorporation contract at Common Law is, therefore, not binding on the company. In the case of Caligara v. Giovanni Ltd. (1961) 1 ALL NLR 534, the Court held that a company cannot ratify or adopt a contract purported to have been entered into on its behalf by its promoters prior to its incorporation.

Where the promoter signed the contract for and on behalf of the company, he is personally liable – Kelnar v. Baxter (supra) but where the promoter signed the contracts in the proposed name of the company, then there is no contract at all. In Newbourne v. Sensolid (Great Britain) Ltd 1954 1 QB 45, it was held that the contract was not made with the plaintiff but with a non-existing limited liability company. Therefore, the contract was a nullity and the plaintiff could not adopt it and sue upon it as his own contract.

But Section 72 of CAMA has now modified this rule. It provides thus:

“Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company, prior to its formation, may be ratified by the company after its formation and thereupon the company shall be bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract…”

In other words, the company can ratify after formation as if it were in existence when the contract was entered into. The company then becomes bound and entitled to the benefits therein. 

Although, it is significant to treat the word “ratified”, as used in this section could have been used in its strict legal connotation. This observation accords with legal principles since there cannot be ratification of a contract or transaction by a principal who was not in existence at the material time of contract. The law in this context, merely treats the company as if “it has been in existence at the date of such contract or other transaction and had been a party thereto”. The theoretical basis of the power of ratification which companies are given under this section, is, obviously, predicated on agency principle by which a principal has the legal competence to ratify unauthorised acts of his agent. The power of ratification endowed upon incorporated companies in this section, it must be pointed out, is co-existence with that exercisable under normal agency relationship. Therefore, ratification may be express or implied.

The question whether or not the insertion of a pre-incorporation contract in the object clause of a memorandum of a company would make it binding on the company came up in the case of Edokpolor and Company Ltd. v. Sem-Edo Wire Industries (supra). The apex court per Nnamani, JSC stated the position in the following way:

“The object Clause is no more than a list of the objects the company may lawfully carry out. They are certainly not objects that the company must execute. The inclusion of the terms of the pre-incorporation contracts in the Memorandum of a company is an indication of a strong desire… that the proposed company after incorporation should execute the terms of the agreement so included.

On when can pre-incorporation contract be binding, the court stated in the case of Garba v. Kic Ltd. (2005) 5 NWLR (PT. 917) 160 at 117, that before a company can become bound by any contract or transaction entered on its behalf before its formation, there must be evidence of ratification by the company upon its formation.

Before such ratification, any person who claims to have entered into a contract on behalf of a company before its formation is presumed to have done so personally – ET and EC Nigeria Ltd. v. Nevico (Nigeria) Ltd. (2004) 3 NWLR (PT. 860) 327 at 347.

TYPES OF PRE-INCORPORATION CONTRACT

The following are types of pre-incorporation contract:

1.      Joint Venture Agreement especially between Nigerians and aliens.

2.      Shareholders’ Agreements.

3.      Contract for Payment of Promoters’ expenses.

4.      Directors’ service contract (appointment of the Managing Director).

5.      Contract Agreement for the acquisition of business or property (Takeover agreement).

6.      Contract for Conversion of partnership to incorporated companies.

FEATURES OF A PRE-INCORPORATION CONTRACT

1)      Such contracts (pre-incorporation contracts) are said not to be binding on the company until it has been ratified or adopted by the company.

2)      Such contracts are made prior to the existence and incorporation of the company

3)      Such contracts are binding on the promoter and not the company except in cases where a company has ratified the contract.

4)      It is usually made by a promoter with a third party on behalf of the company before incorporation.

5)      Promoters are personally answerable under pre-incorporation contracts.

RELATIONSHIP BETWEEN MEMORANDUM AND ARTICLES OF ASSOCIATION AND PRE-INCORPORATION CONTRACTS

The Memorandum of Association is the dominant instrument and the Articles of Association are subordinate to and controlled by the memorandum – Liquidator of Humbold Redwood Co. Ltd. v. Coasts (1908) SC 751 at 753. A company’s power to alter its articles is subject to the conditions in the memorandum – section 48(1) of CAMA. Consequently, an alteration of articles must not conflict with the memorandum.

Where parties have a joint venture agreement, it is important that the terms of the joint venture agreement are incorporated into the memorandum of association of the company. This is done by providing in the first object clause of the memorandum of association as follows:

“To give effect to the Joint Venture Agreement, dated this ………….. day of ……….. between …………………. And ………………………..”

However, where there is a conflict between the joint venture agreement and the memorandum and articles of association, the joint venture agreement will prevail if there is a supremacy clause in the joint venture agreement – Edokpolor’s case (supra).

The main objectives of a Joint Venture Agreement (JVA) would be:

a)      To record how the company and its business are to be run with the least possible friction;

b)      To make sure the rights of each shareholder are secured and that so far as possible, each shareholder gets what he expects from the venture; and

c)      To determine what happens if something goes wrong.

EFFECT OF INCORPORATING THE JOINT VENTURE AGREEMENT INTO THE MEMORANDUM OF ASSOCIATION

This is to the effect that the members of the company have a strong desire to perform the terms of the joint venture agreement. However, the terms are not binding on the company because the object clause in the memorandum of association of a company is no more than an object that the company may lawfully carry out. This does not mean that the company must carry out the object – Edokpolor v. Sem-Edo Wire Industries (supra).

EFFECT OF MEMORANDUM AND ARTICLES OF ASSOCIATION

Subject to the provisions of CAMA, the memorandum and articles when registered, shall have the effect of a contract under seal between the company and its members and officers and between the members and officers themselves whereby they agree to observe and perform the provisions of the memorandum and articles, as altered from time to time in so far as they relate to the company, members or officers as such – section 41(1) of CAMA; Longe v. FBN (2006) 3 NWLR (Pt. 967) 228 at 269.

The effect of the above provision is that the articles of association (and memorandum) constitute a contract not merely between the shareholders and the company, but between each individual shareholders – Per Stirling J. in Wood v. Odessa Waterworks 42 Ch. D. 636 at 642.

This means that:

1.      A shareholder may bring an action to enforce any personal right contained in the articles. In  Burdett v. Standard and Exploration Co. (1889) 16 TLR 112, Conzens Hardy J held that a member was entitled to enforce compliance by the company with a clause in articles giving him a right to a share certificate.

2.      The company is entitled to sue its members for the enforcement and to restrain the breach by them of its articles, and to treat as irregularly anything which is done in contravention thereof – Blackpool v. Hampson (1882) 23 Ch D. 1.

3.      A member can sue a member for the enforcement of his right in the articles – Hudges, King (Nig.) Ltd. v. Ronald George Harris (1972) 2 UILR 63.

4.      The company, directors and officers will be treated as having made a contract in terms of the clause in the articles and are bound accordingly. In Swabey v. Port Darwin Gold Mining Co. (1889) I Meg. 385, the court held that he was entitled to recover on the footing of an implied contract in the terms of the clause.

5.      The directors/officers of a company are bound by the articles and if they act otherwise than in accordance with the provisions of the articles, they may render themselves liable to an action at the instance of the members and if as a result of the breach of duty any loss is suffered by the company, the directors are liable to refund of the company any damage so suffered.

6.      Where the memorandum or articles empower any person to appoint or remove any director or other officer, he cannot be prevented from doing so and such power shall be enforceable by that person notwithstanding that he is not a member or officer of the company – section 41(3) of CAMA; Longe v. FBN Plc (supra) at 272.

7.      Any alteration to the articles is, for the purpose of section 41(1) treated as if it were part of the original articles and will bind the company members and directors and officers of the company accordingly.

8.      The contractual relations created by the articles have statutory operation – Evans v. Chapman (1902) 86 LT 381; and the court cannot rectify them under its equitable jurisdiction even if it is proved that they do not reflect the intention of the parties – Scott v. Frank F. Scott (London) Ltd. (1940) Ch. 794.

9.      All money payable by any member to the company under memorandum or articles shall be a debt due from him to the company and shall be of the nature of a specialty debt.

CONTENTS OF SHAREHOLDER AGREEMENT

1.      Parties.

2.      Date.

3.      Recitals.

4.      Definition and Interpretation.

5.      Consideration.

6.      Warranties.

7.      Completion.

8.      Auditors and Bankers.

9.      Registered Office.

10.  Accounting Reference Date.

11.  Secretary.

12.  Directors.

13.  Dividend Policies.

14.  Further Financing.

15.  Guaranties and Indemnities.

16.  Company’s Business.

17.  Directors and Chairman.

18.  Important Management Decisions.

19.  Deadlock.

20.  Transfer of Shares.

21.  Material Breach.

22.  Winding up.

23.  Restrictive Covenants.

24.  Confidentiality.

25.  Shareholders Consent.

CONTENTS OF JOINT VENTURE AGREEMENT

1.      Parties.

2.      Date.

3.      Capital Contribution.

4.      Management Composition of the Board.

5.      Place of the Business.

6.      Nature of the Business.

7.      Supremacy Clause.

8.      Joint Venture Sharing Ratio.

9.      Dissolution Clause.

10.  Duration.

11.  Governing Law.

12.  Arbitration (that is, how should a matter be solved in the event of dispute).

ETHICAL ISSUES

1.      Rule 1 of Rules of Professional Conduct (RPC), 2007 – A lawyer shall uphold and observe the rule of law, promote and foster the cause of justice, maintain a high standard of professional conduct, and shall not engage in any conduct which is unbecoming of a legal practitioner.

2.      Rule 7(2)(b) of RPC – A lawyer shall not practice as a legal practitioner while personally engaged in the business of a commission agent.

3.      Rule 7(3)(a) of RPC – A lawyer shall not participate in any business that involves either executive, administrative or clerical functions.

4.      Rule 23 of RPC – A lawyer shall deal with his client’s property diligently and shall not use his client’s property for personal gain. He must also be accountable to his client as regards to client’s money.

5.      Rule 52 of RPC - The professional fee charged by a lawyer for his services shall be reasonable and commensurate with the service rendered.

6.      Rule 14 of RPC – A lawyer shall devote his attention, energy and expertise to the service of client.

A DRAFT OF PRE-INCORPORATION DOCUMENT (SAMPLE)

AGREEMENT BETWEEN PARTNERS FOR FORMATION OF A COMPANY TO ACQUIRE THEIR BUSINESS

This agreement is made this ………….. day of ………… 20…….

BETWEEN …………………. (name), first partner of ……………………… (address) and …………………. (name), second partner of ……………………. (address).

WHEREAS, the parties have agreed to form a company for the purpose of acquiring as a going concern, the business of the parties …………………. (state the kind of business) now carried on by them in partnership under the name …………………….. (name of the business).

NOW IT IS AGREED as follows:

Formation and capital of the company

The parties shall procure the incorporation of a company having an authorised share capital of ………………… (amount) divided into ordinary shares of ……………. (amount) each.

Name

The company shall be called “………………….. (name of the company) Limited” if such name is available for registration or by other available names as may be agreed between the parties (or in default of such agreement (name of one of the parties) shall sect).

Memorandum and Articles of Association

The Memorandum and Articles of Association of the company shall be in the form of draft and attached and marked as “A” with such modifications as the parties may agree in writing.

The Memorandum and Articles of Association shall be subscribed by the parties or their respective nominees each of whom shall agree in the memorandum to take up ordinary shares of ………………… (amount) each in the capital of the company.

Directors

The parties will procure their appointment as the sole first directors of the company. Each of the parties will exercise his voting right for the time being in the company and take other such steps as lie within his power to procure that the other parties retain their appointment to the office of director.

That each of the parties shall remain a director of the company until the ……… day of ……... (date) and so long after that as he holds beneficially (ordinary) shares of stock in the capital of the Company having an aggregate nominal value of not less than …………………. (amount) (or not less than ………….. per cent in nominal value of the issued share capital of the Company).

That ………………. (name) shall be the Chairman of the Company until ………… day of ……….. (date) and so long after that as he remains a director of the Company.

That so long as any of the parties is entitled to remain a director of the Company in accordance with the provisions of this clause, the maximum number of directors of the Company shall not exceed ……………. (number).

Sale of the business and cost and expenses

The parties and the company will enter into an agreement for the sale of their business to be in the form of the attached draft marked “B” and the company will bear the costs, fees and expenses of solicitors and accountants to the preparation of this agreement the formation of the Company and the sale of the business to the company.

Directors’ Powers

Nothing contained in this agreement shall in any way affect the free exercise by any person of his powers as a director of the company.

IN WITNESS of which we set out our hands the day first above written.

Signed by

………………………. (name)                                                           First partner

……………………….. (name)                                                          Second partner

In the presence of

Name: ……………………….

Address: …………………….

Occupation: ………………..