CORPORATE LAW: PROMOTION OF COMPANIES

Promotion of Companies
Promotion of a company is any act done by an individual aimed at bringing a company into existence. See S. 61 of CAMA.
Note that a professional engaged in the promotion is not to be treated as a promoter, e.g. a Legal practitioner.
The legal nature of the relationship between a promoter and the proposed company

• It is a fiduciary relationship (of trust) between the promoters and the company.
• It is not an agency or a trust. The promoter is to act in good faith towards the Proposed Company and he is to account for the monies or properties received in the course of the promotion.

The duties of a Promoter are:

1. Duty to account
2. Duty not to make secret profits
3. Duty not to exploit confidential information obtained in the course of the promotion activities
4. Duty to disclose conflicts of interest in the transactions with or on behalf of the company
5. Duty not to expose the company to loss See S.

Liabilities of Promoters
This means that a promoter can be sued and held liable on the following:

1. Action to render account
2. Action to recover proceeds of secret profits
3. Action for damages for wrongful exploitation of confidential information
4. Action for compensation for loss caused to the company
5. Refusal of the company upon incorporation to ratify pre-incorporation contracts tainted with , fraud
6. Action to set aside or rescind contracts tainted with fraud, misrepresentation etc

See S. 62 of CAMA.
Note that there is no time limit within which to bring actions for the breach of a promoter’s duties. The Court may also grant relief to a promoter from liability if it is equitable to do so. See S. 62(4) of CAMA.
Contracts between the Promoters and the Company
The company cannot ratify an oral contract or promise to pay sums of money incurred by the promoters on behalf of the company, so there must be a formal contract executed to that effect. See GARBA V. SHEBA INTER. (NIG.) LTD. The company upon incorporation has an option to ratify a contract/agreement to reimburse the Promoters only if there is a full disclosure. Promoters who are directors of the company are excluded from the meetings to ratify pre-incorporation contracts.
The Resolution for ratification can be:
“… that the company does ratify, confirm and approve the purchase of assets by
agreement dated………May 2012.”
The effects of Pre- incorporation contracts on behalf of the company are as follows depending on the position of the Law one looks at it from as follows:

• Common Law position

The company is not bound by the contract and cannot ratify it upon incorporation. See KELNER V. BAXTER

• The Companies and Allied-Matters Act

The promoters are personally liable but upon incorporation the company may ratify the pre-incorporation contracts. See S. 72(1) of CAMA.
Remuneration of Promoters
There is no automatic right to remuneration. (S.62 (3) & 72(2) CAMA)
EXCEPTIONS to the above are:

• The Articles of Association of the company allows the directors to pay
• The promoters entered into a pre-incorporation contract with the proposed company to pay
• The promoters entered into a personal contract with the persons instructing them to float the company, such that even if the company did not pay the persons who instructed the promoters will be bound to pay.

Circumstances desiring a pre-incorporation Contract are:

1. Payment of promoters’ expenses/remuneration
2. Joint venture business between a Nigerian and an Alien
3. The new company is to take over the existing business or purchase property
4. Shareholders’ agreement or Formation agreement to protect shareholders’ interest.
5. Promoters/Directors service contracts.
6. Protection of confidential information used for promotion activities
7. Contract to obtain regulatory permit and other preconditions to its incorporation

The best ways to protect key terms of pre-incorporation contracts in the formation of a company are to:

1. Include it as its object clause in the Memorandum of Association, e.g. take over agreement of an existing business.
2. Other terms are to be included as clauses in the Articles of Association.
3. The reason for this is because upon incorporation, the Memorandum and Articles of Association of the company are the superior contracts of the company. See S. 41(1) of CAMA.

Preliminary documents in company formations are:

1. Appointment of first Directors by subscribers of the Memorandum and Articles of Association. See S. 247 of CAMA
2. Appointment of secretary by the Board of Directors.
3. Nomination of address of the business

Conflicts between the Memorandum of Association, the Articles of Association and Pre-Incorporation Contracts.
The use of supremacy clauses in pre-incorporation agreement is ineffective against the company. This is because the Memorandum and the Articles of Association of the company are still the superior documents upon registration and they prevail over any agreement. See S. 41(1) of CAMA. More so, that the Memorandum and Articles of Association are public documents. See S. 35(2)(a) of CAMA. However, the terms in the pre-incorporation contracts are enforceable against the parties to the agreement and an action can be sustained for specific performance. Between the Memorandum of Association and Articles of Association, the Memorandum of Association is superior.

Checklist of basis terms in formation agreements are:

1. Name of parties
2. Business nature
3. Capital source and financing
4. Appointment of key officers
5. Management decisions
6. Confidentiality
7. Dividend sharing policy, interest and rate.
8. Dispute Resolution
9. Ratification by company upon incorporation
10. Winding up