5/11/2011 Company Law I Lecture 5:Promoters and Pre- incorporation contracts Promoters:scenario A rogue is thinking of some way to make some money. He decides to buy some land and sell it to a company that he will form. He buys a piece of land for $5,000,000. He then creates a new company and appoints himself and a friend as directors. He invites investors to subscribe to the company. He then sells the land to the company for $8,000,000.As director, he uses the money paid by subscribers to pay for the land. So he pockets the $3,000,000 profit,and soon after he winds up the company. Will the law permit this??
5/11/2011 1 1 Company Law I Lecture 5: Promoters and Preincorporation contracts 2 Promoters: scenario • A rogue is thinking of some way to make some money. • He decides to buy some land and sell it to a company that he will form. • He buys a piece of land for $5,000,000. • He then creates a new company and appoints himself and a friend as directors. • He invites investors to subscribe to the company. • He then sells the land to the company for $8,000,000. As director, he uses the money paid by subscribers to pay for the land. • So he pockets the $3,000,000 profit, and soon after he winds up the company. • Will the law permit this??
5/11/2011 Promoters ·Who is a promoter? Twycross v Grant(1877)2 CPD 469 at 541 Cockburn CJ:one who"undertakes to form a company with reference to a given project and to set it going,and undertakes the necessary steps to accomplish that purpose." Tracy v Mandalay Pty Ltd(1953)88 CLR 215 .Not [for]the hope of profit from the operation after its setting up...but the very profit from its establishment... Promoters Emma Silver Mining Co Ltd v Lewis and Son (1879)2CPD396 Lindley J:"the term 'promoter'involves the idea of exertion for the purpose of getting up and starting a company." Implication:coverage of the term "promoter" 2
5/11/2011 2 3 Promoters • Who is a promoter? • Twycross v Grant (1877) 2 CPD 469 at 541 Cockburn CJ: one who “undertakes to form a company with reference to a given project and to set it going, and undertakes the necessary steps to accomplish that purpose.” • Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 Not [for] the hope of profit from the operation after its setting up … but the very profit from its establishment … 4 Promoters • Emma Silver Mining Co Ltd v Lewis and Son (1879) 2 CPD 396 Lindley J: “the term ‘promoter’ involves the idea of exertion for the purpose of getting up and starting a company.” Implication: coverage of the term “promoter
5/11/2011 Examples of promoters To arrange for someone to be a director To arrange to place shares To negotiate preliminary agreements To arrange for existing company to raise new capital from the public(but with exceptions) Examples of promoters To prepare prospectus(s 40(5)) Liable for untrue statements in the prospectus to the subscribers for shares or debentures Exceptions to this liability rule No joint liability between promoters 3
5/11/2011 3 5 Examples of promoters • To arrange for someone to be a director • To arrange to place shares • To negotiate preliminary agreements • To arrange for existing company to raise new capital from the public (but with exceptions) 6 Examples of promoters • To prepare prospectus (s 40(5)) Liable for untrue statements in the prospectus to the subscribers for shares or debentures Exceptions to this liability rule No joint liability between promoters
5/11/2011 How to Promote? Most common way:buy and sell Promoters and fiduciary duties Fiduciary duties imposed on promoters Erlanger v New Sombrero Phosphate Co(1878)3 App Cas 1218 (House of Lords) Lord Cairns:"..in a fiduciary position.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." The promoter...provide it with a board of directors,"who shall both be aware that the property which they are asked to buy is the property of the promoters,and who shall be competent and impartial judges as to whether the purchase ought or ought not be made." 8 ?
5/11/2011 4 7 How to Promote? • Most common way: buy and sell 8 Promoters and fiduciary duties • Fiduciary duties imposed on promoters Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (House of Lords) • Lord Cairns: “… in a fiduciary position. 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.” • The promoter … provide it with a board of directors, “who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not be made
5/11/2011 Promoters and fiduciary duties Fiduciary duties imposed on promoters Erlanger v New Sombrero Phosphate Co(1878)3 App Cas 1218 (House of Lords) Lord Cairns:"I do not say that the owner of the 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 O'Hagan:"it required,in its exercise,the utmost good faith, the completest truthfulness,and a careful regard to the protection of the future shareholders." Promoters and fiduciary duties Fiduciary duties imposed on promoters Erlanger v New Sombrero Phosphate Co(1878)3 App Cas 1218 (House of Lords) Lord O'Hagan:"In all such cases the directorate nominated by the promoters should stand between them and the public,with such independence and intelligence,that they may be expected to deal fairly,impartially and with adequate knowledge in the affairs submitted to their control." "the promoters in this case failed to remember the exigencies of their fiduciary position,when they appointed directors who were in no way independent of themselves,and who did not sustain the interests of the company with ordinary care and intelligence..." ."such a transaction ought not to be allowed to stand." 10 6
5/11/2011 5 9 Promoters and fiduciary duties • Fiduciary duties imposed on promoters Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (House of Lords) • Lord Cairns: “I do not say that the owner of the 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 O’Hagan: “it required, in its exercise, the utmost good faith, the completest truthfulness, and a careful regard to the protection of the future shareholders.” 10 Promoters and fiduciary duties • Fiduciary duties imposed on promoters Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (House of Lords) • Lord O’Hagan: “In all such cases the directorate nominated by the promoters should stand between them and the public, with such independence and intelligence, that they may be expected to deal fairly, impartially and with adequate knowledge in the affairs submitted to their control.” • “the promoters in this case failed to remember the exigencies of their fiduciary position, when they appointed directors who were in no way independent of themselves, and who did not sustain the interests of the company with ordinary care and intelligence…” • “such a transaction ought not to be allowed to stand