Promotion and Nature of Promotion Activities

Promotion activities deal with promoters of a company. Promotion activities are vital aspects of company formation. Promotion activities are capital intensive and energy-sapping as it involves painstaking efforts undertaken to assemble relevant documents, necessary materials and human resources for the company to be formed and commence business smoothly.

Specifically, promotion activities usually involve: Fund Raising, Obtaining Requisite Permits, Personality, Shopping, Packaging of Incorporation Documents and Getting the Company to Obtain Local Registration and Commence Business Activities. It also involves finding of directors, acquisition of properties and preparation of prospectus in case of Public Companies.

Section 61 of CAMA defines a promoter. It says that a promoter is 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. 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. Accordingly, a person can be a promoter before or after registration.

Also, a professional such as lawyer or accountant who acted in a professional capacity (for example by drafting the Memorandum and Articles of Association) is not a promoter unless he acted in another capacity, such as negotiating property for the proposed company for profit, or helping in the procurement of directors for the company. Thus, the law looks at the facts in determining whether or not a person is a promoter.

Note that an existing company may be a promoter for another new company. Also, a person who instructs a solicitor to prepare a Memorandum and Articles and register a company for him is a promoter. A person becomes a promoter from the very moment he begins to take part in forming a company or in setting it going.

Also, a promoter gets the first directors of the company and assembles management/technical staff for the proposed company; he enters into agreements on behalf of the company (pre-incorporation contracts) or assists in getting the capital for the company by private placement of shares or loan capital. He is never regarded as an agent or trustee of a proposed or newly formed company: Garba v. Sheba Int. (Nig) Ltd. (2002) 1 NWLR (Pt. 748) 372 at 401.

The legal position of promoters is as follows:

i.             Though a promoter occupies a unique position and is like parent to the company, he is neither an agent or trustee of the company.

ii.           He is not an agent because there is no principal.

iii.          He is not a trustee because there is no trust property nor beneficiary.

iv.          He stands in a fiduciary position towards the company with the accompanying duties of accounting, not to make secret profit, not to exploit confidential information obtained in the course of promotion activities for personal use, disclosure of conflict of interest in transactions with the company and not to expose the company to loss.

1.            Duties of a Promoter

Statutorily, section 62 of CAMA provides for the duties of promoter when it states thus:

1)           A promoter stands in a fiduciary relationship 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)          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.

3)          Any transaction between a promoter and the company may be rescinded by the company unless, after full disclosure of all material facts known to the promoter, such transaction shall have been entered into or ratified on behalf of the company –

a.           By the Company’s Board of Directors independent of the promoter; or

b.           By all the members of the company or

c.           By the company at a general meeting at which neither the promoter nor the holders of any share in which he is beneficially interested shall vote on the resolution to enter into or ratify that transaction.

Furthermore, a promoter cannot claim for payment of his services or expenses incurring during promotion of the company. Indeed any agreement to pay is void at common law because it is passed consideration. But in practice a promoter can recover his preliminary expenses and remuneration by the following means; reselling property to the company at on enhanced price; or receive commission from a sale to the company or taking up deferred or founders shares; or given options to subscribe for shares at a particular price within a specified limit.

Also, the promoter can be entitled to remuneration if the Articles of Association of a company allows the Directors to pay. He can also enter into a contract with the proposed company and let his fees and expenses be subjected to ratification under section 62(3) of CAMA upon full disclosure of all facts necessary to the categories of person designated for that purpose.

Lastly, by section 62(4) of CAMA, there is no limitation period within which the company may sue a promoter for breach of his fiduciary duties. Again, an agreement by the company to pay a promoter is void at common law because it is based on passed consideration – Garba v. Sheba International.

                

2.       Types and Features of Different Pre-incorporation Contracts (Joint Venture and Share Holders Agreements)

Pre-incorporation contracts can be described in variety of names: “promotion agreements”, “Preliminary Agreements”, “Pre-Incorporation Agreements”, “Formation Agreements”, “Shareholders Agreements”, Memorandum of Understanding” “Joint Venture Agreements”, etc. In Sparks Electrics Nig Ltd v. Samuel Ponmile (1986) 2 NWLR (Pt. 23) 519 at 525, pre-incorporation contracts where defined as contracts purported to be made usually by promoters on behalf of a company before it is incorporated. In fact, all contracts/agreements entered into on behalf of a company which has not been incorporated with aim that the company would takeover and be bound to implement the terms of the contract upon incorporation, are classified as pre-incorporation contracts.

Under common law, such contracts are invalid and unenforceable by or against the company and cannot be ratified by the company. But, under the CAMA, pre-incorporation contracts can be ratified but before and until such ratification by the company, the promoter will be personally liable and can also benefit there from, unless there is an express agreement negativing personal liability of the promoter. The relevant section 72 of CAMA provides that:

1)           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 become bound by and entitled to the benefit thereof as if it has been inexistence at the date of such contract or other transaction a party thereto.

2)          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 entitled to the benefit thereof.

Indicators or need or examples of pre-incorporation contracts are:

a)           Contract for payment of promoter’s expenses

b)          Shareholders Agreement

c)           Contract for take-over of business

d)          Conversion of partnership into incorporated companies

e)           Joint-venture Agreements especially between Nigerians and Aliens

f)           Formation Agreement and MOU

g)           Promoter/Directors Service Contracts/Agreements

h)          Transfer of Technology Agreement

i)            Confidentiality Agreements

j)           Managerial/Consultancy Agreement

k)           Patents/Trademark Agreement

l)            Contract for the securing of office space or registered office of the company proposed

m)         Regulatory permits and pre-conditions Agreements

3.           Relationship between Memorandum and Articles of Association and Pre-incorporation Contracts:

The Articles of Association of a company is the constitution, rules and regulation that guide the internal management of the company, conduct of meetings and decision making in a company. On the other hand, the Memorandum of Association defines a company, what the company is made up of and the purpose of its formation as provided by law.

Memorandums are dominant instruments while Articles of Association are subordinate to and controlled by the Memorandum. 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 the Articles must not conflict with the Memorandum.

4.           Relationship between Pre-Incorporation Agreements & Memorandum & Articles of Association

i.             Whereas the Memo and Articles are approved documents to be submitted for filing at the Corporate Affairs Commission under section 35(2)(a) of CAMA, pre-incorporation documents are not.

ii.           Whereas a company is bound by the provisions of its Memo and Articles, it is not bound by a pre-incorporation contract unless it ratifies same. This is so even when the pre-incorporation contract is incorporated into the Object Clause of the Memo. Authority for this proposition is the case of EDOKPOLOR & CO LTD. v. SEM EDO WIRE INDUSTRIES LTD (1984) 7 SC 119 where NNAMANI JSC opined that: “the object clauses are 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 contract in the Memorandum of Association 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.

iii.          Again, in the case of a conflict between the provisions of a Memo and Articles of association and a pre-incorporation contract, where the two documents are kept separate, the memo/articles prevails unless there is a ‘Supremacy Clause in the formation agreement/pre-incorporation contract making the provisions of the latter to be superior to any provision of the Memo/Articles. However, in such a case, the provisions of the formation agreement is enforceable as personal contract and not as company contract – section 41 of CAMA – since it only binds the parties to the pre-incorporation contracts. (pre-incorporation contracts are usually made by the promoter with a 3^rd party on behalf of the company before incorporation). This is because it is settled that as far as the company is concerned, the Memo and Articles are paramount and prevails over other agreements.

iv.          By section 41(1) of CAMA, Memo and Articles are superior contracts of the company, and by section 35(2)(a) of CAMA, Memo and Articles are incorporation document filed at Corporate Affairs Commission, constituting public documents obtainable and verifiable by the public. The position is further reinforced by the Court of Appeal case of NIB investment (West Africa) Ltd v. Omisore (2005) 4 NWLR (Pt. 969) 17 where it was stated that “when parties make a contract, it is within their prerogative to make their own law to which they are subject. The contract creates binding obligation on them. In case of a company, it is the Memo/Articles and CAMA that creates the rights and obligations”. 

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