promotion of companies and pre-incorporation contracts

A promoter is anyone who undertakes to take part in forming a company with reference to a given project and to set it going and takes the necessary steps to accomplish that purpose or undertakes raising capital for it provided that a person acting in a professional capacity in the formation of the company is not deemed to be a promoter. Section 85 CAMA, 2020.

No. Mr. Kodilinye Bale is not an agent of Malcolm & Sons. This is because Mr. Kodilinye Bale is a promoter of the company Malcolm & Sons and the relationship that exists between a company and a promoter is not that of agency or trust. Garba v. Sheba International (Nig.) Ltd. In an agency relationship, there must be in fact, a known principal in existence and the act of the agent binds the principal.

A person becomes a promoter from the moment he begins to take part in forming a company or in set it going.

The duties of a promoter are as follows:

• a. Duty to account to the company the profits made in the course of promotion of the company.
• b. Duty to be honest in all dealings entered into on behalf of the company.
• c. Duty not use confidential information obtained in the course of promotion of the company for personal use.
• d. Fiduciary duty of utmost good faith. A promoter must not make secret profits.
• e. Duty to disclose any conflict of interest with the company.
• f. Duty not to expose the company to loss.

The following are the liabilities of a promoter:

• a. A company can sue a promoter for secret profits made in the course of promotion of the company.
• b. A company can bring an action against a promoter to render account of monies received on behalf of the company in the course of promotion.
• c. A company can bring an action for damages against a promoter for use of confidential information obtained by the promoter in the course of the promotion of the company.
• d. 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.
• e. Refusal to ratify the pre-incorporation contract.

The position of the law is that a promoter is not entitled to remuneration, unless there is a clause in the Articles of Association authorizing the directors to pay the promoter. In the absence of such clause, a promoter is not entitled to remuneration.

Pre-incorporation contract is necessary in the following cases:

• a. Payment of promoter’s expenses and remuneration when needed.
• b. Joint ventures business between Nigerian(s) and alien.
• c. A new company incorporated to take over existing business or property to be owned or used by new company.
• d. Partnership business to be converted to incorporated company.
• e. Promoters/directors’ service contracts is to be executed before the company is formed.
• f. Protection of technical/confidential information used for promotion activities is highly desired.
• g. Regulation permits and other steps are preconditions before the company can be incorporated.

A 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 person shall be personally bound by the contract or other transaction and entitled to the benefit. Section 96(2) CAMA, 2020.

The persons who can ratify the contracts entered into by Dan Kale are:

• a. Board of directors of the company independent of the Promoter
• b. Members of the company.
• c. 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.

The various types of pre-incorporation contracts are:

• 1. Joint Venture Agreement especially between Nigerians and aliens.
• 2. Shareholders’ Agreements.
• 3. Formation Agreement
• 4. Contract for Payment of Promoters’ expenses.
• 5. Directors’ service contract (appointment of the Managing Director).
• 6. Contract Agreement for the acquisition of business or property (Takeover agreement).
• 7. Contract for Conversion of partnership to incorporated companies.
• 8. Confidentiality/non-disclosure agreements

• 9. Employment contracts
     

• 10. Procurement contract
• 11. Technology transfer agreement

• 12. Loan agreement
      

• 13. Deed of assignment
• 14. Partnership Agreements
• 15. Commercial Memorandum of Understanding

The features of a pre-incorporation contracts are as follows:

• a. Pre-incorporation contracts are made prior to the existence and incorporation of the company.
• b. Pre-incorporation contracts are not binding on the company until they are ratified or adopted by the company.
• c. Pre-incorporation contracts are binding on the promoter and not the company except in cases where the company has ratified the contract.
• d. Pre-incorporation contracts are usually made by a promoter with a third party on behalf of the company before incorporation.
• e. Promoters are personally answerable under pre-incorporation contracts.

The contents of a shareholder’s agreements are:

• 1. Directors and Chairman
• 2. Indemnities and Guarantees
• 3. Dividend
• 4. Consideration.
• 5. Completion.
• 6. Confidentiality.
• 7. Accounting Reference Date.
• 8. Management Decisions.
• 9. Material Breach.
• 10. Parties.
• 11. Secretary
• 12. Date.
• 13. Recitals.
• 14. Shareholders’ Consent.
• 15. Interpretation/Definition
• 16. Time for winding up
• 17. Further Financing.
• 18. Options available where there is deadlock.
• 19. Registered office
• 20. Business of company
• 21. Auditors and Bankers.
• 22. Restrictive Covenants.
• 23. Transfer of Shares.
• 24. Warranties.
• 25. Official Policies.

The contents of a Joint Venture Agreement are as follows:

• 1. Parties.
• 2. Date.

• 3. Place of the Business
     

• 4. Governing Law.
• 5. Nature of the Business.
• 6. Capital Contribution.
• 7. Composition of the Board.
• 8. Supremacy Clause.
• 9. Dissolution Clause.
• 10. Duration.
• 11. Joint Venture Sharing Ratio.

• 12. Settlement of disputes/dispute resolution.