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PROMOTERS
A promoter is the person who conceives the idea of forming a company and who undertakes,
does and goes through all the formalities and incidental preliminaries of incorporating a
company. Promoter help to incorporate a company, provide it with a share and loan capital and
acquire business or properly which it is to manage.
In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD 109s Bowen
LS stated a promoter is not a term of law but of business, usually summing up in a single word
number of business operations familiar to the commercial world by which a company is
generally brought in existence.
Lord Blackburn stated that it is a short and convenience way of designating those who set in
motion the machinery by which the act enables them to create an incorporated company.
Justice Cockburn defines a promoter as one who undertakes to form a company with reference
to a given project and to set it going and who undertakes the necessary steps to accomplish that
purpose.
Section 45 (5) of the companys act (cap 486) excludes persons acting on professional capacity
from being called promoters.
Section 45 (5) (a) provides that promoter means a promoter who has party to the separation of
the prospectus; or the portion thereof containing the untrue statement, but does not include any
person acting in a professional capacity for persons engaged in the formation of the company. If
any such person acts beyond the scope of his professional duty and helps in any way in the
formation of a company or in preparations for the management of its affairs, he will become a
promoter (great wheal polgooth company Ltd; Re (1883) 53 LS ch. 42).
N/B however a registered company may also act as a promoter.

Function of the promoters
The following are the functions of the promoters: -
1. Decide on the company name and ascertain that it is accepted by the registrar.
2. Prepare memorandum and Articles of Association.
3. Nomination of directors, Bankers, auditors and secretary and the registered office of
the company.
4. Printing memorandum and articles of association.
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5. Registration of the company.
6. Issue of prospectus.
Legal status of promoter
In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position of a promoter
as although not an agent for the company, nor a trustee for it before its formation, the old
familiar principles of the law of agency and its trusteeship have been extended and very
popularly extended to meet such cases.
A promoter is thus not an agent nor a trustee of the company but certain fiduciary duties have
been imposed on him under the companys Act.

Fiduciary position of a promoter
In Er Langer vs new Sombrero Phosphate company 1878 3A Ac 1218 Lord Cais observed that
promoters in equity cannot find the company by any contract with themselves as promoters
without fully disclosing to the company all material facts which the company ought to know.
Promoters are in a fiduciary position: -
a) Not to make profit at the expense of the company. Cape Breton company Re.(1885) 29
Ch.D 795
b) To give benefit of negotiation to the company.
Thus where the promoter purchases an item he cant rightfully sell that item at a higher price that
he gave in for. (Erlanger vs. new Sombrero phosphate company (1878) AC 1218). The right of
rescission is lost if the parties cannot be relegated to their original position this happens: -
(i) Where the character of the property has been altered.
(ii) Where flird parties have acquired valuable rights.
Where a promoter sells or wishes to sell his own property to the company he should: -
(i) See that there is a Board of independent persons appointed as directors of the new
company.
(ii) Disclose his interest in the property to the intended members or to the public by
means of a prospectus. He must also disclose the profit he is making out of the deal.
c) To make full disclosure of interest of profit. Promoters need to fully disclose his profit and
his personal interest in a transaction. A case in support of this is the Liluck vs. Barress AC 240.
in this case a syndicate bought property worth $140000 property at $120000, which they later
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sold to a company which they formed at $180000. A prospectus was issued disclosing a profit of
$ 40000. it was held that the $ 20000 was a secret profit and promoters are sound to refund the
company. Lady well winning company Ltd B Brookers (1887) 35 ch. D400 in the above case
five persons bought a nine for $5000 on 1/2/1873 and sold it to a company on 4/4/1873 for
$18000, making a profit of $13000.
It was held that the vendors were not promoters when they bought the mine and they were
therefore under no fiduciary duty to disclose their interest and account for the profit they had
made.
d) Not to make unfair use of position. He must avoid seeking. He must guard against taking
advantage of position or seek under influence or participate in fraud.

Duty of promoters as regards prospectus
Promoters must ensure that a prospectus is issued (public company) and the prospectus.
(i) Contains necessary particulars
(ii) Does not contain an untrue or misleading statements or does not omit any material
facts.
Section 39 of the act states that a prospectus shall be dated; and that date unless the contrary is
proved be taken as the date of publication of the prospectus.
Section 40 provides that a prospectus issued shall state the matters specified in part 1 of the third
schedule. Chapter 7 specifies the form and contents of a prospectus.
A prospectus must be truthful and promoters can be held responsible (liable) for any
misstatement in the prospectus. If a prospectus is found untruthful: -
a) Allotment of shares may be set a side in the case of fraudulent misrepresentation.
b) Promoters may be sued for damages.
c) They may be sued for compensation for misrepresentation.
d) They may be sued for damages by shareholders who have suffered by reason of their non-
compliance with the statutory requirements as with the contents of prospectus.
e) They may become liable for criminal proceedings.
The companys act provides both criminal and civil liability for both civil and criminal liability
for any untrue statement contained in the prospectus.
For civil liability 3. 45 (1) provide.
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Section 45 (1) provides that the following persons shall be liable to pay compensation to all
persons who subscribe for any untrue statement included therein.
a) Every person who is a director at the time of issue of the prospectus.
b) Every person who has agreed to be named as a director in the prospectus or any one who
has agreed to be a director immediately or after an interval.
c) Every person being a promoter of the company.
d) Every person who has authorized issue of the prospectus. However an expert can only be
held responsible for an untrue statement made by him. Section 45 (2) provides defences to
liabilities under section 45 (1) such persons shall not be liable if he proves.
a) He withdrew from being a director before issue of the prospectus and it was issued without
his authority or consent.
b) Prospectus was issued without his knowledge or a consent and on becoming aware he gave
reasonable public notice that it was issued without his knowledge.
c) That after the issue of the prospectus and before allotment there under, then on becoming
aware of any untrue statement there in withdrew his consent there to and gave reasonable
notice of the withdrawal and reason thereto that: -
(i) Of every untrue statement not made by an expert he had reasonable ground to believe and
did up to the time of allotment believe that the statement was true.
(ii) That he relieved on an expert and untrue statement is a fair representation of the expert
report and he had reasonable ground to believe that the person making the statement was
competent to make it.
(iii) As regards every untrue statement purporting to be a statement made by an official person
or contained in what purports to be a copy of an extract from the document.
Section 46 (1) of the Act a prospectus may attract criminal liability.
An untrue statement in prospectus may lead to imprisonment for a term not exceeding two
years or to a time not exceeding ten thousand shillings or both unless he proves either that the
statement was immaterial or that he had reasonable ground to believe and did up to the time of
issue, believe that the statement was true.
Criminal proceedings are only made where there is willful untrue statement and not otherwise.


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Remuneration of promoters
A promoter has not right for compensation unless there is a contract. In Clintons claim (1908) 2
ch. 515 promoters were unable to recover fees and stamp duty incidental to formation of the
company as there was. A promoter takes remuneration for his services in one of the following
ways: -
a) Selling his own property to the company at a profit provided there in full disclosure.
b) He may be given an option to buy shares at par.
c) He may take commission on the shares sold.
d) He may be paid a Lumpson by the company.
Article 80 table A provides that directors can pay all expenses incurred in promoting and
registering the company.

Pre-incorporation or preliminary contracts
These are contracts entered by promoters to acquire properly or some right for the company. In
Kelner vs. Baxter (1866) LR Z. Kelner agreed to sell a hotel to Baxter who was acting agent for
a company which was about to be formed. It was held that Baxter was personally liable on the
contract as the company was not in existence after its incorporation.
The company is not liable for the Act of the promoters done before incorporation. In Newborne
vs.Sensolid Ltd 1954 1Q B45 Newborne a director, entered into a contract in the name of a
company before its incorporation. He signed his name a contract on behalf of the company. It
was held that there was no contract.

Position of promoters as regards pre-incorporation contracts
1. Company is not bound by pre-incorporation contract even where it takes the benefit of
the contract entered into on its behalf.
A case law in this is in English and colonial produce company Ltd Re (1906) 2 ch 435. A
solicitor prepared the memorandum and articles of a company and paid necessary taxes and other
expenses to obtain the registration of the company. He did this on the instructions of promoters.
It was held that the company was not liable to pay the solicitors costs although it had taken
benefit of his work.
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2. The company cannot enforce pre-incorporation contract. A case law in this point is
Natal Land and colonization company Ltd vs. Pauline Colliery and development syndicate
Ltd Ac 120. a company cant enforce a contract made before its incorporation.
3. Promoters are personally liable for contracts made on behalf of the company before the
companys incorporation.

Ratification of a pre-incorporation contract.
A company cannot ratify a contract entered into by promoters before incorporation. Where
contract is entered into by with both parties aware of the non-existence of the company, the
contract isa deserved to have been entered into personally and promoters are liable.
To validate the pre-incorporation contracts a new contract has to be entered into with the other
party (in which case promoters cease to be liable)
For promoters acting on behalf of the company about to be formed it is safe (advisable) to
provide in the contract that: -
a) If the company makes a fresh contract in terms of the incorporation contract, the liability of
the promoters shall come to an end.
b) If the company does not make a fresh contract within a limited time either of the parties may
rescind the contract.