By Dr AbdelGadir Warsama, Legal Counsel
Promotors (or founders) are those who bring a company \ corporation into being. Thus, the promotion is a vital activity in booming business ventures in a free enterprise system. The promotor is the person who has the idea, finds the idea, of a business and to look for other people who are willing to finance or join forces, by buying shares \ stocks and or to lend money. In most cases, there are many promotors (founders) to initiate the start of the business activity.
The relation of promotors with the company, shareholders and with whom they contract if we could say, is a unique relation. We conclude this, as promotors are not agents to the company prior to its incorporation because the company is not yet in existence. Moreover, they are not agents for the persons who are interested in the venture because the promotors were not appointed by them and are not under their control.
Nevertheless, the promotors owe a fiduciary duty to the company and to the persons interested in the business. This includes the duty of full disclosure, of good faith and absoluter honesty to the company and to the shareholders. Thus, it would be a breach of duty to use money received on stock subscriptions to pay the expenses of forming the company unless they disclose their intention to the concerned. Everything shall be in full disclosure and complete transparency to all parties. Clean hands and clean minds are required coupled with genuine intention. Otherwise, there is accountability and liability.
A promotor often takes an option on property or makes an outright purchase on behalf of the company. If there is misrepresentation in the price paid or to be paid, the company may recover the “secret profit” made by the promotor. However, if the promotor makes a full disclosure of the expected profit to the “management” in-charge, the company can’t recover. Of course, if the management in charge is under the control of the promotor, the company could rescind the contract or recover damages for breach of the fiduciary duty.
Promotors are generally held liable on contracts they make on behalf of the company that are not yet formed. If the company is never formed or if it fails to adopt the promotors preincorporation agreement, the promotor is liable. This is based on the agency law, where an agent who makes a contract for a nonexistent principal is personally liable on it. If there is more than one promotor, they are all liable under a joint enterprise theory. Promotors sometimes, try to escape this potential liability by having the third party to agree, when the preincorporation contract is under cooking, that the promotor not to be liable. The disadvantage of this strategy, however, is that neither the promotor nor the company can force the third party to perform such a contract. This results from the rule for bilateral contracts that if one party is not bound, neither is the other because such contracts lack mutuality.
After the company comes into existence, it may agree to assume liability for the promotors preincorporation contracts. Such an agreement between the promotor and the company, in and of itself, is not sufficient to relieve the promotor from all liability on the contracts. This is because the third party contracted directly with the promotor. The promotor is released from liability on the preincorporation contracts only if the company, the promotor and the third party all agree that the company will be substituted for the promotor. This arrangement will take the role of an agreement under the theory of novation.
We are highlighting such points because many persons take the role of the promotor \ founder, without being aware of such burdens and legal liabilities. And most of them, take things at ease and mix their wallet with that of the company\ others. And form such attitude there are uncountable disputes to the extent, sometimes, of hindering the incorporation of the company and stopping the potential good venture. All are advised to look carefully in the path, understand the exact role and to keep away from suspicious actions. If you are not sure nor comfortable, keep far away from such ventures and stay aloof.