2) Pre-Incorporation Matters Flashcards
Who is the promoter of an unincorporated company?
One who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.
Does not include professionals engaged in the promotion activities (e.g., incorporation and preparing prospectus).
Is not an agent or a trustee.
To be considered a promotor, there must be:
- Intention to promote the company.
- Performance of some act/s inferable to intention.
A company can be the promoter of another company.
What are the typical roles of the promoter?
Attending to formalities of incorporation
Instructing professionals to incorporate, register for tax, set up websites etc
Preparing business proposal
- Aka the prospectus (legal documents with the constitution of the company)
Raising initial finance
Finding shareholders and directors for the new company
Negotiating business contracts on behalf of the company
Inaccurate info on the proposal will expose the promoter to liability
What are the duties of the promoter?
Fiduciary relationship (from promotion to incorporation):
Duty to act in good faith
No personal interest/ secret profits
Full and frank disclosure of all interests in any transactions involving the company
What is a pre-incorporation contract?
A pre-incorporation contract is a contract entered into by a person acting on behalf of a company that does not exist.
The obstacle in common law is that one cannot act on behalf of a non-existent principal.
“It is an agreement entered into before incorporation of a company by a person who purports to act on behalf of the company, with the intention/understanding that the company will be incorporated, and will thereafter be bound by the agreement”.
The idea is that the principal (company) will come into existence and then ratify the contract (can be express ratification or ratification by conduct)
Common law options:
- The promotor can contract in his own name and transfer the rights once the company is incorporated.
- The promotor can contract for the benefit of the 3rd party (an agreement to enter into an agreement with the company once it has been incorporated)
What are the liabilities of the promoter?
Section 21: a promotor is jointly and severally liable if:
- The company is not subsequently incorporated
- If the company is incorporated but rejects any part of the pre-incorporation contract.
- Fails to ratify the contract, or does not accept the contract
Liability of promotor is discharged upon ratification of the contract by the company.
What are the entitlements of the promoter?
The promotor is entitled to the benefits of a rejected or unratified contract.
- Otherwise the company would be unjustly enriched (if it kept benefits but rejected contract)
The promotor has no legal claim for remuneration or expenses incurred before incorporation because the company could not contract.
However, in practice the promotors are usually the first directors and can approve payment for promotion services.
A promotor can also be remunerated/paid in shares.
What is stipulatio-alteri?
This is a contract for the benefit of a 3rd person – the promotor acts as a principal and not as an agent.
The 3rd party would be contractually bound to the company after incorporation, but the company would not be contractually bound to the 3rd party (this is a risk for the 3rd party).
Unless specifically stated in the contract, a promotor is not personally liable if the company rejects the PIC.
Promotor is entitled to automatically step in where company rejects PIC.
No formalities required for stipulatio-alteri:
- Does not have to be in writing, can be verbal.
Stipulatio-alteri is an alternative to Section 21: PICs
What are PICs under section 21?
Common law obstacles: no possibility of agency because the principal is non-existent.
S21 provides legislative solution:
- Creates statutory agency
- If you follow certain requirements, you can be an agent for a non-existent company
Puts promotors, acting as agents, in a position to contract on behalf of the company even though it’s non-existent.
What are the requirements for PICs under section 21?
PIC must be in writing
Entered into before the company is incorporated (i.e. pre-incorporation contract).
Between 3rd party and a promotor (acting as agent on behalf of the company).
Intention for the company to be bound once it is incorporated.
Company is only bound after ratification.
What are the principles relating to ratification of PICs under section 21?
Must ratify within 3 months of incorporation.
May reject part or whole of the agreement.
- With stipulatio-alteri this is not the case as they have to accept/reject the whole contract
If company fails to ratify/reject within 3 months:
- Company will be deemed to have ratified.
There can be tacit ratification (2 elements):
- Some sort of conduct which implies compliance with the contract, EG: accepting some of the benefit.
- Company is aware of the terms of the contract (harder to prove).
Once ratified (or deemed to be), company is bound by the PIC.
What is the liability to promoters under section 21?
If the company is not later incorporated, the promotor is jointly and severally liable with any other promotor.
With stipulatio-alteri, the promotor does not have liability (3rd party is at risk).
If company rejects whole/part of the agreement, promotor is jointly and severally liable.
If company rejects part of agreement, promotor liable for that part.
Liability is discharged upon ratification/deemed ratification.
In a case where the company rejects a contract and the enters the same contract with a 3rd party (i.e. redrafts the contract with different terms):
- The promotor would not be liable – it would discharge the liability
