Chapter 4 promoters 1. Nature of promoters Before a company be formed, there must be some person who have an intention to form a company and who take the necessary steps to carry that intention into operation. Such persons are called promoters. It is them who conceive the idea of forming the company, and it is them who take the necessary steps to incorporate it by registration, provide it with share and loan capital and acquire the business or property which it is to manage.

Persons who are acting in a purely professional capacity who have been instructed by a promoter, for example, a lawyer or accountant, do not become promoters themselves. However, if a person acts beyond his professional capacity and helps in any way the formation of the company; he will become a promoter. A promoter may become a natural or artificial legal person such as registered companies.

2. Functions of promoters Decide the name and the kind of the company and ascertain that it will be accepted by the registrar of the companies; Gets the memorandum and articles prepared, executed and registered; Gets together the subscribers to the memorandum; Finds the bankers, brokers and legal advisors; Find the first directors; Settles the terms of preliminary contracts with vendors and agreement with underwrites; and

Makes arrangement for preparation, advertisement and circulation of the prospectus and placement of the capital. 3. legal status of promoter A promoter is neither an agent of, nor a trustee for, the company because there is no principle at that time and a beneficiary in existence. A promoter stand in a fiduciary position to the company which he promoters.

From the fiduciary position of promoters, the following duties will arise: A promoter cannot be allowed to make any secret profits. If any secret profit is made in violation of this rule, the company may, on discovering it, compel the promoter to account for and surrender such profit; The promoter is not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed; and The promoter must not make an unfair or unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud.

4. Duty of Promoter as regards to Prospectus The promoter has to ensure that the prospectus contains the necessary particulars and there is no any untrue and misleading statement or does not omit any material facts. Failure of observing to this obligation may result for becoming the promoter liable to any person who subscribes for any share or debentures on the faith of the prospectus for any loss or damage sustained by reason of any untrue statement included in it.

5. Remuneration of promoters A promoter has no right to get compensation from the company for his services in promoting the company unless there is a contract to that effect. A promoter may take his remuneration for his services in one of the following ways: He may sell his own property at a profit to the company for cash or fully paid shares provided he makes a disclosure to this effect; He may given an option to buy a certain number of shares in the company; He may take commission on the shares sold; and He may paid a lump sum by the company.

6. Pre-incorporation or preliminary contract Preliminary contracts are contracts which are made on behalf of a company yet to be incorporated. In principle, the company cannot be held liable for these contracts for the following reasons: The company cannot ratify preliminary contracts as the company did not exist and hence cannot be held liable for preliminary contracts.

In case of personal liability, the promoters will continue to be liable until the company adopts the contracts. The company may adopt these contracts by entering into new contracts with the third parties on the same terms as were embodied in the original contract.