The Law Months, Part II: Promoter’s Fiduciary Duties

What duties are owed by a promoter of a company to the company?


This question is about promoters fiduciary duties. In this essay I will consider relevant case law to discuss what duties are owed to the company by promoters..

There is no statutory definition of a promoter, however there are two well established common law definitions. Lord Cockburn put forward that a promoter is someone who “undertakes to form a company with reference to a given project, and to set it going…takes the necessary steps to accomplish that purpose” (Twycross v Grant). Lord Bowen said “the term promoter is a term not of law but of business, summing up [the way] by which a company is generally brought into existence” (Whaley Bridge v Green). However, a professional advisor is not deemed to be a promoter solely because of his actions in a professional capacity (Re Great Wheel Polgooth).

A promoter has fiduciary duties that it owes to the company (similar to directors duties). These duties are imposed on promoters due to the large amount of power promoters have – “they have in their hands the creation and moulding of the company” (Lord Cairns, Erlanger v New Sombrero Phosphate). A fiduciary duty is essentially a duty to act in good faith, trust and confidence in matters involving the company. These duties include; the duty not to make a secret profit, to declare any interest in a proposed transaction involving the company, and not to defraud the company.

If the company enters into a transaction in which the promoter was interested, then it is voidable if it was not properly approved by the company after full disclosure. The court can order for the transaction to be rescinded (Erlanger v New Sombrero Phosphate). However if there is no independent board to make a full disclosure to, then it is considered sufficient enough to make the disclosure to the original shareholders, if they are the only shareholders (Lagunas Nitrate v Lagunas Syndicate).

If a company enters into a transaction in which its promoter has an interest, the company can recover from the promoter any profit made on the transaction which was not disclosed to and approved by the company – ‘secret profits’. In the event of this breach of duty, the promoters are joint and severally liable (Gluckstein v Barnes).

In conclusion, the duties owed by promoters of a company to the company are; the duty not to make a secret profit, to declare any interest in a proposed transaction involving the company, and not to defraud the company. These duties are essentially one in the same, and therefore it is often the case where a breach of one duty results in a breach of all these fiduciary duties e.g. making a secret profit defrauds the company by not disclosing the promoters full interest in a transaction.

Click here for a downloadable copy of explanatory notes for each of the cases used in this essay.

Table of Cases

Erlanger v New Sombrero Phosphate Co. [1878] 3 App Cas 1218
Gluckstein v Barnes [1900] AC 240
Lagunas Nitrate Co. v Lagunas Syndicate [1899] 2 Ch 392 (CA)
Re Great Wheel Polgooth Co Ltd (1883) 53 LJ Ch 42
Twycross v Grant (1877) 2 CPD 469
Whaley Bridge  v Green (1879) 5 QBD 109

Featured image courtesy of http://www.businessnewsdaily.com/images/i/000/001/954/original/megaphone-art.jpg?1332974604

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