Promoters and pre-incorporation contracts (Fiduciary duties of promoters…
Promoters and pre-incorporation contracts
Fiduciary duties of promoters
Erlanger V New Sombrero Phosphate Co (1878)
Promoters purchased a mine for 55k then formed a company to which they sold for 100k. The new board had the agreement rescinded
The promoters were under a fiduciary duty to the company and were under an obligation to disclose the material facts to an independent board.
Gluckstein V Barnes (1900)
In the absence of independent directors disclosure may be made to the original shareholders, but not if they are not truly independent and the scheme is designed to defraud the public.
Profits can be recouped even if rescission is not made (Gluckstein V Barnes)
Pre incorporation contracts
Common law position
Kelner V Baxter (1866)
A company cannot be bound in contract. In terms of agency an agent cannot bind a non-existent principle. Held that the agreement was one which was made with the promoters personally and could not be ratified by the company.
Promoters of a hotel company purchased wine. The wine was consumed and the company went into liquidation. The promoters as agents were sued on the contract and they argued that the contract had passed by ratification to the company.
S.51 CA 2006
Phongram Ltd V Lane (1982)
Lord Denning held that the phrase 'subject to any agreement to the contrary' meant that where the liability was expressly excluded by the promoter they would avoid persona liability on the contract.
Braymist Ltd V Wise Finance Co Ltd (2002)
Firm of solicitors acting as agents of a company to be incroporated agreed to sell a property to developers. The developers subsequently changed their minds. The issue was whether the promoter of a company could enforce a pre-incorporation contract under s.51.
Held that the solicitors were entitled to rely upon s51 to enforce the agreement.