LAWS2301 Study Guide - Final Guide: Telstra, Civil Penalty, Whitworths
Promoter’s Duties
Relationship between Company and Promoter
A promoter is someone who is:
•actively involved in formation of a company (arranges for BOD)
•passive S/H with expectation that she will receive profits: Tracy v Mandalay
(1953) 88 CLR 215
oA company RSC owned land which was to be sold at a huge profit to a new
company Mandalay.
oThe general public bought shares in Mandalay and the money was used to
purchase the land and shares from RSC and its shareholders respectively.
Held: The shareholders of RSC were promoters of Mandalay and owed
duties to Mandalay.
Promoters may form large companies, that seek stock exchange listing, or small
pty companies that are formed to purchase a business previously run by a sole
trader. Salomon v A Salomon
The common law imposes fiduciary duties on persons involved in the setting up
or floating of companies
A person who enters into a contract on behalf of a co before it is registered is
sometimes referred to as a promoter
NB: Lawyers or accts who set up company are not promoters – ppl who are doing
professional work are not promoters
Duties of Promoters
•A promoter has a fiduciary relationship with the co.
•Duties are owed to the Company, NOT shareholders.
•These f duties also apply to directors in relation to their companies, ie dirs owe
duties to the co
Duties are:
•No secret profit
–Promotors have a duty to disclose personal profits that may arise from
their position
•Duty of disclosure
–Promotors must fully disclose their interests in contacts with the co they
are promoting
–Non disclosure is a breach of duty towards the co and this is so
whether or not the promoter was acting honestly or whether or not a profit
was made
•No conflict of interest - cannot think about yourself – must think about the co
•Duty not to disclose confidential info
–Promoter must avoid taking up a contract or opportunity that in equity
belongs to the co
find more resources at oneclass.com
find more resources at oneclass.com
–Eg purchasing property that ought to have been acquired by the co.
–Breach also occurs if, during promotion, promoters buy property with
the intention of selling it to the co at a profit
Duty of Disclosure
Successful case of Rescission:
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 – think of Re
Darby
•Syndicate (group of ppl) purchased island which was supposed to contain
minerals. Company was formed to purchase that land. Investment not profitable.
Syndicate knew the island was worthless but the new co didn't. New Board of
Directors of the co formed sued the syndicate.
Held:
•Contract rescinded. Result of rescission is that the promoter must return any
consideration received and the co must return the property
•There must be an independent Board and full disclosure of promoters’ interest
Undisclosed profits
Successful case of damages but not rescission:
Gluckstein v Barnes [1900] AC 240
•Gluckstein was a member of a Syndicate. The Syndicate bought the mortgage
over the property at a discount of 20,000 pounds. The property itself was
purchased for 140,000 pounds subject to the mortgage. Syndicate formed the
company, Olympia, and Olympia bought the property from syndicate for 180,000
pounds. Full value was paid for the mortgage. Profit of 40,000 pounds was
disclosed in Prospectus (a doc) but the discount of 20,000 pounds (on the
mortgage) was not disclosed.
Held:
•The liquidator of Olympia was able to recover the 20,000 secret profit. Promoters
failed to disclose all profits.
•Here the secret profit is separate from the contract price. The court ordered that
the co could recover the secret profit even though it chose not to rescind the
contract.
•Promoter should make disclosure to an independent board of directors. Its
insufficient for a promoter merely to disclose to directors who are also involved in
the venture
•Disclosure to Board comprised of other members of the syndicate was not
sufficient. Disclosure must be to independent board or to ultimate shareholders of
company at the GM.
•Also, the liability of promoters is joint and several. A promoter who is found liable
may recover contributions from the other promoters
find more resources at oneclass.com
find more resources at oneclass.com
Common Law Remedies
Remedies for breach of a promoter’s fiduciary duty are available to the co and not
its shareholders
Rescission - Co may rescind the contract
•Right to rescind is unavailable if there is:
•a delay in applying for rescission,
•affirmation (adoption) of contract,
•innocent third party rights involved,
•inability to restore parties to their original position
•If the misrepresentation is fraudulent as opposed to innocent, the co may
obtain damages as well as rescind the contract. Re Leeds and Hanley
Theatres of Varieties Ltd
Account of profits
Constructive trust - where promoter during the course of promotion, purchases
property for personal gain instead of for the company.
May also be liable in damages in the tort of deceit or for negligent misstatement.
Statutory Remedies
•Recovery by liquidator as voidable transactions s 588FH, s 588FE - related entity
•Recovery for false statements in disclosure document. (Applies to public
companies)
•Promoter must disclose any property acquired by company and any offer of
securities to company: s711(2)
•Promoter must disclose any fees or benefits received: s711(3)
•Promoter must not offer securities if there are misleading statements in offer
document: s728
•Person who suffers loss may seek compensation: S729
Pre-registration Contracts
Outsider vs Company OR person who signed.
Part 2B.3 covers contracts before registration. This part replaces Common Law:
s133 – don’t need to know this section
s 131 only applies to contracts made before a co is registers.
•If a person enters into a contract on behalf of a company before it is
registered, the company becomes bound by the contract and entitled to its
benefit, if the company is registered and ratifies the contract within the time
agreed* to by the parties to the contract; or within a reasonable time after the
contract is entered into.
•Ie a person may enforce a pre-registration contract against a co, if it ratifies
the contract after it is registered.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Held: the shareholders of rsc were promoters of mandalay and owed duties to mandalay. Promoters may form large companies, that seek stock exchange listing, or small pty companies that are formed to purchase a business previously run by a sole trader. The common law imposes fiduciary duties on persons involved in the setting up or floating of companies. A person who enters into a contract on behalf of a co before it is registered is sometimes referred to as a promoter. Nb: lawyers or accts who set up company are not promoters ppl who are doing professional work are not promoters. Promotors have a duty to disclose personal profits that may arise from their position: duty of disclosure. Promotors must fully disclose their interests in contacts with the co they are promoting. Promoter must avoid taking up a contract or opportunity that in equity belongs to the co. Eg purchasing property that ought to have been acquired by the co.
