Promotion and formation of a company in Tanzania.

PROMOTION AND FORMATION OF A COMPANY

Promotion: refers to the entire process by which a company is brought into existence. It starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. The persons who conceive the idea of forming a company and invest the initial funds are known as the promoters of the company. These are persons who do the necessary preliminary work incidental to the formation of a company. Chronologically, the first persons who control Company’s affairs are its promoters.

Promoter not a term of law, but of business, usually summing up in a single word a number of business operations familiar to the commercial world, by which a company is generally brought into existence. Whaley Bridge Calico printing Co. v Green & Smith (1880) 5 QBD.

The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital. However, a person who merely acts in his professional capacity on behalf of the promoter (e.g. lawyer, Accountants, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter.

Legal Status

As to exact legal status of a promoter, the statutory provisions are silent. His legal status is incapable of precise statement but Lindely L.J describe his position in Lydeny & Wigpool Iron Co vs. Bird (1886) 33 Ch.D as follows

“Although not an agent for the company nor trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very popularly extended to meet such cases.”

Thus, it appears that promoter is neither agent nor trustee of the company under incorporation but fiduciary duties have been imposed in him Erlanger v New Simbrero Phosphate (1878) 3 AC 1218. From the moment the promoter acts with the company in mind, a promoter stands in the fiduciary position towards the company. 

The promoters’ fiduciary duties may be summed up as follows

1. He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sells the property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members . He must also make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

2. He must not make unfair use of position and must take care to avoid anything which has appearance of undue influence or fraud

3. The promoter, once he has begun to act in the promotion of the company, must give the benefit of any negotiations or contracts into which he enters in respect of the company. Thus where he purchases some property he cannot rightfully sell the property to the company at a price higher than he gave for it. If he does so the company may upon discovering it, rescind the contract and recover purchase price.

Remedies available to a company against the promoters: -

1. Rescind or cancel the contract made and if he has made profit on any related transaction, that profit may also be recovered

2. Retain the property and paying no more for it than what the promoter has paid for.

3. If these are not appropriate (e.g. cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are: -

1. The company may decide to pay some remuneration for the services rendered.

2. The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members.

3. The promoter may sell his property for fully paid shares in the company after making full disclosures.

4. The promoter may be given an option to buy further shares in the company.

5. The promoter may be given commission on shares sold.

6. The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement.

Pre-Incorporation Contracts

The legal position is that two consenting parties are necessary to a contract, whereas company, before incorporation, is not an entity.  Kelmer v Baxter (1866) L.R. 174). The promoters cannot therefore, act as agent for a company which has not yet come into existence. As such the company is not liable for the acts of the promoters done before incorporation. A pre-incorporation contract purported to be made by a company which does not exist is a nullity. As such the company when it comes into existence can neither sue nor be sued on that contract.

Position of promoters:

• Company is not bound by pre-incorporation contracts

• Company cannot enforce pre-incorporation contract

• Promoters remain personally liable.  

Can a company ratify/adopt a pre-incorporation contact after it comes into existence?

• Company cannot ratify a contract entered into by the promoters on its behalf before incorporation. The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of contract by agent.

• It cannot by adoption or ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence.

Pre-incorporation contract - solutions to personal liability

The following methods may be used to ensure that the company becomes, after incorporation, an effective party to a pre – incorporation contract:

a. A draft agreement may be settled with the other party so that when the company is formed it enters into the draft agreement thus giving it contractual force when signed also by the other party. In order to ensure that the company does enter into the contract, the memorandum or articles of a new company can be drafted to include a provision binding the directors to adopt it. It will be noted here that the promoter here is not liable because there is no contract with him.

b. The promoter can make the contract himself and be bound by it, provided the other party agrees that the promoter shall be released from his obligations under the contract if and when the company enters into a new, but as regards terms, identical contract with the other party after incorporation. This is really recommended for those cases – which are many – where the promoter(s) will be in effective control of the company after incorporation and can ensure the making of a new contract .

c. Where the promoter is anxious that the company should acquire property which he does not himself own, he may take an option to purchase for, say three months. If the company later wishes to take the property, the promoter may assign the benefit of the option to the company or enforce it for the benefit of the company. If the company does not take over the property, the promoter is not liable to do so but he may loose any money which he paid for option.

d. Section 40 (1) of the companies Act states that the promoter is personally liable ‘subject to any agreement to the contrary’. Thus the promoter could agree when making of a contract that he should not be personally liable on it, even if the company after incorporation do not make a new contract.

e. Formation of companies

Currently in Tanzania companies are formed under the companies Act 2002, Cap 212. Those forming companies are called promoters. The main tasks of the promoters are to prepare various documents, and lodge these, with the necessary fees, with the Registrar of Companies. 

Forming a company under Cap 212 one is expected to follow the following steps: 

• Name: The first thing the promoter should do is to think of a name in light of section 30(2) of the Cap 212. The promoter can make a written application to the Registrar for reservation of a name. Such reservation will remain in force for a period of thirty days or such longer period not exceeding sixty days, as the Registrar may, for special reasons allow. (s. 30(1) of Cap 212

• If the proposed name of the company is approved then the following document duly stamped together with the necessary fees are to be filed with the registrar:

1) The memorandum of association duly signed by subscribers. This in effect, defines the company and what it can do. It is the requirement under section 5 (1) of the Act that there should be at least one witness who must attest the signature by subscribers to the memorandum.

2) The articles of Association, if any, signed by the subscribers to the memorandum of Association. These usually regulate the internal management, and the rights and duties of shareholders vis-à-vis the company and each other. They deal with matters such as transfer of shares, meetings, voting and other rights of shareholders, dividends, and directors’ powers of management. A public or private limited company by shares need not, in fact, submit any articles. If it does so, it will be taken to have adopted Table A, a model articles in regulations made under the companies Act.

3) A statement in prescribed form containing the names and address (or registered office) of:-

(a) the person or persons being the first director or directors  of the company

(b) the person or persons being the first secretary or joint secretaries of the company; and in the case of a first director or directors, the particulars of any other  directorship held during the five years preceding the date on which the statement is delivered to the Registrar.

4) A statement specifying the intended address of the company’s registered office on incorporation. 

5) A statutory declaration, in pursuant to section 16(2) of Cap 212 by the advocate of the High Court or by the person named in the articles as a director or the company secretary declaring that the requirements of the ordinance have been complied with, and the registrar may accept such declaration as sufficient evidence of compliance.

If all the requirements in respect to registration and matters incidental to it have been satisfied, the registrar issues a certificate of incorporation which is the company’s birth certificate .