A corporate promoter (also "projector") is a person who solicits people to invest money into a corporation, usually when it is being formed. An investment banker, an underwriter, or a stock promoter may, wholly or in part, perform the role of a promoter. Promoters generally owe a duty of utmost good faith, so as to not mislead any potential investors, and disclose all material facts about the company's business.
- a promoter is a person who does the preliminary work incidental to the formation of company.
Generally, a promoter is in a fiduciary relationship with the corporation and the shareholders. The promoter must avoid conflicts of interests and exercise reasonable care in performing his duties. He must refrain from self-dealing or other types of abuse to take advantage of his position as a promoter.
A promoter could be a shareholder in the corporation he promotes. If the promoter is the only shareholder, the corporation may, in compliance with the rule of the United States Securities and Exchange Commission (SEC), need to disclose the information prior to selling shares to the public.
A conflict of interests puts a promoter in a situation where he might breach fiduciary responsibility. Self-dealing occurs, for example, when a promoter unfairly profits from the conduct of business with the corporation by charging higher prices for the goods he sells to the corporation than it would otherwise pay.
The fiduciary duties of a promoter are mentioned below:
- 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 selling the concerned 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 make full disclosure to the company of all relevant facts, including any profit made by him in transactions with the company.
In case the promoter fails to disclose the profits, made by him in the course of promotion or he 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.
Types of Promoters
Promoters may be classified into the following types.
They are experts who specialise in company promotion.They float the company and hand it over to the shareholders or their representatives.Promotion is their main profession or occupation .
These promoters take interest in floating some companies.They are not engaged in promotion work on a regular basis.They take up the promotion of some company and once it is over they go to their original profession.For instance, engineers, lawyers etc. may float some companies.
They are both promoters and entrepreneurs. They conceive idea of a new business unit, do the groundwork to establish it and subsequently become a part of the management.
Some financial institutions, like investment banks or industrial banks, may take up the promotion of a company with a view to finding opportunities for investment.
Functions of Promoters
The various functions of a promoter may be outlined as follows.
Discovery of a business idea
The first stage in company promotion is the conception of a new idea. It is the promoter who conceives the idea of setting up a business. He makes an assessment of the viability of a particular business.
Promoters undertakes a detailed investigation of the viability, profitability and future prospects of the growth of the proposed activity. To assist them in this venture, they seek the help of specialists such as chartered Accountants, Cost Accountants, Company Secretary, Engineers. Organisations engaged in market research and other specialised agencies. Specialists are in a position to make an objective analysis of their own areas which may help the promoters. Decisions have to be taken regarding the size, location, layout, manpower etc.
Assembling the factors of production
If the proposed endeavour gives promise of success and the promoter is willing to undertake the risk of forming the business, step must be taken to assemble various factors of production viz, land, labour, capital and managerial personnel. Assembly of resources involves making contracts for the purchase of material, land, machinery, etc.
Entering into preliminary contracts
The promoter enters into contracts with different parties before the registration of the company. After registration, the company approves these contracts.
- e.g. Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218