Week 5 Corporate Law Practice: Promotion of Companies & Pre-Incorporation Contracts
Justice Joust Editorial
Legal Content Team
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- Promotion: The 6 core activities that constitute promotion of a company before incorporation.
- Who is a Promoter? S.85(1) CAMA 2020 definition, silent promoters, and the subscriber rule.
- The Professional Exemption (S.85(2)): When a lawyer loses the shield and becomes a promoter.
- Fiduciary Status (S.86(1)) and the SAD mnemonic — Secret Profit, Account, Disclose.
- Gluckstein v. Barnes: Disclosure must be made to an independent body — not to yourself.
- Remedies for breach: Rescission (Erlanger), account for profit, damages — and when rescission is lost.
- The Forever Rule (S.86(4)): No limitation period ever applies to the company's action against a promoter.
- Pre-Incorporation Contracts: Kelner v. Baxter (void at common law) vs S.96 CAMA (ratification allowed).
- Drafting the Non-Liability Clause under S.96(2) to protect the promoter if ratification fails.
- JVA vs SHA: PDP NCC SDJS and DID C3AM2PS drafting mnemonics and the Articles conflict rule.
Week 5: Promotion of Companies & Pre-Incorporation Contracts
Today, we tear apart Part B, Chapter 4 of CAMA 2020 with surgical precision — every statutory section, every common law principle, every drafting mnemonic, and every ethical rule. Fifteen exhaustive modules. No shortcuts.
When you see a pre-incorporation question in the Bar Finals, you will not just answer it — you will obliterate it.
Module 1: The Anatomy of Promotion Activities
Before a company is born, it is merely an idea. A company is an artificial creation of the law; it cannot birth itself. Promotion is the entire process of conceiving the business idea, gathering the resources, and undertaking the registration of the company.
The 6 Core Promotion Activities
- 1Conceiving the business idea and business plan.
- 2Raising capital and sourcing for initial investors.
- 3Finding the First Directors and Shareholders (Subscribers).
- 4Acquiring properties, securing leases, or buying machinery on behalf of the proposed company.
- 5Instructing Solicitors to prepare the MEMART and register the company.
- 6Preparing the Prospectus (if it will be a public company).
Module 2: Who Exactly is a Promoter?
"Promoter" is not a term of law — it is a term of business and a question of fact. You determine a promoter by asking: What did the person do?
Statutory Definition — Section 85(1) CAMA 2020
"Any person who undertakes to take part in forming a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose, or who, with regard to a proposed or newly formed company, undertakes a part in raising capital for it."
Natural Person
A human being who actively promotes the company.
Artificial Person
Another company can act as promoter of a new company.
The Silent Promoter
A person who took no active part but stands to profit from the formation is STILL deemed a promoter.
The Subscriber Rule
All subscribers to the Memorandum and Articles of Association are automatically deemed promoters of the company.
Module 3: The Professional Exemption & The "Hybrid" Exam Trap 🚨
If a lawyer drafts the MEMART and runs around the CAC to register the company, is the lawyer a promoter? No.
Section 85(2) CAMA 2020 — The Statutory Shield
A person acting in a professional capacity for persons engaged in procuring the formation of the company shall NOT be deemed to be a promoter. Protected: Solicitors, Accountants, Valuers, and Engineers.
⚠ The Examiner's Trap
Examiners will give you a scenario where Barrister Emeka drafted the MEMART, but also helped the clients negotiate the purchase of a warehouse and found two investors for the company.
The Verdict
Barrister Emeka has stepped outside his "professional capacity." By raising capital and negotiating assets, he has lost the protection of S.85(2) CAMA and is now a Promoter bearing all fiduciary liabilities!
Module 4: The Legal Status of a Promoter
The Common Law Problem
- Cannot be an Agent — the principal (company) does not exist yet.
- Cannot be a strict Trustee — the trust property (company) doesn't exist.
Section 86(1) CAMA 2020 — The Statutory Solution
A promoter stands in a Fiduciary Relationship to the company — a relationship of absolute trust, loyalty, and confidence. The promoter must observe the utmost good faith towards the company in any transaction with it or on its behalf.
Module 5: The Strict Fiduciary Duties — Mnemonic: S-A-D
Secret Profit
A promoter must not make a secret profit from the promotion. He CAN make a profit — he just cannot make a SECRET profit. If he buys a truck for N10m and sells it to the new company for N15m, he must disclose the N5m profit.
Account
He must account to the company for any money or property received during the promotion. He holds such funds as a constructive trustee.
Disclose
He must fully disclose any personal interest or conflict of interest he has in any transaction involving the proposed company.
Module 6: The Disclosure Rule & Gluckstein v. Barnes
If a promoter must disclose his profit, who exactly does he disclose it to? The company is just a piece of paper!
The Rule in Gluckstein v. Barnes — Valid Recipients of Disclosure
An Independent Board of Directors — a board that is NOT controlled or heavily influenced by the promoter.
All existing and intended members/shareholders of the company.
The general public, via the Prospectus — if it is a public company raising funds.
Key Rule: Disclosing to yourself or your cronies is no disclosure at all.
Module 7: Remedies for Breach of Fiduciary Duty
Under Section 86(3) CAMA 2020, if a promoter breaches his fiduciary duty (e.g., sells his own land to the company at an inflated price without disclosure), the company has powerful weapons:
Rescission of Contract
The company can completely cancel the transaction, return the property, and recover its money.
Erlanger v. New Sombrero Phosphate Co.
Account for Profit
The company can compel the promoter to hand over the exact amount of the secret profit made.
S.86(3) CAMA 2020
Action for Damages
The company can sue the promoter for damages for breach of fiduciary duty, deceit, or negligence.
S.86(3) CAMA 2020
Module 8: Limitations on the Right to Rescind
Rescission is an equitable remedy — and equity is not absolute. The company will lose the right to rescind if:
Ratification
The company, after discovering the secret profit, formally ratifies (accepts) the transaction anyway.
Restitutio in Integrum is Impossible
You cannot rescind if you cannot restore the parties to their original position. E.g., if the promoter sold a perishable good and the company has already consumed or destroyed it.
Third-Party Rights Intervene
Innocent third parties (bona fide purchasers for value without notice) have already acquired rights in the property.
Module 9: The "Forever" Rule — Section 86(4) CAMA 2020 🚨
The General Rule
Under the Statute of Limitations, civil actions for torts or simple contracts become statute-barred after 6 years.
Section 86(4) CAMA — The Promoter's Exception
The period of limitation shall NOT apply to any proceedings brought by the company to enforce any of its rights against a promoter. Ever.
Exam Scenario
If a company discovers in 2045 that its promoter, Dr. Tunde, made a fraudulent secret profit during its incorporation in 2020, the company can still sue him. Dr. Tunde cannot plead that the action is statute-barred!
Module 10: Remuneration of a Promoter
The Strict Law
A promoter has NO automatic legal right to claim remuneration or recovery of preliminary expenses from the company. Why? Because the company did not exist to authorize those expenses.
The Legal Workaround
A promoter can only get paid if the company, after incorporation, enters into a valid contract to pay him.
Methods of Remuneration
Cash payment (voted by the Board post-incorporation).
Allotment of fully-paid shares (often called Founder's Shares).
Appointment as a Director with a lucrative remuneration package.
A commission on the shares sold to the public.
Module 11: Pre-Incorporation Contracts & Kelner v. Baxter
A pre-incorporation contract is any agreement entered into by a promoter on behalf of a company before it is incorporated (e.g., signing a lease for an office).
The Common Law Problem — Kelner v. Baxter
- 1A company lacks legal capacity before incorporation.
- 2A non-existent principal cannot have an agent.
- 3Therefore, any pre-incorporation contract is VOID against the company.
- 4The company CANNOT ratify the contract even after incorporation because it was a stranger to it.
- 5The promoter who signed the contract is PERSONALLY LIABLE for it!
Module 12: The CAMA 2020 Modification — Section 96
The Nigerian legislature recognized that Kelner v. Baxter stifled business. How can you set up a factory if you can't sign a lease until the CAC certificate is out?
Section 96(1) CAMA 2020 — The Statutory Lifeline
Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation.
The Effect of Ratification
Upon ratification (usually by a Board Resolution), the company becomes bound by the contract and entitled to its benefits as if it had been in existence at the date of the contract!
Module 13: The Promoter's Liability Trap & Drafting the Escape 🚨
Section 96(2) CAMA 2020 states that prior to ratification by the company, the person who entered into the contract (the Promoter) shall be personally bound by the contract — in the absence of express agreement to the contrary.
The Non-Liability Clause — Draft This Exactly
"It is hereby expressly agreed that this agreement is made subject to ratification by the proposed company upon incorporation. If the proposed company fails to be incorporated, or fails to ratify this agreement within 30 days of incorporation, the Promoter shall incur no personal liability whatsoever under this agreement, and this agreement shall be discharged."
This clause exploits the "express agreement to the contrary" saving provision in S.96(2), eliminating the promoter's personal liability.
Module 14: Drafting JVA & Shareholders' Agreements
1. Joint Venture Agreement (JVA)
Used when two distinct entities pool resources for a common enterprise.
Mnemonic: PDP NCC SDJS
Parties to the agreement
Date of the agreement
Place / Nature of the Business
Name of the proposed company
Capital Contribution (cash vs land/tech)
Composition of the Board of Directors
Supremacy Clause
Dissolution Clause / Deadlock resolution
Joint Venture Sharing Ratio
Settlement of disputes (Arbitration)
2. Shareholders' Agreement (SHA)
A private, confidential contract requiring unanimous consent to alter — the ultimate tool for minority shareholder protection.
Mnemonic: DID C3AM2PS
Directors and Chairman appointment rights
Indemnities and Guarantees
Dividend policy
Consideration, Completion, Confidentiality
Management Decisions / Material Breach
Parties
Secretary
Conflict Rule: SHA vs Articles of Association
If the SHA says "Mr. Obi is a life director" but the Articles say "Directors can be removed by ordinary resolution," the Articles prevail regarding the internal affairs of the company. However, the aggrieved party can sue the other shareholders personally for breach of contract based on the SHA!
Module 15: Ethical Issues in Promotion & Formation (RPC 2007)
Rule 15 — Bounds of the Law
A lawyer must not assist promoters in drafting fraudulent pre-incorporation contracts, or incorporating a company for an illegal purpose (e.g., terrorism financing or money laundering).
Rule 17 — Conflict of Interest
When advising multiple promoters pooling capital together, a lawyer must be highly vigilant. If a dispute arises over who owns what percentage of the company, the lawyer cannot represent both sides and must advise them to seek independent counsel.
Rule 52 — Fixing of Fees
You must not charge extortionate fees for drafting the JVA/SHA or incorporating the company. Your fees must be commensurate with the skill, time, and scale of charges involved.
Summary / Exam Hacks 🧠
Ready to test your knowledge?
Try this quick 3-question Joust taken straight from our past questions database.
CLP Week 5 Mini-Joust
Barrister Ada incorporated a company for a client, drafted the MEMART, and also sourced two investors and negotiated the purchase of office premises on the client's behalf. Under CAMA 2020, what is Barrister Ada's legal status?
Practice Resource
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