Corporate promoter

For other uses of this word, see promoter.

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 general 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.^[1]

Fiduciary duties

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.^{[citation needed]}

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.

See also

• Projector (patent)
• Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

References

1. ^ eg Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

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