Salomon and Salomon & Co. ltd.

A promoter is a person who takes on the responsibility of setting up a co or any other venture. The promoter of a co were defined in section 4 as a person who brings the co into existence by taking an active part in forming co or finding persons to join it as soon as it is technically formed; taking an active part in forming co that actives include buying property for the co, taking lease for co, buying goods for co, employing professional to set up co and buying shelf co, and finding persons to join co that persons refer to directors, co sec, accountants, solicitors and shareholders. As case Twycross v Grant [1877] the courts held that the promoter is the person who undertakes to form the co with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.

In the Salomon’s case, Salomon is a promoter of the company, because of he formed a company to continue his large successful business, which was duly incorporated under the applicable English companies Act. The company was at all times intended to be what a private company is now. Basis on the section 4 Salomon was taking an active part in forming co. Moreover, Salomon, his wife and five of his children, each of them took up one share. Salomon and his two eldest sons were appointed directors, according to the Section 4 says, a promoter is person who find persons to join co to be directors and shareholders. So, Salomon is a promoter.

A promoter owes a fiduciary duty to the co which he is setting up. A fiduciary duty means that the person must act in the best interests of the co as a whole at all times. He is trusted to act in the interests of the co when he is carrying out the actions of a promoter.

There are some basic duties towards the company formed. First of all, promoter must not make any secret profit or commissions out of the promotion of the company. Secret profits or commissions is made by entering into a transaction on his own behalf and then sell to 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.

Secondly, a promoter must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. Under the fiduciary duty, promoter must make disclosure to an independent board of directors. If there are no independent board of director, promoter must disclose to present and future shareholders; profits made, commissions received, and any interest in the transaction with the co must be disclosed.

In this case, Salomon did not take any secret profits or commissions on behalf of own purpose and secret interests as well. All of the behalf on the co are not secret, because Salomon formed this co, he is a promoter and director, and this co purchased Salomon’s business as a price, even though it is an excessive price. Processing of the transactions is open. Since in an attempt to maintain the company, Salomon borrowed money from lender and granted him a mortgage over his debentures and reissued in lender’s name. Salomon still took the transaction on the behalf of co.

If a promoter breach of the trust and/or fiduciary duty, remedies will be available to a company against the promoters. Firstly, rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered. Secondly, retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit. Thirdly, 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. Case Gluckstein v Barnes [1900] the House of Lords held that the disclosure was not fulls enough and the liquidator was allowed to recover the profit.

A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways, such as, a company may to pay some remuneration for the services rendered; The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members. The promoter may sell his property for fully paid shares in the company after making full disclosures. The promoter may be given an option to buy further shares in the company. The promoter may be given commission on shares sold. 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.

As principles of the Salomon’s case, the debits of the company are the responsibility of the company and not its members; company may contract with its shareholder should the need arise; the company must sue in its name for any wrong that is committed against it; and the company can own assets and that the shareholders have no proprietary interest in those assets. So, Salomon in this case did not breach of the fiduciary duty.