Promoters and Founders

Promoters/founders of
companies
Definition
Duties
Liabilities
Benefits
Promoters
• As humans needs to be conceived and go through
several stages of development before birth,
companies too requires planning and other
preliminary arrangements.
• These preliminary tasks are to be carried out by
persons called ‘promoters’ (named founders under
the old commercial code).
Promoters
• Promoters play an important role in the creation
and development of public companies.
• It's important for promoters to understand their
responsibilities and obligations, and act in the
best interests of the company and its
shareholders.
Founders
• They also go by the name:
• ‘founder’
• ‘organizer’
• Incorporator
• Projector
• Though agreed that promoters are indispensable for the
formation of a company, defining them seems to be a
difficult exercise.
• Despite the fact that identifying promoters is approached
variously in different legal jurisdictions, there is a
common element in the attempts to define or explain the
term.
Founders/ promoters
• Generally, the promotional activities of promoters may be
classified:
– Discovery (finding business idea),
– Investigation (studying economic feasibility of the
idea) and
– Assembly (bringing together the necessary personnel,
property and money).
– Legalization of the formation process
Founders/ promoters
• Hence, it stands for persons who are involved to carry out
the necessary steps to form a company.
– They framed the company,
– Prepared the prospectus,
– Found the directors and
– Paid for printing, advertising and the expenses
incidental to establishing the company.
Why do we need to know and regulate promoters?
• Naturally, the process of forming share company causes various
legal transactions in which the promoters and subscribers are the
primary actors.
– For those who subscribe shares, the main reasons are the
promoters as they could invite them to invest in the share
company under formation.
– The subscribers will benefit when the company is
established and make profit and may suffer loss when the
company goes nonpaying or is not established at all.
• In this instance, the investors need remedies
against unwarranted actions of the promoters
that may affect their interest.
Why do we need to know and regulate
promoters?
• Secondly, prospective creditors of the company would have
interests in the success of the company formation process.
– The promoters may rent offices, hire and train relevant workers,
use professional expertise and may conclude other contracts.
• Further, creditors may also conclude contracts with the share
company after its formation by relying on the statements made to
the public about the company by founders.
• Thirdly, the company under formation may come up with its own
interests against the promoters.
– Promoters may sell their properties to the company by exaggerated
price
– They may also overvalue in kind contributions…etc
– In such case, the company needs to be remedied against the
problems it may suffer due to the founders’ pre-incorporation acts.
Why do we need to know and regulate promoters?
 Fourthly, promoters get some benefits and privileges after the
company is formed.
 Rewarding the efforts made for the formation of the company is
also something appealing which the law should recognize.
 In sum, the company under formation and the promoters have
no principal and agent relationship as a company has no legal
existence before it is formed.
 So, it is incapable of entering into a contract itself and equally
incapable of acting through an agent.
 As a result, rules are necessary to protect the subscribers, the
creditors and the company under formation.
Who are promoters?
 The old code refers them as founders. [Art. 307]. Under the new
Code, founders are those who establish a company among
themselves without offering shares for public subscription
[Art.252].
 In a closed companies, the obligation of promoters is assumed by
founder [Art. 252.3]
 Article 248 of the Commercial Code provides the lists of persons
who shall be promoters.
 Accordingly, promoters;
 May be one or more
 Could be natural or artificial persons ;
 Need not be a shareholder in the company .
Who are promoters?
 Specifically, promoter shall mean: (Art. 248)
a person who initiates the formation of a company by
public subscription ;
invites persons to join the company by preparing a
prospectus;
generally acts with the view to realizing the formation
of the company; and
is liable for damage sustained in connection with
failure to establish the company, if the company is not
formed.
 The list is not exhaustive, which means only exceptions
could save you once you involved in formation process.
Who are promoters?
 The term ‘acts with the view to realizing the formation of the company’
is somehow vague.
 Though this argument seems logical, there is a problem as it could be
difficult to exactly fix what ‘acts with the view to realizing the formation’
means.
 This provision permits one to consider many persons, even with so
insignificant contribution in the formation process, as promoters.
 Whether a person is liable for damage sustained in connection with
failure to establish the company could also serve as another metric to
determine whether a person can be considered as promoter.
 The reason in taking persons who initiate or facilitate company formation
as founders seems that some persons may convince investors to invest or
deal with persons for the formation of the company.
 Those who convinced the third parties either directly or indirectly should bear
liabilities.
Who are promoters?
Art. 307 of the old Code describes persons who
may qualify as founders. They are:-
Persons who sign the prospectus, (Art.307(3)).
Bring in contributions in kind, (Art.307(3))
Persons to be allocated a special share in the
profits,
Persons who has initiated plans or facilitated
the formation of the company, no exception to
this broad rule.
Who are not promoters?
 In most jurisdictions, it is maintained that persons who

act merely in a professional capacity or employees
acting within their employment contract will not be
founders unless they become involved in the business
side of formation.
 In Ethiopia, Article 307(4) of the Commercial Code has
provided no exception like this.
 However, the new Code excludes persons who based on a
contract concluded with a promoter, for consideration,
(248 (1 second sentence))
conducts a study necessary for the formation of the
company,
renders professional support or similar service.
Who are not competent to be promoters? (249)
• In most company laws, individuals who are not competent to be

promoters of public companies are those who have a
disqualifying history, such as:
 Conviction for certain crimes, such as fraud or deceit
 Bankruptcy or insolvency
 Unlawful conduct in connection with promotion, formation, or
management of a company
 Disqualification by a regulatory authority
• Minors and individuals of unsound mind are also generally not
considered competent to be promoters of public companies.
• The exact criteria for competency may vary depending on the
jurisdiction.
Who are not competent to be promoters? (249)
• A person that had been convicted of

– Breach of trust,
– Theft,
– Robbery or
– Any other similar criminal offense,
• In connection with his function as a promoter,
director, manager, inspector, auditor or any other
managerial positions in a business organization or
in any other circumstance
Who are founders?
 Article 547(2) of the Code mentions another set of founders.
 Pursuant to Article 547(2), members of a Private Limited Company
(PLC) who decide to convert the PLC in to share company will
occupy the status of founder of the new share company.
 This is so because Article 544(5) of the Commercial Code states
that rules related to formation of relevant business organization
shall apply during conversion.
 As a result, the rules on founders are applicable in connection with
conversion of a PLC to a share company.
Duties of Promoters
Can be categorized:
• Making disclosures about the company
• Securing necessary permits and licenses
• Securing financing
• Recruiting key personnel
Duties of Promoters
 In many jurisdictions, promoters have a fiduciary duty in relation to the
company to be formed.
 By this, they owe duties of care and loyalty to their co-promoters, the
company that is going to be formed and to others who have financial
interests in the company.
 Among others the founders ,
 shall sign memorandum and articles of association before applying
for commercial registration.
 make accurate statements to the public in respect to the formation of
the company.
It is also a duty whose violation is punishable under Article 718 of
the Ethiopian Criminal Code.
This provision makes it clear that a founder, who is in a position
to know the state of affairs of an undertaking, intentionally gives
or causes to be given essential and untrue information to the
public is punishable by imprisonment or fine.
Duties of Promoters
 Further, promoters shall have:
 Obligation to call a meeting of subscribers immediately after
the audit of company formation has ended.
 Obligation to have the formation of the company verified by
external Auditors [Art. 261.1]
 Obligation to a prospectus and make an offer to subscribers in
accordance with relevant provisions. [Art. 259.1]
 Obligation to verify the valuation of contribution in kind [art.
257.3]
 Obligation to effect the registration of the company [265.2]
Liabilities of Promoters 250
Promoters of a public company can be held liable for various grounds
generally including:
– Misrepresentation: Promoters can be held liable for making false or
misleading statements in offering materials or other documents
related to the public offering.
– Non-disclosure of material information: Promoters have a duty to
disclose material information to the public, and can be held liable if
they fail to do so.
– Failure to comply with securities laws: Promoters must comply with
all relevant securities laws and regulations, and can be held liable if
they fail to do so.
– Breach of fiduciary duty: Promoters can be held liable for breach of
fiduciary duty if they act in a manner that is not in the best interest of
the company or its shareholders.
– It is important to note that the exact grounds for liability may vary
depending on the jurisdiction and the specific circumstances of the
case.
Liabilities of Promoters 250
 The liabilities may be either contractual or extra contractual,

crominal.
 In principle, promoters are jointly and severally liable for the pre-
incorporation commitments. [Art.250]
 Promoters shall be jointly and severally liable to persons with
whom they contracted, shareholders, and third parties with respect
to the following matters:
 commitments entered into for the formation of the company;
 full subscription of the capital of the company and deposit of
the paid-up capital in the name and to the account of the
company;
 valuation of contributions made in kind to the company in
accordance with the provisions of Article 257 of this Code;
Liabilities of Founders 250
Accuracy of statements made to the public in respect of the

formation of the company;
Legality of the process followed in the formation of the
company;
Verification by an auditor of the formation procedure of
the company;
Where the company is not formed, refund of paid up
contributions with interest to subscribers who demand that
in accordance with this code; [see cum 254.3 & 4]
All other matters connected with the formation process.
In addition, the founders may incur criminal liabilities as
per articles 718, 675 and 676 of the FDRE criminal code.
Liabilities of Promoters
 In general, in addition to pre-incorporation commitments, even after
formation of the company, the commercial code impose liabilities on
founders. Note that the liabilities under article 250 extend after
company’s formation for 5 to 10 years.
 Accordingly, the liabilities of the founders are generally of three types:
For the company:
 The founders owe the share company fiduciary duty as it is entirely in
their hands during its formation.
 If this duty is violated, they will be liable for the share company they
have established.
 For subscribers
 For Creditors
Protections of Promoters
Before the establishment of a company, promoters

may conclude contracts expecting the company
to enjoy the rights and perform the liabilities
thereof.
The Code provide cases whereby the founders can
be free from liabilities they have incurred in their
way to establish a company.
Protection of promoters
1. Commitments and Expenses for the Formation of

the Company [251]
 Promoters may incur numerous expenses and enter into
commitments with third parties in the process of company’s
formation.
 If formed, the company shall take over such commitments
from the promoters and refund the expenses;
 so far as such commitments and expenses were
necessary for the formation of the company; or
 if approved by the general meeting of the subscribers/
 Where the company is not established for whatever reason, the
subscribers shall not be liable for the commitments and
expenses made by the promoters, promoters are [248.1]
Commitments and Expenses for the Formation of
the Company [251]
 The unregistered company does not have legal personality so it

can not own property, it can not sue or be sued so it can not be
declared bankrupt, it can not enter into contractual or other
juridical acts.
 All contracts entered by the promoters on behalf of unformed
company will remain personal transaction between the
promoters and the third party since the principal (the
company) does not exist. [248.1] [250 (1a)] [251]
 For obvious reason, the above mentioned commitments and
expenses will be taken only if the share company is established.
 This means that the founders would remain helpless where the
formation of the share company is aborted.
 The law prevents founders from claiming anything from the
subscribers. [251.2]
Protections of Founders
2. Protection through Period of Limitation (250 (2))

 In Ethiopia, period of limitation is the other mechanism to
avoid liabilities of founders that might arise because of their
involvement in the formation of share company.
 Claims for damages shall be barred after five years from the
date when the aggrieved party knew:
Of the damage and
of the person liable.
 There shall be absolute limitation after ten years from the date
when the act complained of took place.
Benefits of promoters/founders
 The mere success of the formation process alone cannot guarantee
the founders realize the benefit provided for in the law.
 In the first place, the rule is ‘no profit no benefit’.
 On the other hand, in the eyes of the law, founders could hardly
escape liabilities if there is any damage to persons due to the
formation process of the company.
 The process of formation is generally onerous and risky.
 Therefore, after share company is established, it is fair to
compensate promoters for their services in addition to taking their
commitments and refunding expenses.
Benefits of promoters/founders
May benefit in two ways:

Compensation arrangements
Potential to build a successful company
and create value for shareholders
Benefits of founders
 As per art. 253 (1), receive a share in the net profits in the balance
sheet of up to 20%.
 But, such share.
 May not exceed a period three years (1)
 It shall be paid in cash, may not be paid by issuing shares (4)
 Specifics regarding the amount of the share in profits, the
manner in which the years payment is to be effected are chosen
and the like shall be provided for in the Memorandum of
Association.
 The promoters may not receive, from the company, any other
special benefit except the one under [Art. 253.1[
 However, the benefits that may be due to promoters in their
capacity as shareholders shall not be affected. [Art. 253.1]
Benefits of founders
 The conditions under Article 253 of the Commercial Code are not
the only conditions.
 In the old Code promoters can be entitled to the benefits only if
their proposal receives the blessing of the subscribers pursuant to
Article 321(3).
 The new Code Art. 263.5 provides that the subscribers meeting
determines the share in profits allocated to the promoters.
 Since the subscribers meeting has the power to approve the final
text of the memorandum of association, it can be said that the same
meeting will determine and approve the share allocated to
promoters.

Promoters and Founders

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Promoters and Founders

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Promoters/founders of

 In most jurisdictions, it is maintained that persons who

• In most company laws, individuals who are not competent to be

• A person that had been convicted of

 The liabilities may be either contractual or extra contractual,

Accuracy of statements made to the public in respect of the

Before the establishment of a company, promoters

1. Commitments and Expenses for the Formation of

 The unregistered company does not have legal personality so it

2. Protection through Period of Limitation (250 (2))

May benefit in two ways:

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