FORMATION OF A COMPANY INTRODUCTION There are several formalities, which have to be followed before a company is incorporated (formed).

The process is grouped in the following stages: 1. Promotion 2. Incorporation or Registration 3. Capital subscription 4. Commencement of business It should be noted that a private company need only to go through the first two stages only. A public company must go through all the four stages. 1. Promotion L.W Lautenberg defines promotion as the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits there from. Promotion therefore has to do with the discovery of a business idea which can be profitably undertaken by a company and includes preliminary and detailed investigation of the feasibility of the idea, assembling of business elements and making provisions of the funds necessary to launch the enterprise as a going concern. Thus stages can be summarized as under: i) Preliminary analysis and examining the proposed idea to see whether the business is profitable. ii) Estimating the cost of production, selling price of goods and services and the amount of profits likely. iii) Arranging for the acquisition of labor, materials, capital and managerial ability.

iv) Presentation to the public and underwrites the business proposition in order to make people to manage in the venture. This is done through the issue of a prospectus. 2. Registration or incorporation This involves registering the company with the Registrar of companies under the Companies Act. For a public company, membership should be at least seven and at least two for a private company. The people who are involved in registration of a company are called promoters. The following activities or steps are taken by promoters in order to register the company. a) Obtaining approval of the proposed name from Registrar of the companies. Promoters are free to choose any name for their new company; section 19 of Companies Act however, has put restrictions on the names to be chosen. Section 19 (2) provides that no name shall be reserved and no company shall be registered by a name which in the opinion of the Registrar is undesirable. Section 17 of the Business Names Act cap 499 lists instances when a name is deemed undesirable: Where the name chosen suggests a criminal or immoral intent.
Where the name suggests association with the President or head of state or

a government ministry or department or a local authority or suggests connection with an international organization such as World Bank e.t.c. If the name is misleading especially as to the nature of the business the company will undertake or as to the nationality or religion of the people behind the company.

 Where the name is similar to the name of an existing company, partnership or co-operative society. Section 109 of the companies name requires publication of the name of the company by: a) Painting or affixing and keeping painted or affixed name on the outside of every office or place where its business is carried on, in a conspicuous position; in easily legible roman letters. b) Having its name engraved in legible roman letters on its seal which shall take the form of an embossed metal die; c) Having its name mentioned in legible roman letters in all business letters of the company and in all notices and other official publications of the company and in all its bills of exchange, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by or on behalf of the company; and in all bills or parcels, invoices, receipts and letters of credit of the company. Section 20 of companies Act provides that a company can change its names subject to the following: Its the company itself that can change its name i.e. members in a general meeting. The resolution changing the name must be a special resolution.
After changing the name the company must within fourteen days give notice

of its change of name to the Register of Companies. The Registrar will make the change and publish the fact in the Official Gazette. b) Presentation of documents

The following have to be prepared and presented to the registrar of companies 1. Memorandum of Association Contains conditions upon which the company is allowed to be incorporated. It defines and sets the limits of the powers of the company. The memorandum also sets the objects of the company. 2. Articles of Association Contains the rules, regulations, by laws for the internal management of the affairs of a company. Articles enable the company operate in a way to achieve the aims and objectives set out in the memorandum of association. 3. A statement of the companys nominal capital. Nominal capital is the maximum amount of capital that a company aims to raise. 4. A declaration that all the requirements of the companies Act and other formalities relating to registration have been complied with. The declaration has to be signed by an advocate, a person named as Director or Company Secretary. 5. A list of the company directors and their written consent to become company directors. Immediately after registration, the following true documents are required: (i) Notice of the situation of the Registered Office. (ii) Particulars of Directors and the Secretary. The registered office cant be changed but if it changes, notice of change must be given to the Registrar within 14 days. Particulars of the directors and the secretary need to be filed with the Registrar within fourteen days of their appointment. c) Issuance of a certificate of incorporation On receipt of necessary documents the Registrar opens a file for the particular company. If all requirements of the Act have been complied with, he will register the company and place, its name in the Register of Companies. A Certificate of

Incorporation will be issued where upon the Registrar shall certify under his hand that the company is incorporated. The original copy is given to the promoters and a copy will be left in the companys file (s. 12). It should be noted that presentation of documents does not mean automatic registration of the company. The Registrar of companys powers to refuse registration are inherent. If the Registrars reasons for refusal to register a company are not valid the promoters can seek order of mandamus from the high court to compel the Registrar to issue the certificate. In R vs. Registrar of joint stock companies (1913) 2k B 197; the promoters of the company sought mandamus to issue the Registrar of the joint stock companies on grounds that he had without reasonable cause refused to register their company. It was held that where promoters are aggrieved by the decision of the Registrar they can apply for order of mandamus to issue against the Registrar. However where the Registrar is justified in law and infact not to issue the certificate the order of mandamus shall not be issued. In the above case the promoters failed in their attempt because issuing the certificate would mean allowing an English company commit an illegality. Section 17(1) once the certificate is issued it acts as conclusive evidence that the company was properly formed in accordance with all the requirements of either the companys Act or the company practice. If it is later found that the granting of the certificate was made in ignorance of some irregularity on the part of promoters; it cannot be withdrawn. Incase in this point is Barnards Banking company Re Poels case (1867) L.R.2 ch. 674, it was held by Lord Cairns in this case that: When once the memorandum is registered and the company holds out to the world as a company undertaking business willing to receive shareholders and ready to

contract engagements then it would be of most disastrous consequences if at all that has been done, any person was allowed to go back and enter into examination of the circumstances attending original registration and the regularity of the execution of the documents. The certificate cannot be disputed on any grounds and cannot be challenged even: a) Where the memorandum is altered after signatories put their signatures on memorandum but before it is registered with the registrar. b) When memorandum is signed by only one person for all the seven. c) Where all the signatories are minors. d) Signatures to the memorandum are forged. Circumstances when incorporation can be withdrawn: (i) Where it is discovered that the company was formed with blasphemous objectives. This is the case in Bowman and others vs. the secular society limited (1917) AC 406, where the company thought against Christianity and urged its members to stop Salvation Army members from attending their Sunday worship. This was found that the activities of this company were blasphemous to the doctrines of that religion and the certificate was withdrawn and cancelled. However on technical grounds the action failed. (ii) Where the objects of the company are found to be immoral. In R vs. Registrar of joint stock companies (Ex-parte the A.G) (1980) QBX a firm of Accountants sought to register a company on behalf of their client. They intended to register the company in the name prostitutes but the name was rejected and the reserved another Hooker Ltd, which was also refused by the Registrar. The accountants then submitted the name Lindi St. Claire French Lessons Ltd. The Registrar accepted the name and registered the company issuing a certificate. Later it was

discovered that the companys sole purpose was to enable clients either alone or with others provide prostitution service for gain. Judge Ackner LS stated that though prostitution per se was not unlawful under the English law it was contra Moros bonus. Hence the Registrar was entitled to quash registration and with draw the certificate. (iii) Where the entity that was registered as a company is not a company in nature. In Salomon vs. Salomon and company Ltd (1897) AG 22 Lord Parker in the course of his judgment suggested that courts would be ready to go behind the certificate and nullify the registration of a company on the grounds that the entity which was not corporate body with the status and capacity conferred by the Act. (iv) Where the company to which the certificate has been issued turns out to be an enemy of the state. A company becomes an enemy if persons controlling it defacto are resident in an enemy country or wherever resident are adherent of taking instruction from or acting under the control of the enemy Lord Parker. A company becomes an enemy if it draws its membership from an enemy country. A case law relating the above is Daimler company Ltd vs. continental Tyres company (1916) 2 AC 307. d) Acquisition of legal personality Where a company is registered it becomes a legal person by the name contained in its memorandum of association. S 16 (2) incorporation of a company as a legal person was established in the case of Salomon vs. Salomon and company Ltd (1897) AC 22. In this case it was held that upon incorporation and in essence of any fraud on the part of the promoters the company becomes a legal person separate and distinct from its members, however closely it may be controlled by those members.

In Lee vs. Lee Air farming company Ltd (1960) WIR 758, Lee formed a company and he secured a job in his company. He died while on duty and it was held that a company being a legal person separate and distinct from its members is capable of employing and dismissing workers. As an employer, the company is subject to amongst laws, the workmans compensation law and must compensate an injured or deceased worker (employee) accordingly. However the case failed on a procedural technically since the widow sued on her own name. Another case in support of separate entity is the Mc Aura vs. Northern Assurance company Ltd 1925 AC 619. In this case MC Aura formed a company and transferred his timber estate to it and he also owned the company. He affected an insurance policy on the timber in his own name with several companies. The timber was destroyed by fire but he was not compensated for he had no insurable interest in the timber. 3. Capital Subscription This involves steps taken to raise capital for the company. Promoters are the first directors of the company. To raise capital directors will be called to deliberate on the following: a) Appointment of secretary and fixing the terms and conditions of this appointment. b) Appointment of bankers, brokers, solicitors and Auditors. c) Adoption of preliminary contracts entered by promoters on behalf of the company in the per-incorporation stage. d) Securing underwriting contracts in order to secure minimum subscription. e) Adoption of the draft prospectus or statement in lieu of prospectus. f) Appointment of Managing Director or manger and other officers.

g) Approval of the design of the common seal of the company and the authorizing the custody thereof. h) Listing of shares on the stock exchange. If the directors wish to invite the public to subscribe for its shares, they will file a copy of the prospectus with the Registrar of companies. On the advertised date, the prospectus will be issued to the public, investors can obtain the prospectus from the registered office or from the bankers. Investors then forward their applications for shares along with application money to the companys bankers mentioned in the prospectus. The bankers will then forward all applications to the company and the directors will consider the allotment of shares. If the share applications meet a minimum subscription as disclosed in the prospectus, directors will allot shares to the applicants. Allotment letters are then sent to those given shares and regret letters to those who are not. If applications fall below the minimum subscription as in the prospectors within 120 days after prospectus issue, no allotment is made and all money will be refunded. When a public company does not intend to raise money from the public the company will file a statement in lien of prospectus with the Registrar at least 3 days before allotment of shares. 4. Commencement of Business. Section 3 of the Act gives conditions and restrictions which a company must observe before it is allowed to start business. This includes issuance of prospectus, and whether the minimum subscription was raised. Form 211 which must be given to the Registrar which confirms the following: a) The minimum subscription has been raised.

b) Every director of the company has paid the company or made the shares taken or contracted to be taken by him. Having given for 211 and 212 and the statement in lieu of prospectus the Registrar shall certify that the company is entitled to commence business and issue it with a Trade Certificate. If the company defaults on the above, contracts entered by it will be provisional only and not binding on it. Section 3 (b) provides a penalty for breaching the conditions (i.e. `.1000 each day as contravention continues). Section 3 (7) exempts private companies from the conditions and restrictions thus a private company can start business without the trading certificate. PROMOTERS. A promoter is the person who conceives the idea of forming a company and who undertakes, does and goes through all the formalities and incidental preliminaries of incorporating a company. Promoter help to incorporate a company provide it with a share and loan capital and acquire business or properly which it is to manage. In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD 109s Bowen LS stated a promoter is not a term of law but of business, usually summing up in a single word number of business operations familiar to the commercial world by which a company is generally brought in existence. Lord Blackburn stated that it is a short and convenience way of designating those who set in motion the machinery by which the act enables them to create an incorporated company.

Justice Cockburn defines a promoter as one who undertakes to form a company with reference to a given project and to set it going and who undertakes the necessary steps to accomplish that purpose. Section 45 (5) of the Companies Act (cap 486) excludes persons acting on professional capacity from being called promoters. Section 45 (5) (a) provides that promoter means a promoter who has party to the separation of the prospectus; or the portion thereof containing the untrue statement, but does not include any person acting in a professional capacity for persons engaged in the formation of the company. If any such person acts beyond the scope of his professional duty and helps in any way in the formation of a company or in preparations for the management of its affairs, he will become a promoter. Function of the promoters The following are the functions of the promoters: 1. Decide on the company name and ascertain that it is accepted by the Registrar. 2. Prepare memorandum and Articles of Association. 3. Nomination of directors, Bankers, auditors and secretary and the registered office of the company. 4. Printing memorandum and articles of association. 5. Registration of the company. 6. Issue of prospectus. Legal status of promoter In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position of a promoter as although not an agent for the company, nor a trustee for it before

its formation, the old familiar principles of the law of agency and its trusteeship have been extended and very popularly extended to meet such cases. A promoter is thus not an agent nor a trustee of the company but certain fiduciary duties have been imposed on him under the companys Act. Fiduciary position of a promoter In Er Langer vs new Sombrero Phosphate Company 1878 3A Ac 1218, Lord Cais observed that promoters in equity cannot find the company by any contract with themselves as promoters without fully disclosing to the company all material facts which the company ought to know. Promoters are in a fiduciary position: a) Not to make profit at the expense of the company. b) To give benefit of negotiation to the company. Thus where the promoter purchases an item he cant rightfully sell that item at a higher price that he gave in for. The right of rescission is lost if the parties cannot be relegated to their original position this happens: (i) Where the character of the property has been altered. (ii) Where parties have acquired valuable rights. Where a promoter sells or wishes to sell his own property to the company he should: (i) See that there is a Board of independent persons appointed as directors of the new company. (ii) Disclose his interest in the property to the intended members or to the public by means of a prospectus. He must also disclose the profit he is making out of the deal.

c) To make full disclosure of interest of profit. Promoters need to fully disclose his profit and his personal interest in a transaction. d) Not to make unfair use of position. He must avoid seeking. He must guard against taking advantage of position or seek under influence or participate in fraud. Duty of promoters as regards prospectus Promoters must ensure that a prospectus is issued (public company) and the prospectus; (i) Contains necessary particulars (ii) Does not contain untrue or misleading statements or does not omit any material facts. Section 39 of the act states that a prospectus shall be dated; and that date unless the contrary is proved is taken as the date of publication of the prospectus. Section 40 provides that a prospectus issued shall state the matters specified in part 1 of the third schedule. Chapter 7 specifies the form and contents of a prospectus. A prospectus must be truthful and promoters can be held responsible (liable) for any misstatement in the prospectus. If a prospectus is found untruthful: a) Allotment of shares may be set a side in the case of fraudulent misrepresentation. b) Promoters may be sued for damages. c) They may be sued for compensation for misrepresentation. d) They may be sued for damages by shareholders who have suffered by reason of their non-compliance with the statutory requirements as with the contents of prospectus. e) They may become liable for criminal proceedings.

The Companys Act provides both criminal and civil liability for both civil and criminal liability for any untrue statement contained in the prospectus. For civil liability, Section 45 (1) provides that the following persons shall be liable to pay compensation to all persons who subscribe for any untrue statement included therein. a) Every person who is a director at the time of issue of the prospectus. b) Every person who has agreed to be named as a director in the prospectus or any one who has agreed to be a director immediately or after an interval. c) Every person being a promoter of the company. d) Every person who has authorized issue of the prospectus. However an expert can only be held responsible for an untrue statement made by him. Section 45 (2) provides defenses to liabilities under section 45 (1) such persons shall not be liable if he proves. a) He withdrew from being a director before issue of the prospectus and it was issued without his authority or consent. b) Prospectus was issued without his knowledge or consent and on becoming aware he gave reasonable public notice that it was issued without his knowledge. c) That after the issue of the prospectus and before allotment there under, then on becoming aware of any untrue statement therein, withdrew his consent there to and gave reasonable notice of the withdrawal and reason thereto that; (i) Of every untrue statement not made by an expert he had reasonable ground to believe and did up to the time of allotment believe that the statement was true.

(ii) That he relieved on an expert and untrue statement is a fair representation of the expert report and he had reasonable ground to believe that the person making the statement was competent to make it. (iii) As regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of an extract from the document. Section 46 (1) of the Act a prospectus may attract criminal liability. An untrue statement in prospectus may lead to imprisonment for a term not exceeding two years or to a time not exceeding ten thousand rupees or both unless he proves either that the statement was immaterial or that he had reasonable ground to believe and did up to the time of issue, believe that the statement was true. Criminal proceedings are only made where there is willful untrue statement and not otherwise. Remuneration of promoters A promoter has no right for compensation unless there is a contract. A promoter takes remuneration for his services in one of the following ways: a) Selling his own property to the company at a profit provided there in full disclosure. b) He may be given an option to buy shares at par. c) He may take commission on the shares sold. d) He may be paid a lump sum money by the company. Article 80 table A provides that directors can pay all expenses incurred in promoting and registering the company.

Pre-incorporation or preliminary contracts These are contracts entered by promoters to acquire property or some right for the company. In Kelner vs. Baxter (1866) ,LR Z. Kelner agreed to sell a hotel to Baxter who was acting agent for a company which was about to be formed. It was held that Baxter was personally liable on the contract as the company was not in existence after its incorporation. The company is not liable for the Act of the promoters done before incorporation. In Newborne vs.Sensolid Ltd 1954 1Q B45 Newborne a Director, entered into a contract in the name of a company before its incorporation. He signed his name to a contract on behalf of the company. It was held that there was no contract. Position of promoters as regards pre-incorporation contracts 1.Company is not bound by pre-incorporation contract even where it takes the benefit of the contract entered into on its behalf. A case law in this is in English and colonial produce company Ltd Re (1906) 2 ch 435. A solicitor prepared the memorandum and articles of a company and paid necessary taxes and other expenses to obtain the registration of the company. He did this on the instructions of promoters. It was held that the company was not liable to pay the solicitors costs although it had taken benefit of his work. 2. The company cannot enforce pre-incorporation contract. 3. Promoters are personally liable for contracts made on behalf of the company before the companys incorporation. Ratification of a pre-incorporation contract.

A company cannot ratify a contract entered into by promoters before incorporation. Where contract is entered into, where both the parties are aware of the nonexistence of the company, the contract is deserved to have been entered into personally and promoters are liable. To validate the pre-incorporation contracts a new contract has to be entered into with the other party (in which case promoters cease to be liable) For promoters acting on behalf of the company about to be formed it is safe (advisable) to provide in the contract that: a) If the company makes a fresh contract in terms of the incorporation contract, the liability of the promoters shall come to an end. b) If the company does not make a fresh contract within a limited time either of the parties may rescind the contract.