What promoter means
A promoter is a person who undertakes to form a company and takes the steps to do it.
That includes securing the registration, negotiating the arrangements the company will need, finding the initial subscribers and putting together the business the company will carry on.
The legal significance is the fiduciary position. A promoter is not dealing at arm's length with the company they are forming, because the company does not yet exist and cannot protect itself. The law responds by imposing duties.
The central duty is not to make a secret profit. Where a promoter sells their own property to the company, or takes a commission from somebody dealing with it, they must disclose it fully to an independent board or to the shareholders. Undisclosed, the profit is recoverable and the transaction can be set aside.
Professional advisers acting in their professional capacity are generally not promoters. The role attaches to the people driving the formation, not to the lawyer who filed the documents.
How it is used
The practical questions arise in three situations.
Where a founder transfers an asset into the company they are forming. Property, equipment, intellectual property or an existing business. The transaction should be disclosed and approved rather than simply executed, and the value should be supportable.
Where a founder takes a fee or a commission connected with the company's formation or its early contracts.
And where contracts are made before incorporation. A promoter signing on behalf of a company that does not exist is personally liable on that contract, and CAMA allows the company to ratify it after formation, at which point the company becomes bound and entitled to the benefit.
That ratification is the practical answer, and it should be done by board resolution at the first meeting rather than left indefinitely.
Disclosure is the discipline that makes the rest work. A founder contributing an asset should put the terms in front of the other founders and the board, record it in the minutes, and price it defensibly. Doing that removes the issue entirely.
Key features
- A person who takes the steps to form a company
- Owes fiduciary duties to the company being formed
- Must not make a secret profit from the position
- Transactions with the company require full disclosure
- Personally liable on pre-incorporation contracts until ratification
- Professional advisers acting professionally are generally not promoters
How this works in Nigeria
The Nigerian setting where this matters most is the founder who contributes an asset.
A founder owns land, equipment, a domain, a codebase or an existing customer book. The company is formed, the asset is transferred in, and shares are issued in exchange at a value the founder set. If the other founders and any incoming investor were not told the basis, or the value cannot be supported, that is the shape of a secret profit and it is a live issue in any later due diligence.
The answer is disclosure and documentation, and it is easy while everybody is friendly.
The second Nigerian setting is the pre-incorporation contract. Founders sign leases, engage developers and order equipment while the CAC registration is processing, in their own names or in the name of a company that does not yet exist. CAMA permits ratification after formation, and most Nigerian founders never do it, leaving contracts signed personally and performed by the company.
A single board resolution at the first meeting, listing and adopting those agreements, closes it.
The third is the promoter's expenses. Costs incurred forming the company, including registration fees and professional fees, can be reimbursed by the company where properly approved. That approval should be recorded rather than assumed, because unrecorded reimbursements to founders look different during due diligence than they did at the time.
Promoter vs founder vs director
Three descriptions frequently applied to the same person at different stages.
A promoter is somebody bringing the company into existence: securing registration, arranging the initial contracts, finding subscribers. The role is temporary and it ends once the company is formed and functioning.
A founder is a commercial description rather than a legal one. It usually means somebody who started the business and holds equity, and it carries no specific legal duties by itself.
A director is an office with statutory duties under CAMA, owed to the company, and personal exposure for defined improper conduct. The role begins on appointment and continues until removal or resignation.
Most Nigerian founders are all three in sequence: promoter while forming the company, director once appointed, and founder for as long as they hold shares. The duties attach to the first and third of those, and they are frequently exercised without anybody realising a fiduciary position existed.
Limits and risks
The duties are enforced by the company, which in practice means by whoever controls it later. A founder who was the whole company at formation may face the issue only when outside investors arrive.
Disclosure is judged by what was actually disclosed and to whom, so informal mentions between co founders may not be enough where an investor later complains.
Ratification of pre-incorporation contracts is available but not automatic, and until it happens the signer is exposed.
And remedies depend on the company pursuing them, which a founder controlled company generally will not, so the issue tends to surface as a due diligence problem rather than as litigation.
Worth knowing
Disclose and document any asset you contribute to a company you are forming, including how it was valued, and pass a board resolution adopting every pre-incorporation contract at the first meeting. Both are trivial at the time and expensive to reconstruct during an investor's due diligence.
Questions people ask
Who is a promoter?
A person who undertakes to form a company and takes the steps to do it, including securing registration, arranging initial contracts and finding subscribers. Professional advisers acting in that capacity are generally not promoters.
What duties does a promoter owe?
Fiduciary duties to the company being formed, principally not to make a secret profit and to disclose fully any transaction in which they have an interest.
What is a secret profit?
A benefit taken from the position without full disclosure, such as selling the promoter's own property to the company at an undisclosed markup, or taking an undisclosed commission. It is recoverable and the transaction can be set aside.
Can I contribute my own asset to the company?
Yes, provided it is disclosed and approved rather than simply executed, and the value is supportable. Record the basis in the minutes, because it is the first thing an investor's due diligence examines.
Am I liable for contracts signed before incorporation?
Yes, until the company ratifies them. CAMA allows a company to ratify a pre-incorporation contract after formation, and it should be done by board resolution at the first meeting.
Can the company reimburse my formation expenses?
Where properly approved, yes. Record the approval rather than assuming it, because unrecorded reimbursements to founders look different during due diligence than they did at the time.