1.

In January last year, Annie Apples and Betty Berry decided to form a
company to manufacture wine. In March, Annie without telling Betty
purchased a plot of land, “Grapefield” at a properly conducted auction
for a price of RM 375,000. This was actually more than 100% less than
its true market value at that time. “Grapefield” was then transferred to
the sole name of Annie.

In August, Annie approached Dave Glee and explained to him that she
was forming a wine manufacturing company. She entered into an
agreement with Dave to supply a hydraulic grape press machine for the
sum of RM 50,000 which shall be payable within three months of
delivery.

In December, Annie and Betty formed a company, “Sloshed Sdn. Bhd.”

and that company was duly incorporated in accordance with the
Companies Act 2016. They each held 500,000 RM1 fully paid up
shares in the newly formed company.

In January of this year, Annie sold “Grapefield” for RM1.2 million (the
actual market value at that time) to Sloshed Sdn. Bhd. Last week, they
sold the company to Sean Kayne who has now discovered all these
facts. Sean has been receiving phone calls from an irate Dave
demanding payment.

Discuss.

In January last year, Annie Apples and Betty Berry decided to form a
company to manufacture wine.

 When AA and BB decides to form a company, the issue is

whether this will amount to promotion of a company? The
law provides that there must be some persons who have an
intention to form a company and who take the necessary
steps to carry that intention into operation. (Setting up the
company). (1. Identify the issue/s)

 As per Cockburn, C.J., in Twycross v Grant (1877), a

promoter is described as “one who undertakes to form a
company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish
that purpose.” This classic definition includes anyone who:
…

 either takes the procedural steps necessary to form the

company; or sets up the company’s business (involving
entering into pre-incorporation contracts); but does not
include those who act merely in a professional capacity
 acting on the instructions of a promoter, for example a
solicitor or an accountant. (2. Cite the law)
 In Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff bin
Shah Mohd [1996] 2 MLJ 265, Gopal Sri Ram JCA said that a
promoter is one who start off a venture any venture not
solely for himself, but for others of whom he may be one.
 In this case, as AA and BB had only decided to form a company,
they are not to be regarded as promoters of the company at this
point in time. (3. Provide the legal solution)

In March last year, Annie without telling Betty purchased a plot of land,
“Grapefield” at a properly conducted auction for a price of RM 375,000
and transferred to the sole name of Annie.

 This action again does not amount to formation of a

company, as although there were actions taken, but the
action was to transfer the property to the sole name of
Annie without the knowledge of Betty, as per Cockburn,
C.J., in Twycross v Grant (1877).

 This may not amount to taking of actions to form a

company and a such AA in purchasing the land is not
taking actions to form the company but buying a property
for herself.

This was actually more than 100% less than its true market value at
that time. “Grapefield” was then transferred to the sole name of Annie.

 Half- price from true value. Secret profit discussion

In August of last year, Annie approached Dave Glee and explained to
him that she was forming a wine manufacturing company. She entered
into an agreement with Dave to supply a hydraulic grape press
machine for the sum of RM 50,000 which shall be payable within three
months of delivery.

 When Annie informs Dave of her intention to form a

company, this is not in itself amounting to formation of a
company, but when she enters into a contract to purchase
hydraulic grape press machine for RM 50,000 for the
company, this fulfils the requirements that there must be
some persons who have an intention to form a company
and who take the necessary steps to carry that intention
into operation. (Setting up the company).

 As per Cockburn, C.J in Twycross v Grant (1877), a

promoter is described as “one who undertakes to form a
company with reference to a given project and to set it
 going, and who takes the necessary steps to accomplish
that purpose.”

 This classic definition includes anyone who: Either takes

the procedural steps necessary to form the company; or
sets up the company’s business (involving entering into
pre-incorporation contracts.

 In this case Annie would be a promoter and her signing of

the agreement with Dave is a pre-incorporation contract.

In December of last year, Annie and Betty formed a company, “Sloshed

Sdn. Bhd.” and that company was duly incorporated in accordance with
the Companies Act 2016. They each held 500,000 RM1 fully paid up
shares in the newly formed company.

 In December last year, when Annie and Betty formed a

company “Sloshed Sdn. Bhd., with 1,000,000 shares of RM
1 fully paid-up this fulfill the requirement of section 4 (1) of
the Companies Act 2016 of formation of a limited company
“as a company limited by shares or guarantees…”.

In January of this year, Annie sold “Grapefield” for RM1.2 million (the
actual market value at that time) to Sloshed Sdn. Bhd.

Fiduciary duties of Promoter

The issue that is in contention would be whether Annie fulfilled her

fiduciary role as a promoter. In Erlanger v New Sombrero
Phosphate Co [1878], it was held that the contract should be
rescinded (where misrepresentation has occurred) because the
profit made (bought the mine for £55,000 and sold to the company for
£110,000) by Erlanger had not been properly disclosed (in this case to
an independent board of directors) and therefore could not be kept by
him. A key feature of this status is that such a fiduciary must not make
a secret profit.

The promoter can avoid contravening this requirement in a

number of ways: -

 By making a proper disclosure of any profit he/she has made

(thus removing any element of secrecy) to either an
independent board of directors or to the existing or
prospective members of the company or

 In the case of a public company, compliance with the rules on

prospectus disclosure is sufficient. Gluckstein v Barnes
(1900);
  Facts: Promoters of a company had acquired a property
intending its resale through the sale of shares in the company.
In doing so the original directors made a substantial profit
which they did not disclose (though it was discoverable). The
company became insolvent and investors sought repayment of
the hidden profit. Held: The action succeeded. As promoters
they were under a duty to make explicit declarations of the
profits already made.

 Note the difference in the decision of Erlanger and Gluckstein

– in Erlanger the court decides on rescission, that is, to cancel
the contract, as price has not been paid for the contract,
cancellation is possible. In Gluckstein, the court decided on
recovery of secret profit as the price in this case (money
received from selling of shares) has been paid, rescission is
not possible.

 So, a promoter has to disclose any transaction entered, either by,

 disclosing in Memorandum & Articles;
 by communicating to an independent Board of Directors;
 By communicating to the existing and intended members of
the company.

 Failure to disclose, the company has options:

 Company may rescind the contract (Erlanger v New
Sombrero Phosphate - misrepresentation), and
 In certain circumstances, company may be able to claim the
secret profit obtained by the promoter (Gluckstein v
Barnes),
 Company may file suit for damages for the breach of
fiduciary duties (Re Leeds & Hanley Theater).

Last week, they sold the company to Sean Kayne who has now
discovered all these facts. Sean has been receiving phone calls from
an irate Dave demanding payment.

Sean Kayne as the new member of the Board of Directors may

have the following options: -

Can use Erlanger, Gluckstein and Re Leeds to discuss: -

 Failure to disclose, the company has options:

 Company may rescind the contract with the former owner

of the company, namely AA and BB (Erlanger v New
Sombrero Phosphate), and in this case we were told that
the company had already been sold to Sean. Only if the
 nature of the company has completely changed then Sean
would not be able to rescind the purchase of the company
with AA and BB. Rescission means that Sean would be
placed back in a position before the contract was made
would only be possible if the nature of the company had not
changed. As the company had only recently changed hand
rescission may be possible.

 In certain circumstances, where Sean cannot rescind the

contract the company may be able to claim the secret profit
obtained by the promoter (Gluckstein v Barnes), and failing
which,

 The Company may file suit for damages for the breach of
fiduciary duties (Re Leeds & Hanley Theater).

 It would appear that AA and BB had failed to discharge their

duties as promoters of the company by breaching their fiduciary
duty and as such, the remedies as stated above is available to
Sean Kayne.

 If the company elects to affirm (confirm) the contract (for example

the grape press hydraulic machine was already put into use),
company may have a cause of action against promoters for:

 deceit,
 fraud
 negligent misrepresentation.

 The machine supplied by Dave could have been used by the

company in which case the company must affirm the contract and
pay Dave for the amount owing and pursue to recover from the
past Director, Annie.

 If the company elects to affirm the contract, company may

have a cause of action against promoters for:

o deceit,
o fraud
o negligent misrepresentation.

Note: -

Erlanger v New Sombrero Phosphate Co. [1878] 3 App Cas 1218;

Facts: Mr Erlanger set up a syndicate, which bought an island for £55,000. This
island was said to have phosphate mines, and Mr Erlanger set up a company to take
over the island and its mines from the syndicate.
5 people were named as directors and subscribers (had first shares): 2 abroad, 2
entirely under Mr E’s control, the fifth member (The Mayor of London – Mr. D) was
uninformed.
The syndicate sells the island to the company for £110,000; the transaction was
accepted by the 3 directors who weren’t abroad, on behalf of the company, without
any enquiries.
A prospectus for shares in the company was issued which was very favourable
regarding the scheme (but the true circumstance was not disclosed i.e. Mr Erlanger’s
secret profit).
Members of the public by shares in the company, which subsequently struggles, and
the shareholders discover the true circumstances. The shareholders remove the old
directors and replace them. The new directors apply to the court to have the original
sale rescinded.
Held: The court ordered the rescission and said that the promoters should have
appointed independent directors and should have made a full disclosure of the
circumstances.

Gluckstein v Barnes [1900] AC 240;

Facts: Mr Gluckstein and 3 others formed a syndicate and bought a property for
£120,000, but claimed they were paying £140,000.
They also promote a company of which they become the directors and buy the
property (for the company) for £180,000.
In order to fund the purchase, the company invited members of the public to buy
shares, for which a prospectus was issued. However, a £40,000 profit was disclosed,
whereas the promoters had actually made an additional £20,000 secret profit.
This was not disclosed to the prospective shareholders, but was instead written in
with a vague reference to ‘interim investments’. 4 years later the company went into
liquidation and the extra £20,000 was discovered.
The liquidator brought an action to recover part of this amount from Mr Gluckstein.
Held: The rescission was no longer possible, however, the promoters had to account
to the company for the £20,000 secret profit.