The Promotion Of The Corporation

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 66-71

§ 5.1 Functions of Promoters

Promoters discover business opportunities, prepare plans to take

advantage of them, and push those plans to completion. They perform

an essential economic function in assembling and coordinating the

necessary plan, materials, and personnel for new business enterprises.

Although there are many professional promoters, people whose life’s

work is the conception and organization of business enterprises, most

business enterprises are conceived and orga nized by amateur promoters,

people who play the role of promoter only once or twice in a lifetime,

usually in connection with a business with which they expect to be

permanently identified.

The typical promoter performs many varied services in launching

an enterprise, often enlisting the aid of experts, lawyers, bankers,

solicitors, and other persons. The various activities of the promoter

may be classified as follows: (1) the discovery and investigation of a

promising business opportunity; (2) the formulation of business and

financial plans; (3) the assembling of the enterprise by negotiating and

obtaining some control over the subject matter by options or contracts

made on beha lf of t he propo sed cor porat ion or on the pr omoter’s c redit ;

(4) the making of arrangements for financing t he enterprise and issuing

securities; and (5) the arranging of the promoter’s own compensation.

A promoter often is in a position to sell the enterprise to pro spective

investors, and thus may seek a speculative profit in securities of the

new company. Promoters may further attempt to take advantage

of their position and seek unreasonable, undisclosed, and excessive

compensation. These “secret profits” are often available to promoters

because they are usua lly in complete control of the enterprise in its early

stages. Accordingly, courts have ruled that a promoter owes fiduciary

duties to the company and cannot profit unduly at its expense.

§ 5.2 Pre-incorporation Contracts:

Questions Raised

Under modern statutes, formal incorporation is relatively quick, sim-

ple, and inexpensive, but promoters may still find it desirable, and in

some instance s essential, to make arrangement s before incorp oration of

the business to ensure that the corporation will have needed property,

funds, patent rights, licenses, ser vices, or key employees. Thus, before a

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