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Unit II. Formation of Companies

BY TASHI WANGMO

Learning Objectives:

At the end of the session, students should be able to:

1. Explain the roles and responsibilities of a Promoter/s
2. Explain different circumstances under which Promoter/s can take benefits of incorporation process.
3. Explain different steps of Incorporation BY TASHI WANGMO

BY TASHI WANGMO

1. Promotion of a Company

Promotion refers to the stage of conceiving an idea to start a business and its working up.

Promoter

▪ (^) The person who assumes the task of promotion are termed as ” Promoter.” ▪ (^) Therefore the promoter is a person who conceives an idea of starting a business, plans the formulation of company and actually brings into existence. Is a director/ officer/employee of the company a promoter? ▪ (^) A director/officer/employee who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise is considered as a promoter. ▪ (^) However, a director or officer or employee of the company or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter.

BY TASHI WANGMO

Promoter

The duty or obligations of the promoter are: a) Prohibition of Secret Profits – A promoter must not derive any undisclosed financial gains at the expense of the company. b) Full Disclosure – A promoter is obligated to disclose all material facts relevant to the formation and operation of the company. c) Avoidance of Unfair Advantage – A promoter must not exploit their position for personal benefit or engage in activities that create conflicts of interest. d) Acting in the Best Interest of the Company – Any negotiations or transactions undertaken by the promoter should primarily serve the interests of the company rather than personal or external interests.

Position of a Promoter

Legal Position of a Promoter

1. The promoter is neither a trustee nor an agent

of the company.

2. He/she stands in a fiduciary position towards

the company. He/she: i. must act in good faith, deal fairly and provide full disclosure; ii. is not allowed to derive any profit from the sale of his/her own property to the company unless all material facts are disclosed in the prospectus (if shares are being offered to the public) or to the directors and members i.e. they cannot make a secret profit. BLT204_CORPORATE LAW_SPRING

Function of a promoter

1. Name Approval In accordance with Chapter 5 of CA2016 i.e. the name must be unique, not misleading and indicate that it is a private or public company BLT204_CORPORATE LAW_SPRING

Function of a promoter

2. Make decisions about the following: ⮚ (^) The location of its registered office, ⮚ (^) The amount and form of its share capital, ⮚ (^) The brokers or underwriters for capital issue, if necessary, ⮚ (^) The bankers, ⮚ (^) The auditors, ⮚ (^) The legal advisers. BLT204_CORPORATE LAW_SPRING

Functions of a Promoter (cont.)

1. meet preliminary expenses.
2. arrange the minimum subscription.
3. arrange any business license from the Regional Trade and Industry Office of MOICE (§32(b));
4. prepare for the registration of the company as a taxpayer (§32(a)); BLT204_CORPORATE LAW_SPRING

2. Incorporation (Registration)

The second stage is the formation of the company is incorporation stage where in, the company must be registered with the registrar of the companies. ⮚ (^) A subscriber to the Articles or person acting on their behalf shall deliver to the Registrar (§30): (a) An application in the prescribed form signed by the subscribers; (b) Consent to act as directors by the first directors in the prescribed form; BY TASHI WANGMO BLT204_CORPORATE LAW_SPRING

2. Incorporation (Company

names)

1. Decide if it will be a private or public company:

• The name of a private company shall end with the words “Private Limited” (§38) or abbreviated to “Pvt. Ltd” (§41).
• The name of a public company shall end with the word “Limited” (§39) or abbreviated to “Ltd” (§41). BY TASHI WANGMO BLT204_CORPORATE LAW_SPRING

2. Incorporation (Company

names)

1. Name to be distinct from existing name i.e. (§42): a) shall not be the same as the name of a company already registered under this Act; b)shall not be similar to the name of a company already registered under this Act if, in the view of the Registrar, such similarity would be liable to confuse or mislead. BY TASHI WANGMO BLT204_CORPORATE LAW_SPRING

2. Incorporation (Company

names)

4. A name will not be registered if it misleadingly

describes (§43(e)):

i. the business, goods or services in association with which it is proposed to be used; ii. The conditions under which good and services will be produced or supplied; iii. the persons to be employed in the production or supply of those goods or services; iv. the place of origin of those goods and services. BY TASHI WANGMO BLT204_CORPORATE LAW_SPRING

2. Incorporation (Company

names)

5. A name will not be registered if, in the opinion of the

Registrar it is objectionable for any reason. The Registrar

needs to justify and communicate in writing to the applicant its reasons (§43(f)). BY TASHI WANGMO BLT204_CORPORATE LAW_SPRING