ASSIGNMENT

1.(a) Define a promoter in the context of company law and explain their legal status.
In the context of the Business Act, a promoter is a person or group of individuals who
act as the process of establishing the company, often before its formal incorporation.
The role of a promoter is central to the basis for a company.
Legally, a promoter is not an agent in the company during the pre-reservation phase, as
the company does not yet exist as a legal entity. However, the organizer takes
responsibility for ensuring the necessary resources, capital and other conditions
required to include the company.
Promoters usually engage in sports like identifying the commercial enterprise
opportunity, acquiring property, drafting the business enterprise’s memorandum and
articles of association, and recruiting administrators. Importantly, they will be held
personally liable for contracts entered into on behalf of the organization before it's miles
legally formed. Once the agency is included, the promoters can transfer their rights and
duties to the organization, but any pre-incorporation contracts may additionally want to
be ratified with the aid of the organization for those to be legally binding.
Legal Status: In the eyes of the regulation, the promoter isn't always but an agent of the
business enterprise and does now not have authority to act on behalf of the
organization till it is incorporated. Furthermore, they ought to act in excellent religion,
disclosing any private hobbies to keep away from conflicts.
b. Functions of a Promoter in the Formation of a Company

Pre-Incorporation Activities:
The promoters are tasked with initiating the process of forming the company. This
involves selecting the company's name, drafting the memorandum and articles of
association, and making sure that the necessary documents are submitted to the
appropriate authorities.
Example: A collective of entrepreneurs plans to establish a tech startup. They draft the
memorandum and articles of association, detailing the company's goals, internal
guidelines, and share structure before presenting the documents to the registrar for
incorporation.
Raising Capital:
A primary responsibility of a promoter is to obtain the funding required for the
company's operations. This may include attracting investors or issuing shares to gather
funds, as well as negotiating financial arrangements or loan agreements.
Example: A promoter may organize and manage an initial public offering (IPO) to raise
capital for the newly incorporated company, offering shares to the public or seeking
venture capital funding.
Acquiring Assets and Entering into Contracts:
Promoters can also acquire essential assets or enter into agreements representing the
company, even prior to its incorporation. Since the company is not yet established,
these agreements are generally made in the name of the promoter, with the company
taking on the responsibilities once it is officially formed. For example, a promoter might
execute a lease for office space on behalf of the company before it is incorporated.
After the company is established, it can ratify and take on the obligations of that lease.
4. Choosing the Company’s Directors and Key Staff
Function: Promoters typically take on the task of selecting the initial directors and key
management staff for the organization. They determine the board's structure and may
also recruit the first executives.
Example: During the creation of a startup, the promoters might look for individuals with
the requisite expertise to take on roles as directors or CFOs. They may reach out to
seasoned industry professionals to join the company's leadership team in the early
stages of its establishment.

5. Acquiring Business Locations

Function: Promoters may also locate and secure the business premises for the
company’s operations, which includes negotiating lease agreements or purchasing
property.

Example: A promoter might secure office space for a newly formed software company,
arranging a long-term lease agreement for commercial property or even purchasing real
estate that will serve as the headquarters once the company is incorporated.

2.(a)Fiduciary Duties of a Promoter Towards the Company Being Formed

Promoters have a fiduciary duty to act honestly and in good faith in the best interests of
the company they are helping to form, even though the company does not yet exist as a
legal entity. These duties arise from the trust placed in promoters by the parties
involved, including the shareholders, potential investors, and creditors.

The key fiduciary duties of a promoter include:

1. Duty of Loyalty:
 Promoters must act solely in the interest of the company and not in their own
self-interest. This means that they cannot exploit opportunities that arise from
the company’s formation for personal gain. If promoters make any profit or
benefit from the company’s activities, it must be disclosed and agreed upon by
the company once it is formed.
o Example: If a promoter acquires land at a cheap price with the intention of
selling it to the company at a higher price, they must disclose this
transaction to the company and seek approval from its directors.
2. Duty of Good Faith:
Promoters are obligated to act honestly and transparently when performing any
actions related to the formation of the company. They should not conceal any
information that could affect the decisions of potential investors or shareholders.
o Example: If a promoter is aware of a significant risk or liability that could
affect the company, they must disclose this to the potential investors and
stakeholders before the company is formed.
3. Duty to Disclose Personal Interest:
Promoters must disclose any personal interests they have in transactions they
undertake for the company. This prevents conflicts of interest and ensures that
their actions are transparent. Promoters must not take advantage of the
company's resources for personal benefit without disclosure.
o Example: If a promoter enters into an agreement with a company in which
they have a personal financial interest (e.g., as a director or shareholder),
they must disclose this relationship to the company’s founders or
investors.
4. Duty to Avoid Conflicts of Interest:
Promoters must refrain from any activities that create a conflict of interest. This
involves refraining from engaging in actions that benefit them personally at the
expense of the company or its stakeholders.
o Example: A promoter should not use company funds to invest in a
business venture in which they have a direct financial interest without the
company’s approval.

b. Legal Consequences of a Promoter Breaching Their Fiduciary Duties (5 Marks)

If a promoter breaches their fiduciary duties, there can be severe legal consequences,
both civil and possibly criminal. The company (once incorporated) can take action
against the promoter, and the promoter may be required to compensate the company or
shareholders for any harm caused. Below are the key legal consequences:

1. Liability for Profits Made:

If a promoter makes any personal profits from transactions involving the
company without proper disclosure and consent, the company can claim those
profits. This can involve recovery of profits made through undisclosed deals or
voiding contracts that are deemed to have been entered into for the promoter’s
benefit.
o Example: In Regal (Hastings) Ltd v. Gulliver [1942] 1 All ER 378, the
 promoters bought shares in a company on behalf of the company at a
lower price but later sold those shares at a higher price, pocketing the
profits. The court held that the promoters were liable to return the profits
to the company because they had breached their fiduciary duty to avoid
personal gain.
2. Rescission of Contracts:
If a promoter enters into a contract with the company (or on its behalf) without
disclosing their personal interests, the company may have the right to rescind the
contract once it is incorporated. This applies particularly when the promoter’s
actions involve self-dealing, such as selling assets to the company at inflated
prices.
o Example: In Aberdeen Railway Co v. Blaikie Bros (1854) 1 Macq 461, a
director (who was also a promoter) of the company was found to have
entered into a contract with the company for the sale of goods from his
own company. The court held that the contract was voidable because of
the conflict of interest and breach of fiduciary duty.
3. Personal Liability:
A promoter can also face personal liability for fraud or misrepresentation. If a
promoter makes false statements or conceals material facts to induce others to
invest or participate in the formation of the company, they can be held personally
liable for any damages caused to investors or the company.
o Example: If a promoter makes false claims about the financial condition of
a company to potential investors and those investors suffer losses as a
result, the promoter could be personally liable for the damages in a court
of law.
4. Constructive Trust:
In cases where a promoter has gained an improper benefit from their breach of
duty, the courts may impose a constructive trust. This means that the profits
made from the breach of fiduciary duty may be held by the promoter on behalf of
the company. The company can recover the benefit or profit from the promoter.
o Example: In Bhullar v. Bhullar [2003] 3 All ER 364, the court imposed a
constructive trust over the profits made by a promoter who had failed to
disclose his personal interest in a land deal made on behalf of the
company.
5. Criminal Liability:
In extreme cases, a promoter’s breach of fiduciary duty may attract criminal
liability, particularly if it involves fraud, dishonesty, or deliberate
misrepresentation of the company’s assets, liabilities, or prospects.

Flotation

3.(a). Definition of Flotation in the Context of Corporate Finance

Flotation refers to the process by which a privately held company offers its shares to
the public for the first time, typically through an Initial Public Offering (IPO). During
flotation, the company transitions from a private entity to a publicly traded one, listing
its shares on a stock exchange. This process allows the company to raise capital by
selling shares to public investors in exchange for equity ownership.

Flotation typically involves several steps, including selecting underwriters (investment

banks), setting an initial price for the shares, and filing necessary regulatory documents
with authorities like the Securities and Exchange Commission (SEC).

b. Importance of Flotation for a Company’s Growth and Expansion

Flotation is a crucial step in the financial life cycle of many companies, especially those
looking to expand and raise significant capital. Here are the key reasons why flotation is
important:

1. Raising Capital for Growth and Expansion:

One of the primary reasons companies go public is to raise capital for expansion,
research and development, acquisitions, or debt repayment. The funds generated
from the sale of shares can be used for a variety of purposes, including entering
new markets, developing new products, or financing large-scale projects.
o Example: A tech company might use the funds raised through flotation to
invest in R&D, scale its infrastructure, or expand its global reach.
2. Improved Visibility and Brand Recognition:
By becoming a publicly traded company, a company gains increased visibility and
public awareness. This can help attract more customers, partners, and investors.
The listing on a stock exchange also provides credibility and status within the
industry.
o Example: Companies listed on major exchanges like the NYSE or LSE
often experience a surge in media coverage, leading to enhanced brand
recognition.
3. Liquidity for Shareholders:
Flotation provides liquidity for existing shareholders, such as venture capitalists
or company founders, who can sell their shares to the public. This makes it
easier for them to realize profits from their investments.
o Example: If a company has been backed by private equity investors,
flotation allows them to exit their investment by selling shares to the
public.
4. Currency for Acquisitions:
Once a company is publicly listed, its shares can be used as a form of currency
for future acquisitions. Publicly traded companies can use their own shares to
acquire other companies, as the shares are liquid and valued in the market.
o Example: A publicly traded company may use its shares to acquire a
smaller company, paying in stock rather than cash.
5. Attracting and Retaining Talent:
Public companies can offer stock options to employees as a part of their
compensation package, which can help attract and retain talent. This can be
 especially valuable in competitive industries like technology or finance.
o Example: A tech startup going public can offer stock options to employees,
motivating them to work toward the company’s long-term success.

Real-Life Examples of Companies that Have Undergone Flotation:

1. Facebook (Meta Platforms):

Facebook's flotation occurred in May 2012, when it went public through an IPO.
The company raised over $16 billion, which it used to fund growth, improve its
infrastructure, and acquire other companies, such as Instagram and WhatsApp.
The flotation allowed Facebook to expand rapidly and become a dominant force
in the social media industry.
2. Alibaba Group:
Alibaba, the Chinese e-commerce giant, went public in September 2014 through
an IPO on the New York Stock Exchange. It raised $25 billion, the largest IPO in
history at that time. The funds helped Alibaba further expand its business,
strengthen its logistics network, and invest in cloud computing, contributing to its
global growth.

4. Stages and Legal Requirements in the Flotation Process

a. Key Stages in Flotation

1. Pre-IPO Preparation:
The company prepares by restructuring, auditing financials, and appointing
advisors like underwriters and legal experts.
2. Selection of Underwriters:
Investment banks are hired to manage the flotation, determine the pricing, and
handle the marketing of shares.
3. Due Diligence and Documentation:
The company prepares a prospectus, disclosing financials, risks, and business
details.
4. Regulatory Filing:
The company submits the prospectus to regulatory authorities for review and
approval.
5. Pricing and Launch:
The shares are priced, and the flotation is launched, with the company’s shares
listed on the stock exchange.

b. Legal Requirements During Flotation

 1. Prospectus Disclosure:
A detailed prospectus with financials, risks, and business info must be filed with
regulators.
2. Regulatory Approval:
Regulatory authorities (e.g., SEC or FCA) must approve the flotation before
proceeding.
3. Audited Financial Statements:
The company’s financial statements must be audited to ensure accuracy.
4. Compliance with Securities Laws:
The company must adhere to anti-fraud, insider trading, and other securities
regulations.
5. Stock Exchange Approval:
The company must meet the listing requirements of the stock exchange it
intends to use.

QUESTION 5

XYZ Ltd is a newly formed company intending to raise capital through an initial public
offering (IPO). The promoters of the company have been accused of misrepresenting
key financial information in the company’s prospectus.

Assignment:

1. Legal Implications of Misrepresentation in a Prospectus (5 Marks)

Misrepresentation in a prospectus is a serious offense under Kenyan company law,

particularly governed by the Companies Act, 2015 and the Capital Markets Act. Key legal
implications include:

 Breach of Fiduciary Duty: Promoters have a fiduciary duty to provide accurate

and truthful information. Misrepresentation violates this duty, undermining trust
and damaging the company’s credibility.
 Regulatory Violation: Misrepresentation in a prospectus breaches securities laws
under the Capital Markets Authority (CMA), which enforces regulations on public
offers in Kenya. Misleading statements could lead to sanctions, fines, and
penalties from the CMA.
 Fraudulent Practices: If the misrepresentation is intentional, it could be seen as
fraudulent, leading to criminal liability for the promoters under the Penal Code
and the Companies Act.
 Investor Harm: Investors relying on the misrepresented financial data may suffer
financial losses. This could lead to claims for damages and rescission of the
contract.

2. Potential Liabilities of the Promoters and Remedies Available to Investors (5 Marks)

Promoters' Liabilities:

 Civil Liability: Under Section 51 of the Companies Act, promoters can be held
liable for misrepresentation if the prospectus contains false statements that
investors rely upon. The company may have to compensate investors for losses
caused by these false statements.
 Criminal Liability: If the misrepresentation was deliberate or fraudulent, the
promoters could face criminal charges under Section 58 of the Companies Act
for fraudulent inducement to invest.
 Liability for Damages: If investors suffer losses due to the misrepresentation,
they may claim damages from the promoters under civil law, as stipulated in
Section 51 of the Companies Act and Section 9 of the Capital Markets Act.

Remedies Available to Investors:

1. Rescission of Contract:
Investors who were misled by the false prospectus may be entitled to rescission,
meaning they can withdraw from the investment and seek a return of their money.
2. Damages:
Investors may claim damages for any losses sustained due to reliance on the
false information. The courts may award compensation for the financial harm
caused.
3. Right to Sue Promoters:
Investors can initiate a civil suit against the promoters for making fraudulent or
negligent misrepresentations. They may seek compensation for the harm caused
by the misrepresentation.
4. Criminal Action:
If the misrepresentation is found to be criminal, the Director of Public
Prosecutions (DPP) may prosecute the promoters for fraud, leading to penalties
or imprisonment.

Conclusion:

Misrepresentation in a prospectus has serious legal consequences under Kenyan

company law. Promoters face both civil and criminal liability, and investors have several
remedies available, including rescission, damages, and the right to sue.
Misrepresentation undermines trust in the capital markets and can have severe
repercussions for both the prom
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 Companies Act, 2015 (Kenya). (2015). Kenya Gazette Supplement No. 145 (Acts
No. 17). Retrieved from http://www.kenyalaw.org
 Capital Markets Act (Cap. 485A), Laws of Kenya. (2012). Kenya Gazette
Supplement No. 110 (Acts No. 3). Retrieved from http://www.kenyalaw.org
 Penal Code, Cap. 63. (2009). Laws of Kenya. Retrieved from
http://www.kenyalaw.org
 Nairobi Securities Exchange (NSE) Listing Rules. (2018). Retrieved from
https://www.nse.co.ke
 Capital Markets Authority (CMA). (2017). Public Offering Guidelines. Retrieved
from https://www.cma.or.ke
 Cook v. Deeks, [1916] 1 A.C. 554 (P.C.).
 Kassam v. The Nairobi Stock Exchange & Others, [2007] eKLR.
oters and investors involved.