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INSTITUTE OF PROFESSIONAL STUDIES LEGON

ERLANGER V NEW SOMBRERO PHOSPHATE COMPANY CASE ASSIGNMENT.

SUBMITTED BY: ASARE WILLIAM FIANKO STUDENT ID: 10MBCG219 DATE: 14TH JAN. 2012

Erlanger was a Parisian banker who bought the lease of the island of Sombrero for phosphate mining for 55,000. He then set up the New Sombrero Phosphate Company with the object to mine the phosphate. Eight days after incorporation; he sold the island to the company for 110,000 through a nominee. One of the directors was the Lord Mayor of London, who himself was independent of the syndicate that formed the company. Two other directors were abroad, and the others were mere puppet directors (directors directly controlled by Erlanger) of Erlanger. The board, which was effectively Erlanger, ratified the sale of the lease. Erlanger, through promotion and advertising, got many members of the public to invest in the company. After eight months, the public investors found out the fact that Erlanger (and his syndicate) had bought the island at half the price the company (now with their money) had paid for it. The New Sombrero Phosphate Company sued for rescission based on non-disclosure, if they gave back the mine and an account of profits, or for the difference.
Before a company is incorporated, or in the process of incorporation, it is common for someone to lay the groundwork for the formation of the company. In practice one does not always wait to receive the Certificate of Incorporation before commencing business. Negotiations for the purchase of material or land would already have commenced. The people who take the responsibility of starting the Company are referred to as promoters. In effect a promoter is the one who undertakes to form a company with reference to a given subject and to set it going and who takes all the necessary steps to accomplish that purpose. According to the companies code, 1963, Act 179 section 12 (1) any person who is or has been engaged or interested in the formation of a company shall be deemed to be the promoter of that company. The companies code, 1963 Act 179 places the following duties on the promoters of a company until the formation of the company is complete: 1) Stand in a fiduciary relationship to the company: a contract made between him and the company is voidable at the companys option unless he has disclosed all material facts relating to the contract to an independent board and the company has freely agreed to the terms. 2) Observe the utmost good faith towards the company in any transaction with it or on its behalf; and 3) Compensate the company for any loss suffered by it by reason of his failure so to do.

In subsection 4 of section 12 of the companies code 1963, act 179, any transaction between a promoter and company may be rescinded by the company unless, after a full disclosure of all material facts known to the promoter, the transaction shall have been entered into or ratified on behalf of the company. If the Company has entered into a Contract with the promoter and it is later discovered there had been no transparency, the Company is entitled to rescind the contract. It is irrelevant that the promoter has made no profit from the contract. Once the contract is rescinded, restitution has to take place. This is where the Company has to return whatever it received from the Promoter and the Promoter has to return all monies received from the company. In this case, Erlanger bought an island containing phosphates for 55,000 pounds. Later, Erlanger promoted a Company and sold the property to it for 110,000 pounds. All the Directors of that Company were nominees of Erlanger and two of them were directly under his control .Later the old board was replaced by a new board which brought an action to rescind the contract with Erlanger. There were no adequate disclosure of the circumstances of the sale and the Company is entitled to rescind the contract. Disclosure is very imperative in an every transaction because of its paramount role in decision making by investors and other relevant stakeholders. This led to the establishment of the corporate governance framework by the Organisation of Economic Cooperation and Development (OECD) countries.

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. In most OECD countries a large amount of information,
both mandatory and voluntary, is compiled on publicly traded and large unlisted enterprises, and subsequently disseminated to a broad range of users. Public disclosure is typically required, at a minimum, on an annual basis though some countries require periodic disclosure on a semi-annual or quarterly basis, or even more frequently in the case of material developments affecting the company. Companies often make voluntary disclosure that goes beyond minimum disclosure requirements in response to market demand. A strong disclosure regime that promotes real transparency is a pivotal feature of market-based monitoring of companies and is central to shareholders ability to exercise their ownership rights on an informed basis. Experience in countries with large and active equity markets shows that disclosure can also be a powerful tool for influencing the behaviour of companies and for protecting investors. A strong disclosure regime can help to attract capital and maintain confidence in the capital markets. By contrast, weak disclosure and non-transparent practices can contribute to unethical behaviour and to a loss of market integrity at great cost, not just to the company and its shareholders but also to the economy as a whole. Shareholders and potential investors require access to regular, reliable and comparable information in sufficient detail for them to assess the stewardship of management, and make informed decisions about the valuation,

ownership and voting of shares. Insufficient or unclear information may hamper the ability of the markets to function, increase the cost of capital and result in a poor allocation of resources.

Disclosure also helps improve public understanding of the structure and activities of enterprises, corporate policies and performance with respect to environmental and ethical standards, and companies relationships with the communities in which they operate. The OECD Guidelines for Multinational Enterprises are relevant in this context.

Disclosure requirements are not expected to place unreasonable administrative or cost burdens on enterprises. Nor are companies expected to disclose information that may endanger their competitive position unless disclosure is necessary to fully inform the investment decision and to avoid misleading the investor. In order to determine what information should be disclosed at a minimum, many countries apply the concept of materiality. Material information can be defined as information whose omission or misstatement could influence the economic decisions taken by users of information.

The Principles support timely disclosures of all material developments that arise between regular reports. They also support simultaneous reporting of information to all shareholders in order to ensure their equitable treatment. In maintaining close relations with investors and market participants, companies must be careful not to violate this fundamental principle of equitable treatment.