Also known as: promoters · promotion · promotions · company promoter
Written by attorneys — see sources below.
A person who organizes and initiates the formation of a corporation or other business venture. The promoter stands in a fiduciary relationship to the entity and to contemplated investors and may not retain secret profits from transactions with the entity without full disclosure and approval.
Piper Patel organizes a charitable trust to advance education by funding scholarships for underprivileged students. She drafts the trust instrument to specify that purpose and transfers assets into the trust. Because the purpose qualifies as beneficial to the community, the trust is validly created.
Paige Porter acts as promoter for Phoenix Technologies and causes the new corporation to become a member of a joint venture developing software. The corporation's articles grant it the power to serve as a promoter of other entities. Paige's action is therefore within the corporation's authority once formed.
Pilar Pena, promoter of Prosperity Investments, sells land she owns to the corporation at a markup. She discloses the profit only to two initial subscribers but not to all persons contemplated as original investors. The corporation may rescind the transaction or recover the secret profit because full disclosure to every contemplated initial shareholder was required.
Priscilla Parks organizes a new securities offering and receives material nonpublic information. The information is tipped to select investors who trade on it. Liability analysis focuses on whether any duty of disclosure was breached.
In 1973, Raymond Dirks served as an officer of a New York broker-dealer firm that specialized in investment analysis of insurance company securities for institutional investors. On March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America, alleging that the company's assets were vastly overstated due to fraudulent corporate practices and that regulatory agencies had failed to act on employee charges of fraud. Secrist urged Dirks to verify the allegations and disclose them publicly. Dirks decided to investigate the claims. He traveled to Equity Funding's headquarters in Los Angeles, where he interviewed several officers and employees. While senior management denied any wrongdoing, Equity Funding employees corroborated the fraud allegations. Throughout his investigation, Dirks openly discussed the information with clients and investors, none of whom included Dirks or his firm in ownership or trading of Equity Funding stock. Some of these investors sold holdings totaling more than $16 million. Dirks also contacted William Blundell, the Wall Street Journal's Los Angeles bureau chief, and urged him to publish a story on the fraud. Blundell declined to write the story because he feared that publishing such damaging hearsay might be libelous. Over the two-week period of Dirks' activities, Equity Funding's stock price fell from $26 to less than $15 per share, prompting the New York Stock Exchange to halt trading on March 27. California insurance authorities then impounded the company's records and uncovered evidence of the fraud. Only then did the SEC file a complaint against Equity Funding. On April 2, the Wall Street Journal published a front-page story based largely on information assembled by Dirks. Equity Funding subsequently entered receivership. The SEC investigated Dirks' role and, following a hearing before an Administrative Law Judge, found that he had aided and abetted violations of federal securities laws by repeating the fraud allegations to investment community members who sold their Equity Funding stock. The SEC censured Dirks, recognizing his role in exposing the fraud. Dirks sought review in the Court of Appeals for the District of Columbia Circuit, which affirmed the SEC's decision. The Supreme Court granted certiorari to address the question presented.
View casePenelope Price organizes a public offering and makes statements about financials that turn out to be false. The SEC brings an enforcement action. An injunction may issue under the antifraud provisions when scienter is shown.
When the events giving rise to this enforcement proceeding occurred, the petitioner Aaron was a managerial employee at E. L. Aaron & Co., a registered broker-dealer with its principal office in New York City. Among other responsibilities at the firm, Aaron was charged with supervising the sales made by its registered representatives and maintaining the due diligence files for those securities in which the firm served as a market maker, including the common stock of Lawn-A-Mat Chemical & Equipment Corp. Between November 1974 and September 1975, two registered representatives of the firm, Norman Schreiber and Donald Jacobson, conducted a sales campaign in which they repeatedly made false and misleading statements in an effort to solicit orders for the purchase of Lawn-A-Mat common stock. Schreiber and Jacobson informed prospective investors that Lawn-A-Mat was planning or in the process of manufacturing a new type of small car and tractor that would be marketed within six weeks. Schreiber and Jacobson also made projections of substantial increases in the price of Lawn-A-Mat common stock and optimistic statements concerning the company's financial condition. Lawn-A-Mat, however, had no such plans. These projections and statements were without basis in fact, since Lawn-A-Mat was losing money during the period between November 1974 and September 1975. Upon receiving several complaints from prospective investors, an officer of Lawn-A-Mat informed Schreiber and Jacobson that their statements were false and misleading and requested them to cease making such statements. This request went unheeded. Thereafter, Milton Kean, an attorney representing Lawn-A-Mat, communicated with Aaron twice by telephone and informed him that Schreiber and Jacobson were making false and misleading statements and described the substance of what they were saying. Aaron had reason to know that the statements were false because he knew that the reports in Lawn-A-Mat's due diligence file indicated a deteriorating financial condition and revealed no plans for manufacturing a new car and tractor. Although assuring Kean that the misrepresentations would cease, Aaron took no affirmative steps to prevent their recurrence beyond informing Jacobson of Kean's complaint and directing him to communicate with Kean. In February 1976, the Commission filed a complaint in the District Court for the Southern District of New York against Aaron and seven other defendants in connection with the offer and sale of Lawn-A-Mat common stock. The Commission alleged that Aaron had violated and aided and abetted violations of section 17(a) of the 1933 Act, section 10(b) of the 1934 Act, and Commission Rule 10b-5. Before commencement of the trial, all the defendants except Aaron consented to the entry of permanent injunctions against them. Following a bench trial, the District Court found that Aaron had violated and aided and abetted violations of the three provisions during the Lawn-A-Mat sales campaign and enjoined him from future violations. The Court of Appeals for the Second Circuit affirmed the judgment. The Supreme Court granted certiorari to resolve the conflict in the federal courts as to whether the Commission is required to establish scienter as an element of a Commission enforcement action to enjoin violations of section 17(a), section 10(b), and Rule 10b-5.
View casePhilip Powell organizes events for Prime Logistics and is subjected to unwelcome advances by a supervisor during a road show. The company has an anti-harassment policy with complaint procedures that Philip did not use. The employer avoids vicarious liability because it exercised reasonable care and Philip suffered no tangible employment action.
Kimberly Ellerth worked as a salesperson for Burlington Industries in its Chicago office from March 1993 until May 1994. During this period her supervisor Ted Slowik, a midlevel vice president based in New York, made repeated boorish and offensive remarks and gestures toward her. In the summer of 1993, while on a business trip, Slowik invited Ellerth to a hotel lounge and, after she gave no encouragement to his remarks about her breasts, told her he could make her life very hard or very easy at Burlington. In March 1994, when Ellerth was being considered for a promotion, Slowik expressed reservations during the promotion interview because she was not "loose enough." The comment was followed by his reaching over and rubbing her knee. Ellerth did receive the promotion; but when Slowik called to announce it, he told Ellerth, "you're gonna be out there with men who work in factories, and they certainly like women with pretty butts/legs." In May 1994, Ellerth called Slowik asking permission to insert a customer's logo into a fabric sample. Slowik responded, "I don't have time for you right now, Kim . . .— unless you want to tell me what you're wearing." A day or two later, Ellerth called Slowik to ask permission again. This time he denied her request, but added something along the lines of, "are you wearing shorter skirts yet, Kim, because it would make your job a whole heck of a lot easier." A short time later, Ellerth's immediate supervisor cautioned her about returning telephone calls to customers in a prompt fashion. In response, Ellerth quit. She faxed a letter giving reasons unrelated to the alleged sexual harassment. About three weeks later, however, she sent a letter explaining she quit because of Slowik's behavior. Ellerth did not inform anyone in authority about Slowik's conduct despite knowing Burlington had a policy against sexual harassment. In October 1994, after receiving a right-to-sue letter from the Equal Employment Opportunity Commission (EEOC), Ellerth filed suit in the United States District Court for the Northern District of Illinois, alleging Burlington engaged in sexual harassment and forced her constructive discharge, in violation of Title VII. The District Court granted summary judgment to Burlington. The Court of Appeals en banc reversed in a decision which produced eight separate opinions and no consensus for a controlling rationale. The Supreme Court granted certiorari to assist in defining the standards of employer liability.
View caseA promoter owes fiduciary duties of loyalty and disclosure to the corporation and to all persons contemplated as original investors. The promoter may not retain secret profits from sales of property to the corporation unless full disclosure is made to every contemplated initial shareholder and approval is obtained.
The Act expressly grants a corporation the power to be a promoter of any partnership, joint venture, trust, or other entity. This power may be exercised once the corporation is formed and its articles so provide.