Legal Principles and Key Points
- In the case of Erlanger v New Sombrero  3 App Cas 1218, the courts ruled on promoter contracts proving that promoters should act in the company’s best interests as per fiduciary duties.
- This company law case involved rescission of contracts, fiduciary duty and sales of land.
- Shareholders require disclosure and consent.
Facts of the Case
- C promoted and sold a lease to a company for £10,000. During the board meeting there was only one independent director to C.
- After bargaining, the lease was sold and approved at the board meeting of the shareholders. However, the directors stepped down and legal proceedings were filed when it was uncovered that there was no formal disclosure of the sale’s circumstances.
- Have material facts been hidden?
- Was the contract challenged at the right time?
- Do laches apply to stop the contract from being rescinded?
- Are the contract terms set aside reasonable?
Held by House of Lords
- Appeal dismissed – defence of laches cannot be applied so the contract cannot be set aside. A fiduciary duty is violated when the facts of a prospectus are revealed.
- A disproportionate amount of trust and faith had been put in the promoters by the company. “As promoters of a company they stood in a fiduciary position towards the company they were creating, and that the bargain between the promoters and that company could not stand unless more was done for the purpose of protecting the interest of that company than was done in this case”.
- The directors could not be situated because their judgment might have shown bias.
- Lord Blackburn referred to Lindsay Petroleum Company v Hurd  LR 5 PC 221 to show that reasonable care must be used to decide whether the remedy of laches should be applied or not.
- “Those who deal inequitably with a company know that it must necessarily be slow in its proceedings, and are not entitled to complain that time elapses; and that it is not desirable that such a rule should be laid down as would practically deprive a company when defrauded of relief. And this is a reason against considering a company as precluded from that relief to which it would otherwise be entitled, on account of delay, unless the delay is excessive”.
- The syndicate of bankers must repay the purchase monies and the contract should be terminated.
- “I do say that if [the owner of the property] does he is bound that he sells it to the company through the medium of a board of directors who can and do exercise an independent judgment on the transaction and who are not left under the belief that the property belongs not to the promoter but to some other person”.