Emile Erlanger v. New Sombrero Phosphate co. (Case Summary)

This is a landmark English case law, on contract and company Law. The case emphasizes the legal position and fiduciary duty of promoters of a company in making necessary disclosures in related party transactions.

Facts of Emile Erlanger v. New Sombrero Phosphate co.

1. Erlanger, a businessman, bought an island for £55,000 that was a mining site for phosphate. 
2. A company named phosphate co. was incorporated. After the incorporation, Erlanger sold the said land to this company for £110,000.
3. The company had one independent director and other directors were mere puppets of Erlanger, giving him control of the company.
4. Through promotion and advertisements, the phosphate co. got many investors.
5. After some time, the investors got to know that the land that the company bought was essentially of Erlanger and he sold the land at double price to the company and had made huge profits out of the investors money. 
6. Phosphate co. sued Erlanger, seeking recession of the contract for not disclosing about the ownership of the island and the profit that he was personally making from the transaction. As it was his fiduciary duty to disclose these related party transactions.

Issues framed

1. Whether the contract between Erlanger and Sombrero Phosphate co. valid?
2. Whether a promoter can make “secret profits” from its company?

Judgment of Emile Erlanger v. New Sombrero Phosphate co.

The court allowed the contention of phosphate co. and held that Erlanger is a promoter of the company. Therefore, he had a fiduciary duty to make necessary disclosures. The promoters can not make “secret profits” from the company.
The court held that the contract is entitled toberescinded and also ordered restitution of the profits made by Erlanger.