CORPORATIONS - PKP

Question 1

What is a “promoter”?

Answer 1

It is a person insturmental in launching a cororation, who typically remains involved withthe corporaton once it’s formed (e.g., as a director or shareholder). A promoter:

1. locates intersted investors,
2. 2. finds needed peronnel and property, and
3. 3. nurtures the idea or product that is the corporation’s focus.

SIGNIFICANCE: the principal issue concerning promoters areises when a corporate promoter enters into contracts on a corporaton’s behalf before the corporation comes into existence (i.e., before articles of incorporation are filed), and it’s this: who’s liable for breach of these pre-incorporation contracts – the promoter, the corporation, or both?

Question 2

Under what circumstances is a promoter liable for a pre-incorporation contract he makes on a corporation’s behalf?

Answer 2

It usually dpends on whether promoter makes it clear he’s contracting on the corporaton’s behalf.
1. Promoter enters into contract on cororation’s behalf, without disclosing that corporation doesn’t exist – promoter is liable personally.
2. Promoter enters into contract on corporation’s behalf, acknowledging that corporation doesn’t yet exist – only the corporation is liable. Quaker hill v. Parr (CO 1961).
3. Promoter enters into contract on corporation’s behlf, witout making it explicit that he’s contracting on the corporation’s behlf – promoter is liable personally. especially if the contract requires performance prior to formation of the corporation.

NOTE: If the promoter is liable, he remains liable even if the corporation, when formed, adopts the contract, unless there is a “novation” (that is, the party with whom the promoter contracted agrees to release hom from the contract). HA Sec. 111
NOTE: If the promter is required to pay under a pre-incorporation contract, he is entitled to reimbursement from the corporation to the extent it benefitted from the contract.

Question 3

Under what circumstances is a corporation liable for breach of a pre-incorporation contract made by a promoter on the corporation’s behalf?

Answer 3

Only if an when it either:
1. “adopts” (a/k/a “ratifies”) the contract, expressly (by board of directors’ resolution) or impliedly (accepting goods or services for which promoter contracted, with knowledge of the contract’s terms), or
2. accepts a desired benefit under circumstances making it inequitble to retain the benefit without paying for it.
Note that, if the corporation expressly or impliedly adopts the contract, it’s liable under the contract; if it only accepts benefits without adopting the contract, the recovery is for the reasonable value of the goods and services it receives, not the contract price. Note that the “reasonable value” recovery is quasi-contractual.

Question 4

Marie Antoinette, a promoter of r the as-yet-unfomred Let “Em Eat Cake Baked Goods Company, signs a requirements contract on the company’s behalf with the Wilted Four Company, covering all the company’s flour needs for the next three years. Under what circumstances will Let “Em Eat Cake, once it is formed, be liable under the contratct?

Answer 4

Only if it:
1. expressly adoopts/ratifies the contrac (via resollution by the Board of Directors),
2. impliedly adopts/ratifies the contract (i.e., by receiving goods as per the contract, with knowledge of the contract’s terms), or
3. accepts goods under circumstances making it inequitble for the company to retain the goods without paying for them.

Note that, under #1 or #2, the company would be liable under the contract; under #3, Wilted Flour would only be entitled to “quasi-contractual” recovery, for the reasonable value of the flour (whether or not that’s reflected in the contract price). Note that the real difference between implied acceptance and quasi contract is that, under the former, the company knows about the terms of the contract, and, under the latter, it doesn’t know about them. HA Sec. 111.

Question 5

Oliver Wendell Douglas, a promoter for the yet-to-be-formed Hooterville Produce Company, contracts to buy a 160-acre farm on Hotterville Produce’s behalf from Mr. Haney. He signs the land sale contract without making it clear to Haney that Hooterville Produce doesn’t exist yet. The closing is set for August 1st. Hooterville Produce is formed one month before that. The board, consisting of Hank Kimball Fred Ziffel, and Sam Drucker, ratifies the land sale contract. Shortly thereafter, Hoooterville Poduce becomes insolvent. Can Hamey hold Douglas personally liable on the land sale contract?

Answer 5

Yes.
When a promoter contracts on a corporation’s behalf before the corporation is formed, and the contract is breached, the promoter may be liable personally on the contract. Where, as here, the promoter contracts on the corporation’s behalf without letting on that the corporation doesn’t exist yet, he’s liable personallly. NOte that, even if the corporation subsequently ratifies the contract, thi doesn’t remove the promoter’s personal liablity unless the other party (Haney) relieves the promoter of liability in favor of the corporation (a “novation”). There’s no evidence of a novation here. As a result, Douglas is liable.

RELATED ISSUE: Say that, instead of Hooterville Produce becoming insolvent, it refused to ratify the contract, because it wasn’t interested in the land. In that case, the corporation couldn’t be liable, because a corporation can only be liable for contracts it ratifies or for benefits it accepts.