Part Three: Promoters Flashcards
What are “promoters”?
Before a corporation is formed, “promoters” procure capital and commitments that will be used by the corporation after formation.
What is promoter’s relationship with each other?
Absent an agreement to the contrary, promoters are JOINT VENTURERS with a FIDUCIARY RELATIONSHIP.
They may not secretly pursue personal gain at expense of fellow promoters.
What is promoter’s relationship with the corporation?
Promoter has a fiduciary duty to the corporation of FAIR DISCLOSURE and GOOD FAITH.
In general, what are the situations in which a PROMOTER may breach their FIDUCIARY DUTY to the corporation?
- Breach of fiduciary duty arising from sales to corporation;
- breach of fiduciary duty arising from fraud.
Describe the rule regarding a promoter’s breach of fiduciary duty arising from a sale to the corporation?
General Rule: A promoter who profits by selling property to a corporation may be liable for his profit UNLESS all material facts of the transaction were discloses.
-If the transaction is DISCLOSED to an independent board of directors and approved, the promoter has met his fiduciary duty.
- if the board is NOT completely independent, the promoter will STILL not be liable, if the subscribers:
1. knew of the transaction at the time they subscribed; OR
2. unanimously ratified the transaction after full disclosure
What is a promoter’s liability for fraud?
Promoters may always be liable for FRAUD if P’s can show:
- fraudulent misrepresentation; OR
- fraudulent faillure to disclose material facts
What is a promoter’s liability on a contract on behalf of a planned but unformed corporation?
The promoter is personally liable for third party contracts on behalf of planned but unformed corporations.
EXCEPTION: If the agreement expressly relieves promoter of liability, there is no contract. Instead, it is treated as a revocable offer to the corporation, and the promoter has no rights or liabilities under the agreement
What is the rule regarding promoter’s liability on a 3rd party contract once the corporation has been formed?
The promoter’s PERSONAL LIABILITY continues even after the corporation adopts the contract and benefits from it.
What is the only way to end a promoter’s liability on a 3rd party contract once the corporation has been formed?
The promoter remains personally liable (even after corporation adopts the contract), until there is an EXPRESS OR IMPLIED NOVATION.
What is a “Novation”?
A “novation” is an agreement between all three parties to release the promoter from liability and substitute the corporation
What is the promoter’s right to reimbursement in the event he is held liable on a pre-incorporation 3rd party contract?
If promoter is held liable on a pre-incorporation third party contract, he may have a right to reimbursement from the corporation to the extent of any benefits recieved by the corporation.
What is the corporation’s liability for pre-incorporation contracts entered in its name?
A corporation is NOT BOUND on contracts entered into by the promotor prior to incorporation.
How does a corporation become bound by pre-incorporation contracts entered by a promoter?
A corporation becomes bound ONLY once it EXPRESSLY or IMPLIEDLY ADOPTS the contract.
What does it mean to “impliedly adopt” a contract?
- knowledge; +
2. benefit
