Pg 14

Question 1

What is corporation by estoppel?

Answer 1

When people purport that their association is a corporation and induce others to deal with it as a corporation, they are estopped from denying corporate status if it would prejudice those they dealt with. This allows the courts to hold a purported corporation to its corporate status.

Question 2

What are the necessary elements for corporation by estoppel?

Answer 2

• entity that was not validly incorporated

– officer does something on the corporation’s behalf

Question 3

What is the result of corporation by estoppel?

Answer 3

The organization is treated as a validly formed de jure corporation for most transactions with third parties and the parties must deal with each other as if a corporation was formed (even though everyone agrees that one wasn’t).

Although it is not treated like that for torts or for government obligations, in those cases the shareholders are personally liable.

Question 4

Most corporate statutes say that a corporation comes into an existence when?

Answer 4

• when the articles of incorporation are filed, or
  – when the Secretary of State issues a certificate of incorporation (conclusive evidence that all conditions to incorporation were met)

Question 5

What is involved in the premature commencement of a business?

Answer 5

Incorporators enter contracts on behalf of an unincorporated corporation and try to obligate it to things before the corporation is formed. Corporations that have not yet been formed cannot consent to be bound because they do not exist.

Question 6

Does a promoter have the power to bind a proposed corporation to contracts?

Answer 6

No, because you cannot create an agency relationship without an existing principal, so technically promoters are not agents, and thus they do not have the power to bind proposed corporations to contracts.

Question 7

What is the situation where a promoter would not be personally liable on pre-incorporation contracts?

Answer 7

If a third-party contracted with the promoter knowing that the corporation wasn’t in existence yet, but still agreed to look solely to the corporation for performance

Question 8

What are different ways for pre-incorporation contracts to bind a corporation once the corporation is formed?

Answer 8

- ratification
– adoption
– acceptance of a continuing offer
– formation of a new contract
– novation
– quantum meruit
– third-party beneficiary theory

Question 9

How can ratification bind a corporation once it is formed to a pre-incorporation contract?

Answer 9

If the corporation accepts an act that is made on its behalf by an agent once a corporation is formed, it is bound. Ratified contracts relate back to the date that the promoter made them

*** Technical note: in order for ratification to work, the principal must have existed at the time of the contract, and since the corporation wasn’t technically formed then, there’s no way to ratify a pre-incorporation contract, but courts generally just use the term ratification to mean adoption

Question 10

How can a corporation be bound after it is formed to a pre-incorporation contract through adoption?

Answer 10

The corporation assents to a contract that was made in contemplation that the corporation would assume it after formation via any words or acts of corporate officers that show a sense or approval, and then the adopted contract becomes binding on the corporation at the date of adoption unless the corporation chooses a different date. Once the contract is adopted, the corporation is liable for it. Adoption need not be formal, it can be inferred from conduct that shows an intention to be bound