Pg 7 Flashcards
What is the function of a promoter with regard to pre-incorporation?
- discovers business opportunities
- prepares plans
- gets experts
- formulates business and financial plans
- assembles the enterprise
- negotiates control over subject matter through options or contracts made on behalf of the proposed corporation or on his own credit
- arranges for his own compensation.
He usually sells the enterprise to investors and gets speculative profits from securities of the new company
What duty does a promoter owe to the corporation?
A fiduciary duty to act with utmost good faith in all dealings with corporate shareholders and fairness with promotional activities and dealings. He cannot take unfair advantage of the corporation or the stockholders
What is the duty of disclosure that a promoter owes during the pre-incorporation process?
He should disclose all material facts to the board, stockholders, and fellow promoters. This includes not misrepresenting any material facts and making known any personal interest in any transaction relating to the corporation
When does the fiduciary relationship of a promoter continue until?
Until the corporation is completely established
Are promoters allowed to make secret profits?
No, and they must fully advise the corporation and its members of any interest that they have that would affect the corporation or its members. Promoters cannot knowingly use their fiduciary position to get secret profits at the expense of the corporation or members
Who does a promoter owe a fiduciary responsibility to?
General creditors, co-promoters, and the corporation
If a promoter sold property that was overvalued to the corporation in return for a large number of the corporation’s securities or stocks, then resold it to the public for high prices, or got a big block of shares for nothing, is that allowed?
No, because that breaches his fiduciary duty since he gets compensation by fraud
If a promoter has secret knowledge, is that imputed to the corporation?
No, even if he becomes a director or shareholder so long as his interests are antagonistic to the corporation and it wouldn’t be expected for him to reveal his knowledge to others.
What is the full disclosure defense for promoters?
A profit isn’t secret if all the parties with an interest in the corporation know about it and assent to it. So the promoter must fully disclose all material facts to the Board of Directors or all existing shareholders, and if they assent to it, by majority, it’s OK.
What is the liability of a promoter?
He is usually personally liable on pre-incorporation contracts even though they were made on behalf of the corporation.
What are possible forms for pre-contractual arrangements with a promoter?
- promoter got an offer from a third-party that can be accepted/rejected after incorporation
– promoter makes a contract in his own name
– promoter makes a contract in the company’s name as its agent
– promoter makes a contract that stipulates that at formation the corporation will take his place
– promoter makes a contract that binds him but says that if the company is formed and adopts the contract, he is just secondarily liable
If a promoter gets an offer from a third-party for pre-incorporation that can be accepted or rejected after incorporation, and the promoter enters this, is he personally liable?
No, this is just a revocable offer to the projected corporation by a third-party, and a contract doesn’t arise until the corporation comes into existence and then accepts the offer
If a promoter makes a contract in his own name without any provision to bind the corporation, must the corporation accept the contract and indemnify the promoter?
Not necessarily, so there’s a risk if promoters do this
What is happening when a promoter makes a contract that binds him at the time of contracting with a stipulation that at formation, the corporation will take his place and the promoter will be relieved of liability?
The parties intend an immediate contract with the promoter, but imagine a novation will happen at formation that will substitute the corporation for the promoter
If a promoter causes another party to think that the corporation is already in existence and that the promoter is its agent and contracts for it, who is liable on that contract?
The promoter. He is also liable for deceit and other breaches
