Pre-incorporation transactions

Question 1

Mini Outline – Pre-incorporation transactions

Answer 1

(1) Promoters definition
(2) Liability of promoters
(3) corp liability for pre-incorporation

Question 2

Promoters definition

Answer 2

Promoters act on behalf and for the benefit of the unformed corp.; take the preliminary steps for creating the corp. such as entering into contracts

Question 3

Promoter power to bind

Answer 3

Promotors are NOT agents of the unformed corp. and thus have no power to bind the corp.

Question 4

Multiple promoters rule

Answer 4

Multiple Promoters: there is a mutual agency (partnership-type relationship) among the promoters.

Contracts entered into bind each promoter and the promoters are joint and severally liable for these contracts

Question 5

Liability of promoters

Answer 5

Promoters are personally liable on pre-incorporation contracts entered into for the benefit of the unformed corp. unless:

• the contract specifically disclaims the personal liability of the promoter; or
• circumstances demonstrate the other party agreed to look only to the corp. for performance

Question 6

Corp liability for pre-incorporation

Answer 6

The corp. is not liable on a pre-incorporation contract unless, after formation, the corp. assumes liability through adoption or novation

Question 7

Liability thru adoption

Answer 7

If the corp. adopts the contract, the promoter remains liable on the contract but is entitled to indemnification from the corp.

Question 8

Kinds of adoption

Answer 8

Express adoption = Board passes a resolution adopting the contract

Implied adoption = Occurs when the corp. accepts or acknowledges the benefits of the contract

Question 9

Novation

Answer 9

A novation releases the promoter from liability on the pre-incorporation contract

Question 10

Novation creation

Answer 10

Novation = 3 parties—the promoter, the second party to the original contract, and the corp.—agree to substitute the corp. in place of the promoter