Pre-Incorporation Transactions

Question 1

Who are Promoters?

Answer 1

Act on behalf of the unformed corp; take preliminary steps for creation such as entering into contracts.

**They are not agents of the corp. and have no power to bind the corp.

Question 2

What is the rule on liability for Promoters?

Answer 2

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

(1) the K disclaims personal liability of the promoter

OR

(2) circumstances demonstrate the the other party agreed to look only to the corp. for performance

Question 3

Rule for Promoter liability in the case of multiple Promoters

Answer 3

Because there is mutual agency among Promoters, contracts entered into bind each promoter and they are joint and severally liable.

Question 4

Rule for Corporation liability on pre-incorporation contracts

Answer 4

The corp. is not liable on pre-incorporation k’s unless the corp. assumes liability through (1) adoption or (2) novation

Question 5

How does a Corp. adopt a pre-incorporation contract?

Answer 5

Expressly: by the board passing a resolution that adopts the k

OR

Impliedly when the corp. accepts of acknowledges the benefits of the K

Question 6

When does a Corp. novation of a pre-incorporation contract occur?

Answer 6

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

**releases the promoter from liability