Pre-Incorporation Transactions

Question 1

Are promoters liable for pre-incorporation transactions?

Answer 1

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

+ K specifically disclaims the personal liability of the promoter; OR

+ circumstances demonstrate the other party agreed to look only to the corp. for performance.

Question 2

Is the corporation liable for pre-incorporation transactions after formation?

Answer 2

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

Question 3

Effect of a corp. adopting a pre-incorporation transaction after formation

Answer 3

If the corp. adopts the K, the promoter remains liable on the K but disentitled to indemnification from the corp.

EXPRESS adoption = Board passes a resolution adopting K.

IMPLIED adoption = Occurs when the corp. accepts/acknowledges the benefits of the K.

Question 4

Effect of a novation of a pre-incorporation transaction

Answer 4

A novation releases promoter from liability on the pre-incorporation K.

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