Promotors and Pre-Incorporation Transactions

Question 1

Promotors

Answer 1

Individuals who are intent on forming a corporation and engaged in some transaction entered into on behalf of this not-yet-formed corporation.

Question 2

Binding Power of Promotors?

Answer 2

Because the corporation is not yet in existence, it cannot be a principal to any agency relationship with a promotor. Therefore, promotors have no power to bind the not-yet-formed corporation.

Question 3

Mutual Agency Among Promotors

Answer 3

When there is more than one promotor there is an agency among the promoters themselves. Therefore, Ks entered into within the scope of the promotion would bind each promotor, and each promoter would become jointly and severally liable for these Ks.

Question 4

Promotor Liability for Pre-Incorporation Transactions (Before Formation of Corp.)

Answer 4

In general, promotors are personally liable on the Ks they enter into for the benefit of a not-yet-formed corporation, but the following requirements must be met

• (participation req.)- one must be acting on behalf of the not-yet-formed corp.
• (knowledge req.)- one must know that the corporation has not yet been formed

Question 5

Exceptions to Promotor Liability for Pre-Incorporation Transactions

Answer 5

• When the pre-incorporation K specifically disclaims the personal liability of the promoter; or
• Circumstances demonstrate that the other party agreed to look only to the corporation for performance

Question 6

Determining Whether the Circumstances Demonstrate that the Other Party Agreed to Look Only to the Corporation

Answer 6

Is a fact-intensive inquiry. Courts will pay particular attention to whether the third-party knew and believed the corporation would be formed and thereafter adopt the K in question.

Question 7

Corporation Liability for Pre-Incorporation Transactions (After Formation of Corp.)

Answer 7

A corporation is not liable on any pre-incorporation agreements to its promoters entered into on its behalf unless –> the corporation assumes liability through adoption or novation

Question 8

Adoption (& Its Effect on Promotor Liability)

Answer 8

If a corporation adopts the K of a promoter, the promoter will remain liable on the K to the third party but will be entitled to indemnification from the newly created corp. Adoption can be expressed or implied.

Question 9

Express Adoption

Answer 9

Express adoption generally occurs when the board passes a resolution formally stating the corp. adopts the K.

Question 10

Implied Adoption

Answer 10

When the corporation accepts or acknowledges the benefits of the K in some manner.

Question 11

Novation (& Its Effect on Promotor Liability)

Answer 11

If a novation occurs when three parties (the promotor, the second party to K, and the newly formed corporation) agree to substitute the corporation as the party to the K. Novation completely releases promotors from personal liability.

Question 12

Subscriptions

Answer 12

A subscription is a K to buy shares that will be issued. A person can become a shareholder of a corporation by agreeing to purchase shares pursuant to a subscription for shares either before or after incorporation.

Question 13

Revocability of Pre-Incorporation Subscriptions

Answer 13

Pre-incorporation subscriptions for shares are irrevocable for six months unless the subscription agreement provides otherwise or all subscribers agree to revocation.