2. Preincorporation Transactions Flashcards
(12 cards)
What are promoters responsible for in the context of creating a corporation?
Promoters take the necessary preliminary steps for creating a corporation
These steps often involve contracts that the promoters enter into for the benefit of the not-yet-formed corporation.
Are promoters considered agents of the contemplated corporation?
No, promoters are not agents of the contemplated corporation
Because the corporation is not yet in existence, it cannot be a principal to any agency relationship with a promoter.
What fiduciary duties do promoters have?
Promoters are fiduciaries of each other and can be held liable for violating their duties as fiduciaries.
What type of relationship exists among multiple promoters?
A mutual agency (or partnership-type relationship) exists among the promoters themselves.
What is the liability of a corporation for pre-incorporation contracts made by promoters?
A corporation is not liable for pre-incorporation contracts made for its benefit by promoters unless it adopts the contract.
What constitutes express adoption of a pre-incorporation contract?
Express adoption generally occurs when the board of directors passes a resolution.
What constitutes implied adoption of a pre-incorporation contract?
Implied adoption occurs when the corporation accepts or acknowledges the benefits of the contract in some manner.
What is the liability of promoters on pre-incorporation contracts?
Any person purporting to act on behalf of a corporation with actual knowledge that the corporation is not yet effectively incorporated will generally be jointly and severally liable.
What are the two exceptions to promoter liability on pre-incorporation contracts?
- Promoter’s liability is disclaimed by the third party
- A novation occurs releasing the promoters from all personal liability.
How do courts determine whether a third party intended to hold the promoter personally liable?
Courts examine the totality of the circumstances, including whether the third party had knowledge or belief that the corporation would come into existence.
What is a novation in the context of pre-incorporation contracts?
A novation occurs when the promoter, the second party, and the incorporated corporation agree to substitute the corporation as a party to the contract.
What happens if the newly formed corporation adopts a contract without a novation?
The promoter remains liable on the contract but will be entitled to seek indemnification from the newly formed corporation.
