Promoters

There are many places the test makers could go to test promoters in the subject of Corporations. I'll hit upon some of the most important places in this post.

First, it's important to understand the role that a promoter plays in the pre-incorporation stage of a business. Before a corporation is formed, promoters attempt to procure the capital and such that will be used by the corporation after the corporation is formed. Absent a contrary agreement, promoters are joint venturers and each has a fiduciary relationship to the others. As is always true with such a relationship, it'll be breached if one secretly pursues personal gain at the expense of the others.

In addition, each promotor owes to the corporation a duty of fair dealing and good faith. If a promoter profits by selling property to the corporation, the promoter may be liable to the corporation for that profit unless there is approval after full disclosure to an independent board of directors as to all material facts about that transaction. If the board is not completely independent, the promotors might still escape liability if there is full disclosure to all involved in the transaction or if those involved in the transaction unanimously ratify. Promotors must avoid any fraudulent activity; promotors may be liable if plaintiffs can show that they were damaged by the promoters' fraudulent misrepresentation or fraudulent failure to disclose any material fact.

Understanding promoter liability is essential. Anyone who acts on behalf of a corporation knowing that it is not yet in existence is jointly and severally liable for any obligations incurred through such acts. This personal liability will continue even after the corporation has been formed. Releasing a promotor from such liability requires a novation (substituting the corporation for the promoter as a party to the contract) or an agreement that expressly relieves the promotor of any liability for acts in furtherance of forming the corporation.

Not all is lost for the promoter if held liable to third-parties for acts prior to incorporation. A promoter who is held personally liable on a pre-incorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation once the corporation has been formed. It should be noted though that since the corporation does not exist prior to incorporation, the corporation itself (absent a later novation as discussed above) will not be bound on contracts entered into by the promotor. Such liability will squarely fall on the promoters unless reimbursement is available.