Pre-Incorporation Contracts (UBE & NextGen UBE)

There are formalities to forming a corporation, but there may be tasks to be completed even before the corporation has been formed. Those acting on behalf of a corporation that has not yet formed are called promoters, and there is much to know both about promotors and those with whom promoters deal. 

First, promoters have a fiduciary duty to each other that is breached if they secretly pursue financial gain at the expense of the other promoters. They also have a fiduciary duty to the corporation both of fair disclosure and of good faith. 

If a promoter profits by selling property to the corporation, that might be a breach of fiduciary duty, but not if the promoter disclosed all material facts to an independent board of directors. Even if the board is not independent, a promoter will escape liability if the subscribers (those who agree to buy the initial shares offered by the corporation) either knew of the transaction at the time they subscribed, or unanimously ratified the transaction after full disclosure.

Promoters might also be liable if plaintiffs can show that they were damaged by fraudulent misrepresentations or a fraudulent failure to disclose material facts. 

Oftentimes, promoters will enter into pre-incorporation contracts with third parties. By the nature of pre-incorporation contracts, the corporation does not yet exist, and so the corporation is not bound on these contracts unless the corporation expressly or impliedly adopts the promoter's contract. An implied adoption can occur, for example, if the corporation accepts a benefit of the contract. 

Promoters, on the other hand, will be liable. Anyone who acts on behalf of a corporation knowing that it is not yet in existence is jointly and severally liable for obligations incurred. That liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it (in such a case there may be liability for both the corporation and the promoter(s). For a promoter to be entirely released from liability, a novation is required (a formal agreement between all parties releasing the promoter from liability).

Might be noted, however, that even given the above, 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. This type of contribution or indemnity is often available when multiple parties are deemed jointly and severally liable.