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Corporations - Organization and Financial Structure

Corporations - Organization and Financial Structure -...

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Unformatted text preview: BUSINESS LAW II Corporations Organization & Financial Structure Promoters Promoters bring about the “birth” of a corporation by arranging for capital and financing, assembling the necessary assets, equipment, licenses, personnel, leases, and services Promoters also handle the details of the legal formation of the corporation Promoter’s Liability on Preincorporation Contracts Contracts in Promoter’s Name If a promoter signs contracts in his or her own name, then the promoter is liable on these contracts The corporation will not be liable upon its creation Promoter’s Liability on Preincorporation Contracts Contracts in the Name of the Yet-To- Be-Created Corporation The promoter may make contracts in the name of a corporation not yet formed These contracts do not automatically bind the corporation upon its formation Promoter’s Liability on Preincorporation Contracts Contracts in the Name of the Yet-To- Be-Created Corporation (Cont.) An unformed corporation has no power to contract Thus, it is not liable on any contract, even one made in its name, or on its behalf Promoter’s Liability on Preincorporation Contracts The newly-formed corporation may choose to adopt the promoter’s pre-incorporation contracts The promoter remains liable on preincorporation contracts even if they are adopted by the newly-formed corporation Promoter’s Liability on Preincorporation Contracts A careful promoter can avoid liability by: The promoter may agree with a third party that it will relieve the promoter of liability under the contract immediately when the newly-formed corporation adopts the contract. A promoter can avoid personal liability if the third party and the corporation also agree to a novation substituting the corporation for the promoter A novation substitutes a new party, and discharges the liability of one of the other parties to the contract This requires the agreement of all three parties Promoter’s Liability on Preincorporation Contracts The safest route for the promoter is to avoid pre-incorporation contracts and to incorporate before making contracts on the corporation’s behalf Crye-Like Realtors, Inc. v. WDM, Inc. , text pg 986 Promoter’s Duty A promoter has a fiduciary duty to the corporation and its initial shareholders A promoter is not the agent of the corporation or of the prospective investors The corporation does not yet exist, and the investors have not appointed the promoter, and have no power to control the promoter...
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