Corporate Promoters - Next Generation Bar Exam

1. What must a promoter do before profiting from selling the promoter's own property to the new corporation?

   Fully disclose the profit to an independent board or to all existing and contemplated shareholders. Disclosure only to a board the promoter controls does not satisfy the duty.

2. What effect does a corporation's adoption of a pre-incorporation contract have on the promoter's liability?

   It leaves the promoter liable unless there is a novation. A novation requires the third party's agreement to substitute the corporation for the promoter.

3. When does a newly formed corporation become liable on a promoter's pre-incorporation contract?

   When it adopts the contract, expressly or by knowingly accepting its benefits. Until adoption, the corporation is not bound.

4. What right does a promoter have to be reimbursed for pre-incorporation expenses?

   Only to the extent the corporation agrees to pay or knowingly accepts the benefits. A corporation is not automatically bound to reimburse its promoters.

5. What fiduciary duties does a promoter owe?

   Duties of loyalty and good faith to the corporation and its intended shareholders. Promoters stand in a fiduciary relationship with the corporation they create.

6. What is a promoter's liability on a contract made for a corporation not yet formed?

   The promoter is personally liable, even after incorporation, unless a novation releases it. There was no principal in existence when the contract was made, so the promoter is treated as a party.

7. Why do courts call a corporation's acceptance of a promoter's contract 'adoption' rather than 'ratification'?

   The corporation did not exist when the contract was made, so its acceptance cannot relate back. Adoption makes the corporation liable from the time of adoption, not from the date of the contract.

8. When is a promoter not personally liable on a pre-incorporation contract?

   When the third party agreed to look solely to the future corporation. The parties may agree that the third party relies only on the corporation, but the agreement must be clear.

9. A promoter signs a lease for 'XYZ Corp., to be formed.' XYZ is formed, occupies the space, and later defaults. Who is liable to the landlord?

   XYZ, by adoption, and the promoter, absent a novation. Adoption adds the corporation as an obligor without releasing the promoter.

10. A promoter buys land for $100,000 and, without disclosure, sells it to the new corporation for $200,000. What may the corporation recover?

    The promoter's undisclosed $100,000 profit. A promoter who breaches the fiduciary duty of disclosure must disgorge the secret profit.

11. Who is a corporate promoter?

    A person who takes the initiative to form a corporation and arranges its capital and initial business before incorporation. Promoters often sign contracts for the corporation before it exists.

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