- Under Rosen, may Lena recover from Beacon?
Answer: No, because Beacon's ratification of the contracts was not a promise to pay Lena, and Rosen bars quantum meruit recovery for both services and expenses.
Whenever you see a promoter seeking compensation from a corporation for preincorporation work, remember the strict rule: the corporation is not automatically liable. Liability attaches only if, after incorporation, the board expressly or by clear implication promises to pay the promoter—and ratifying contracts the promoter made with third parties does not count as such a promise.
Here, Beacon's board ratified the supply agreement and lease and passed a resolution thanking Lena. That ratification binds Beacon to those third parties, but it is not a promise to pay Lena. Because no board action authorized paying her, Lena cannot recover her $40,000 in services or her $8,000 in expenses. Rosen explicitly bars quantum meruit recovery for both services and expenses in the absence of a post-incorporation promise, even if Beacon was enriched.
The choice claiming Beacon's ratification and acceptance of benefits requires payment to avoid unjust enrichment misreads Rosen, which squarely rejects unjust enrichment as a basis for recovery here. The choice allowing only the $8,000 in expenses is also wrong because Rosen expressly prohibits recovering expenses as well. Finally, the choice stating a corporation can never compensate a promoter is overbroad—Rosen allows compensation if the board expressly or by clear implication promises to pay after incorporation. The problem here is that no such promise was made. Remember: ratifying a deal with a third party is not the same as hiring the promoter. Watch for that distinction on the bar exam.
- Which of the following facts, if true, would most strongly support Maya's argument that she is not personally liable on the lease?
Answer: Apex, Maya, and Gourmet Events signed a written agreement stating that Gourmet Events would be substituted for Maya as the tenant and that Apex released Maya from all obligations under the lease.
When you see a pre-incorporation contract signed by a promoter, remember the default rule: the promoter is personally liable. A corporation cannot contract before it exists, so Maya, as promoter, was the actual contracting party. The corporation may later adopt the lease and become liable too, but the promoter is released only by a novation—an agreement among the promoter, the corporation, and the third party substituting the corporation for the promoter and discharging the promoter.
Here, Maya signed as "Maya, for the benefit of Gourmet Events" and Apex knew the corporation had not been formed. Maya's strongest defense would be a true novation. The answer describing a written agreement among Apex, Maya, and Gourmet Events substituting Gourmet as the tenant and releasing Maya is exactly that: Apex consented to substitute the corporation and discharge Maya, so Maya is no longer liable.
Board adoption alone is not enough. Even if Gourmet's board expressly adopted the lease and paid rent for nine months, that only adds corporate liability—Maya remains liable on her original contract unless Apex agrees to release her. Similarly, Maya's statement that she was signing only for the corporation, without Apex objecting, does not overcome the default rule; the third party's mere knowledge of her intent is not the same as agreeing to release her. Finally, the co-promoters' separate indemnity agreement affects only internal rights among the promoters—it does not affect Maya's liability to Apex.
On exam day, for any promoter liability question, ask: was there a novation? Adoption is not release.
- Under In re Advar, are the investors entitled to rescind?
Answer: Yes, because Bianca failed to disclose the spectrum sale and her profit when soliciting the subscriptions, and later board approval does not cure that failure.
Whenever you see a promoter-solicitation question, the key rule is that the fiduciary duty runs to the prospective subscribers at the time of solicitation. They must be told all material facts, including the promoter's secret profit on property sold to the corporation. Here, Bianca's $1.5 million profit on the spectrum licenses was material, and her subscription materials hid it behind the vague phrase "customary fees." So under In re Advar, the investors can rescind. The later board approval—even with independent directors—does not cure the earlier nondisclosure; the duty was already breached when the subscriptions were solicited. That is why the "independent directors approved it" answer is wrong. The "investors cannot show any loss" answer is also wrong: rescission returns the parties to their original positions; the investors need not prove out-of-pocket loss. And the answer saying rescission is available "only if the licenses were worth less than $2 million" misunderstands the remedy—rescission is based on the promoter's breach of fiduciary duty, not on proving the corporation overpaid or suffered damages. The fact that investors later learned of the profit after board approval does not waive their right to rescind. Study tip: on promoter-liability questions, locate the timing of disclosure. Full disclosure to the board after incorporation is too late; disclosure must be made to the investors before they subscribe.
- Which of the following facts, if true, would most undermine the investor's demand?
Answer: Rafael disclosed his purchase price and the $200,000 profit to the board before it approved the purchase.
Whenever you see a founder or promoter transacting with a newly formed corporation, think fiduciary duty. A promoter may profit from selling property to the corporation only after full disclosure of all material facts to an independent board. Here, the investor's demand rests on the $200,000 secret profit Rafael allegedly made.
The strongest defense is that Rafael disclosed his purchase price and the $200,000 profit to the board before it approved the purchase. Full disclosure of the cost and profit is exactly what the fiduciary duty requires. Once the board knowingly approved the transaction, the corporation consented to the deal, and the investor cannot demand that Rafael give back the profit.
The other facts do not cure the problem. If the land's fair market value had risen to $500,000, the corporation may have paid a fair price, but fair value alone does not excuse a promoter's failure to disclose his secret profit. The board still needed to know Rafael's cost and gain. If the board knew Rafael bought the land before incorporation but never asked what he paid, that is not enough; the duty to disclose is on Rafael, not the board's duty to investigate. And if Rafael used the $200,000 profit to buy warehouse equipment leased at below-market rates, that later generosity does not erase the earlier breach; a fiduciary cannot "repay" an undisclosed profit by making a different, favorable deal later.
On exam day, remember the two-part test for promoter transactions: full disclosure plus independent approval. Both are needed; fairness or good intentions alone will not save the transaction.
- Which additional fact would be most important in determining whether Jordan can recover for his pre-incorporation services?
Answer: Whether the board, after incorporation, agreed to compensate Jordan for the services he performed before Bluebird was formed.
Whenever you see a promoter or pre-incorporation transaction, remember the central rule: a corporation is not automatically liable for contracts made before it existed. The promoter may be personally liable, and the corporation becomes liable only if it adopts or ratifies the arrangement. For personal services, that adoption typically requires some post-incorporation corporate action.
So the most important fact is whether Bluebird's board agreed after incorporation to compensate Jordan for his six months of pre-incorporation work. An agreement by the board would be ratification, creating corporate liability to Jordan. Without that, Jordan remains an unpaid promoter who assumed the risk of nonpayment.
The other facts are less decisive. Whether Jordan was elected to the board at the first shareholders' meeting is irrelevant to whether the corporation owes him for past services. Whether Bluebird's business depended on the lease and liquor license Jordan obtained might support ratification of those specific contracts if the corporation accepted their benefits, but it does not by itself establish an obligation to pay Jordan personally for his pre-incorporation efforts. Whether Jordan reasonably expected compensation misses the point: even a reasonable expectation does not bind the corporation absent its own agreement to pay.
On the exam, look for post-incorporation conduct—board approval, acceptance of benefits, or an express promise—before holding the corporation liable for a promoter's pre-incorporation work.
- Which of the following claims is Priya most likely able to bring against Tomas?
Answer: Breach of fiduciary duty as a promoter, because Tomas secretly diverted to his own company a business opportunity that he was expected to pursue for the venture he was promoting with Priya.
Whenever you see a business opportunity taken before a corporation is formed, think promoter's fiduciary duty. A promoter owes the corporation and co-promoters a duty not to secretly divert opportunities within the scope of the venture they agreed to promote. Priya and Tomas agreed to form a medical supply company and share profits from promotional efforts. Tomas learned of the hospital contract in that capacity, yet he formed a separate company and took the contract for himself before the corporation existed. That is the classic diversion of a corporate opportunity by a promoter, so the breach of fiduciary duty as a promoter claim is the strongest.
The duty of loyalty as a director fails because Tomas was not a director when he acted—the corporation had not been formed. Fraud in the inducement fails because the agreement to form the company was not induced by any misrepresentation; Tomas's later concealment does not make the initial agreement fraudulent. Tortious interference with prospective economic advantage fails because Tomas did not interfere with an existing or probable business relationship of the venture—he competed for the contract himself, and the venture had no right to it yet.
On the bar exam, distinguish promoter liability from director liability by timing: promoter duties arise before incorporation, director duties after. If the opportunity was taken before the corporation existed, answer promoter.
- Is Larkspur likely to recover Deon's profit?
Answer: Yes, because Deon failed to disclose the amount of his profit to the independent directors before the approval, so the approval was ineffective and Larkspur may recover that profit.
Whenever you see a promoter transaction, remember that promoters owe the corporation a fiduciary duty of full disclosure—not just honesty about a conflict. The key question is whether the disinterested directors approved the sale with complete information. Here, Deon told the board he owned the parcel and would benefit, but he concealed his cost and the resulting $120,000 profit. The rule requires "complete and candid disclosure," including the amount of profit, before approval is effective. Because that disclosure was missing, the outside directors' approval was ineffective, and Larkspur may recover Deon's profit. Fairness of the price does not cure nondisclosure.
The answer limiting recovery to the amount by which the price exceeded fair market value is wrong: the corporation's remedy is rescission or recovery of the promoter's profit, not merely the excess over fair value. The answer saying Deon's disclosures sufficed is also wrong, because disclosing ownership and benefit is not the same as disclosing the profit amount. Finally, the answer that the objectively fair $200,000 price bars recovery misreads the rule—a fair price does not excuse nondisclosure.
Study tip: in promoter-transaction questions, look for whether the profit amount was disclosed to disinterested directors. If the facts only say the promoter disclosed an interest or a price, the required disclosure is incomplete, and approval is ineffective.
- Under Vega, may ClearMatch obtain the license or its profits?
Answer: Yes, because Jae discovered and developed the opportunity while promoting ClearMatch and did not first present it to a fully informed board.
Whenever you see a promoter on the bar exam, remember that fiduciary duty is measured from the moment the promoter begins promoting the corporation, not from formal incorporation. Under Vega, an opportunity discovered or developed while promoting the corporation and within its intended line of business belongs first to the corporation. Jae was negotiating for ClearMatch's intended logistics-software licensing business before the company existed, and he told the developer he was acting for a company he was forming. That made the license a corporate opportunity. ClearMatch wins because Jae acquired it without first presenting it to a fully informed board, and paying with personal funds does not defeat the duty.
The answer choices saying "No, because ClearMatch did not exist when Jae acquired the license and Jae paid the fee with his own funds" confuse timing and funding with the promoter's duty: promoters owe duties pre-incorporation, and use of personal funds doesn't permit keeping the opportunity. Likewise, "a promoter owes no fiduciary duty until the corporation is formed and has a board" misstates the rule—the duty arises while promoting the corporation, and the board need not exist yet. Finally, "Yes, but only if ClearMatch proves the license would have produced actual monetary profit" is wrong because the corporation may trace and recover the opportunity itself or its profits; it need not prove profitability first.
Your takeaway: when a promoter takes a business opportunity in the company's intended line, ask only whether the board was fully informed before the promoter acted.
- Which of the following is the most significant legal issue raised by these facts?
Answer: Whether Dana, Ellis, and Frank are personally liable on the contract even though the corporation was never formed and they signed in their capacity as promoters.
This fact pattern tests promoter liability on pre-incorporation contracts. When someone contracts "for" a corporation not yet formed, the key question is whether the promoter intended to be personally bound or whether the other party clearly agreed to look only to the future corporation. The mere use of words like "as promoter" or "a corporation to be formed" is usually treated as descriptive, not exculpatory. Because Great Falls never came into existence, there is no principal to assume the contract, so Dana, Ellis, and Frank—as promoters—are the only contracting parties and are personally liable unless the supplier expressly agreed otherwise. That is exactly why the central issue is personal liability despite their promotor signatures.
The failure-to-file-articles argument misses the point: not filing articles means no corporation was ever formed, but that does not relieve promoters; it makes their liability more likely. Likewise, no demand on the corporation is required before suing promoters, because there is no corporate debtor to demand payment from; any such demand requirement would apply, if at all, only after a corporation exists and has adopted the contract. Nor does the collapsed venture make the hops contract unenforceable for lack of consideration: the supplier's promise to sell and their promises to buy are bargained-for exchange, and consideration does not depend on whether the contemplated corporation later materializes.
Keep your focus on promoter liability, not on corporate formalities or consideration. On the bar exam, remember: when in doubt about pre-incorporation contracts, promoters are personally liable absent a clear agreement to the contrary or a subsequent novation.
- Which of the following facts, if true, would most strongly support Tower's refusal to pay Nguyen for the final phase?
Answer: Tower's CEO, when using the plans and paying the first two invoices, did not know that the plans had been prepared under a contract made before Tower's incorporation.
When you see a promoter signing "on behalf of a corporation to be formed," remember the key issue is whether the corporation adopted the contract after incorporation. Adoption can be express, or implied through knowingly accepting the benefits of the contract. So ask: Did the corporation, with knowledge, ratify the deal?
Here, Tower's CEO used Nguyen's plans and paid the first two invoices. Normally that looks like implied adoption. But if the CEO did not know those plans came from a pre-incorporation contract, then Tower never knowingly adopted that contract. A corporation cannot ratify an obligation it does not know exists. Without adoption, Tower is not bound to pay the final phase. That is why the knowing-use fact most strongly supports Tower's refusal.
"Tower never used the final-phase drawings and returned them" does not let Tower off the hook. If Tower had already adopted a single, integrated design contract by knowingly accepting the earlier phases, liability for the final phase attached regardless of whether it later used those drawings. Non-use of a deliverable is not a contractual defense.
"Lee was not elected to the board until after the contract was signed and the corporation formed" is irrelevant. A promoter need not be a board member to sign a pre-incorporation contract; and a corporation can later adopt the contract through its officers or agents even if the promoter never became a director.
The clause that Lee "would not be personally liable" shields Lee, not Tower. If anything, it may indicate the parties contemplated the future corporation as the payer; but it does not by itself make Tower a party. Tower still needed to adopt the contract.
Study tip: Adoption is all about knowing acceptance. If a corporation enjoys the benefits but lacked knowledge of the pre-incorporation contract, its conduct is not ratification. On exam, spot whetherofficers knew the contract existed when they accepted benefits.
- Under the statute, may the lessor recover from Tara?
Answer: Yes, because the lease contains no express release of Tara, and the lessor's knowledge that Atlas was unformed does not satisfy the statutory exception.
Whenever you see a pre-incorporation contract signed by a promoter, start with the statutory default: the promoter is personally liable unless the other party expressly agrees not to hold her liable. Tara signed as promoter for a corporation to be formed and disclosed that Atlas was not yet incorporated. But the statute requires more than knowledge—it demands an express agreement, either in the contract or at the time of contracting, releasing the promoter. The lessor said nothing and the lease had no clause, so Tara remains personally liable.
Atlas's later adoption made Atlas liable too, and its payments show adoption. But the statute is explicit: adoption does not discharge the promoter unless the other party expressly releases her or agrees to substitute the corporation. No such express release or substitution occurred, so Tara was not discharged.
The answer claiming "no because Tara disclosed" ignores that disclosure alone is not the statutory exception. The answer claiming "no because Atlas adopted and paid" misreads adoption as substitution; it only adds Atlas as a second obligor. The answer claiming "yes, but only for pre-adoption obligations" correctly sees liability but wrongly implies adoption discharges Tara going forward—it does not.
On the exam, promoter-liability questions hinge on express agreement, not notice. Search for words like "expressly agrees" or "release"; knowledge or silence will never satisfy the exception.
- Is Ben obligated to pay for the shares?
Answer: Yes, because the parties agreed to a 12-month irrevocability period, and Ben's attempted revocation came before that period expired.
Whenever you see a preincorporation subscription question, remember the statutory rule is a default, not a ceiling. The statute says a subscription is irrevocable for six months "unless the subscription agreement provides otherwise," so parties may lengthen or shorten that period by contract. Here Ben signed an agreement making his subscription irrevocable for 12 months, and that contractual term controls. Ben emailed his revocation ten months later, still inside the 12-month period, so his revocation was ineffective—even though it was written and sent before incorporation and before the board's written acceptance. Alder's later acceptance therefore created an enforceable obligation, and Ben must pay.
The answer claiming the statutory six-month period is the maximum permissible period gets the statute backwards: six months is only the default, and "unless the subscription agreement provides otherwise" expressly allows a longer irrevocability period. The answer claiming the default six-month period had expired before Ben revoked ignores the parties' 12-month agreement, which displaced the default. Finally, the answer claiming a subscriber may revoke at any time before acceptance ignores the valid contractual irrevocability period; acceptance timing matters only after the irrevocability period ends.
Study tip: on bar questions, watch for "unless the agreement provides otherwise"—that language usually signals that the statutory rule is a default that can be modified by contract.
