Bar Exam (Next Generation) Quiz: Corporate Promoters
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Corporate PromotersQuestion 1 of 12

Rivas v. Meridian Corp. (Ct. App. 2021): A promoter who sells property to the corporation he is promoting stands in a fiduciary relation to it. He must make a complete and candid disclosure before the sale is approved, including the amount of his profit. Approval by a majority of disinterested directors is effective only if that disclosure has been made; a fair price does not excuse non-disclosure. If the promoter profits from a sale without effective approval, the corporation may rescind the sale or recover the promoter's profit.

Deon acquired a parcel for $80,000 while promoting Larkspur Foods, Inc., before soliciting investors. After Larkspur was incorporated, Deon told the board (himself and two independent outside directors) that he owned the parcel, would benefit from its sale, and proposed a price of $200,000. He did not disclose his cost or the $120,000 profit. The outside directors voted to approve; the sale closed. A new investor later learned the facts, and Larkspur sued Deon.

Is Larkspur likely to recover Deon's profit?

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.
Yes, but only for the amount by which the $200,000 price exceeded the parcel's fair market value, because nondisclosure makes the sale voidable only to that extent.
No, because Deon disclosed that he owned the parcel and would benefit from the sale, and two independent directors approved the transaction.
No, because the $200,000 price was objectively fair and Larkspur received the parcel, so it suffered no recoverable loss.
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Bar Exam (Next Generation) Quiz

Bar Exam (Next Generation) Quiz: Corporate Promoters

Practice Corporate Promoters in Bar Exam (Next Generation) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Corporate Promoters, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Next Generation).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Rivas v. Meridian Corp. (Ct. App. 2021): A promoter who sells property to the corporation he is promoting stands in a fiduciary relation to it. He must make a complete and candid disclosure before the sale is approved, including the amount of his profit. Approval by a majority of disinterested directors is effective only if that disclosure has been made; a fair price does not excuse non-disclosure. If the promoter profits from a sale without effective approval, the corporation may rescind the sale or recover the promoter's profit.

Deon acquired a parcel for $80,000 while promoting Larkspur Foods, Inc., before soliciting investors. After Larkspur was incorporated, Deon told the board (himself and two independent outside directors) that he owned the parcel, would benefit from its sale, and proposed a price of $200,000. He did not disclose his cost or the $120,000 profit. The outside directors voted to approve; the sale closed. A new investor later learned the facts, and Larkspur sued Deon.

Is Larkspur likely to recover Deon's profit?

  1. 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. (correct answer)
  2. Yes, but only for the amount by which the $200,000 price exceeded the parcel's fair market value, because nondisclosure makes the sale voidable only to that extent.
  3. No, because Deon disclosed that he owned the parcel and would benefit from the sale, and two independent directors approved the transaction.
  4. No, because the $200,000 price was objectively fair and Larkspur received the parcel, so it suffered no recoverable loss.
Explanation: 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.

Question 2

State Business Corporation Act § 2.04 provides: 'A person who purports to act as or on behalf of a corporation before the corporation is formed is personally liable for obligations incurred, unless the other party expressly agrees, either in the contract or at the time of contracting, not to hold that person liable. If the corporation later adopts the contract, it becomes liable on the contract, but adoption does not discharge the promoter unless the other party expressly releases the promoter or agrees to substitute the corporation.'

Tara signed a five-year equipment lease for 'Atlas Biotech, Inc., a corporation to be formed, by Tara, promoter.' Before signing, she told the lessor that Atlas had not been incorporated and that she was acting only for the future corporation. The lessor said nothing and signed. The lease contained no clause about personal liability. After incorporation, Atlas's board formally adopted the lease and Atlas made payments for a year. When Atlas defaulted, the lessor sued Tara.

Under the statute, may the lessor recover from Tara?

  1. No, because Tara disclosed that Atlas was not yet formed and signed only as a promoter, and the lessor signed with that knowledge.
  2. No, because Atlas adopted the lease and made payments under it, so the lessor must look to Atlas and not to Tara.
  3. Yes, but only for obligations that accrued before Atlas adopted the lease; once Atlas adopted it, Atlas became solely liable and Tara was discharged.
  4. 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. (correct answer)
Explanation: 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.

Question 3

Before forming Northstar Logistics, Inc., Rafael bought a parcel of land for $300,000 with his own funds, intending to use it for the corporation's planned warehouse. After Northstar was incorporated, Rafael proposed that the corporation buy the land from him. The newly appointed board did not know what Rafael had paid for the land and agreed to buy it for $500,000. Rafael did not mention his purchase price or the profit. Six months later, a person who had invested in Northstar learned of the price difference and demanded that Northstar recover the $200,000 from Rafael.

Which of the following facts, if true, would most undermine the investor's demand?

  1. The land's fair market value had risen to $500,000 by the time Northstar bought it.
  2. The board knew that Rafael had bought the land before incorporation but never asked what he paid for it.
  3. Rafael disclosed his purchase price and the $200,000 profit to the board before it approved the purchase. (correct answer)
  4. Rafael used the $200,000 profit to buy warehouse equipment that he leased to Northstar at below-market rates.
Explanation: 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.

Question 4

Maya and two friends agreed to form a catering company, Gourmet Events, Inc. Before the corporation was incorporated, Maya signed a one-year equipment lease with Apex Equipment. The lease identified the tenant as 'Maya, for the benefit of Gourmet Events, Inc., a corporation to be formed.' Apex knew that the corporation had not yet been formed. After Gourmet Events was incorporated, its board voted to adopt the lease, and the corporation used the equipment and paid Apex for nine months. The business then failed, and Apex sued Maya personally for the unpaid rent for the final three months.

Which of the following facts, if true, would most strongly support Maya's argument that she is not personally liable on the lease?

  1. The board of Gourmet Events expressly adopted the lease and assumed all of Maya's obligations under it, and the corporation paid rent for nine months.
  2. 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. (correct answer)
  3. Before signing the lease, Maya told Apex that she was signing only for the corporation and would not be personally liable, and Apex did not object.
  4. Maya's two co-promoters signed a separate writing agreeing to indemnify her for any liability she might incur under the equipment lease.
Explanation: 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.

Question 5

Dana, Ellis, and Frank agreed to form a brewery and signed a contract with a hops supplier. The contract read: 'The undersigned, as promoters of Great Falls Brewing Company, a corporation to be formed, agree to purchase hops as specified.' The promoters never filed articles of incorporation, and the venture collapsed. The supplier demanded that Dana, Ellis, and Frank honor the contract. Dana responded that, because the corporation was never formed and she signed only 'as promoter,' no one is liable on the contract.

Which of the following is the most significant legal issue raised by these facts?

  1. Whether the promoters' failure to file articles of incorporation for Great Falls Brewing relieved them of liability under the hops contract.
  2. Whether the supplier must first make a demand for payment on the corporation before it can maintain an action against the promoters.
  3. Whether the contract is unenforceable for lack of consideration because the contemplated corporation never came into existence.
  4. 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. (correct answer)
Explanation: 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.

Question 6

State Business Corporation Act § 6.20 provides: 'Unless the subscription agreement provides otherwise, a subscription for shares entered into before incorporation is irrevocable for six months. After that period, the subscription is revocable by the subscriber, but a revocation is effective only if written notice is received by the corporation before the corporation accepts the subscription.'

Priya, a promoter for Alder Analytics, Inc., obtained a signed subscription from Ben for 1,000 shares. The subscription agreement stated: 'This subscription is irrevocable for 12 months from the date of signing.' Ten months later, before Alder was incorporated, Ben emailed Priya: 'I revoke.' Two weeks after that, Alder was incorporated and the board accepted Ben's subscription in writing. Alder demands payment.

Is Ben obligated to pay for the shares?

  1. Yes, because the parties agreed to a 12-month irrevocability period, and Ben's attempted revocation came before that period expired. (correct answer)
  2. Yes, because the statutory six-month period is the maximum permissible period of irrevocability, and Ben's revocation was ineffective.
  3. No, because the statutory six-month default period had expired before Ben revoked, so the revocation was effective.
  4. No, because a subscriber may revoke a preincorporation subscription at any time before the corporation accepts it.
Explanation: 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.

Question 7

Jordan spent six months before the incorporation of Bluebird Café, Inc. negotiating a lease, obtaining a liquor license, and developing a business plan for the planned corporation. After Bluebird was incorporated, its board asked Jordan to continue as general manager, and he drew a salary for that post-incorporation work. Jordan later asked the board to pay him for the six months of pre-incorporation services. The board refused, saying Jordan was a promoter who had acted before the corporation existed.

Which additional fact would be most important in determining whether Jordan can recover for his pre-incorporation services?

  1. Whether Jordan was elected to Bluebird's board of directors at the first shareholders' meeting.
  2. Whether Bluebird's post-incorporation business depended on the lease and liquor license that Jordan obtained before incorporation.
  3. Whether Jordan reasonably expected to be compensated when he performed the pre-incorporation services.
  4. Whether the board, after incorporation, agreed to compensate Jordan for the services he performed before Bluebird was formed. (correct answer)
Explanation: 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.

Question 8

Priya and Tomas agreed to form a medical supply company, with each to own half of the shares and share equally in any profits from their promotional efforts. Before the corporation was formed, Tomas learned that a hospital chain was about to award a large supply contract. Without telling Priya, Tomas formed a separate company with his brother-in-law, and that company submitted a bid and signed the contract with the hospital chain before the medical supply corporation was ever formed. The corporation that Priya and Tomas later formed never received the hospital contract. Priya consulted a lawyer about Tomas's conduct.

Which of the following claims is Priya most likely able to bring against Tomas?

  1. 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. (correct answer)
  2. Breach of the duty of loyalty as a director, because Tomas failed to present the hospital contract to the medical supply corporation's board after it was formed.
  3. Fraud in the inducement, because Tomas failed to disclose the hospital contract to Priya before they agreed to share equally in the venture.
  4. Tortious interference with a prospective economic advantage, because Tomas caused the hospital chain to contract with his separate company instead of the venture.
Explanation: 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.

Question 9

Lee, a real estate developer, signed a contract with Nguyen, an architect, for design services for an office building. The contract stated that Lee was acting 'on behalf of Tower Development, Inc., a corporation to be formed.' After Tower was incorporated, Tower's CEO used Nguyen's completed plans to obtain financing, and Tower paid Nguyen for the first two phases of the design work. When Nguyen submitted his invoice for the final phase, Tower refused to pay, stating that the corporation was not a party to the contract.

Which of the following facts, if true, would most strongly support Tower's refusal to pay Nguyen for the final phase?

  1. 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. (correct answer)
  2. Tower never used the final-phase drawings and returned them to Nguyen shortly after receiving the final invoice.
  3. Lee was not elected to Tower's board of directors until after the contract with Nguyen had been signed and the corporation was formed.
  4. The contract stated that Lee would not be personally liable for the design fees if the corporation failed to pay them.
Explanation: 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.

Question 10

Vega v. Halcyon Systems, Inc. (Ct. App. 2020): A promoter's fiduciary duty extends to business opportunities that the promoter discovers or develops while promoting the corporation and that are within the corporation's intended line of business. The promoter must first present the opportunity to a fully informed board before taking it for himself. Using personal funds to acquire the opportunity does not permit the promoter to keep it. If the promoter diverts the opportunity, the corporation may trace it and recover the opportunity or its profits.

Jae was promoting ClearMatch, Inc., which was intended to license logistics software. In negotiations with a software developer, Jae said he was acting for a company he was forming. Before ClearMatch had a board or shareholders, Jae signed the licensing agreement in his own name and paid the $10,000 license fee from personal funds. After ClearMatch was incorporated, its board asked Jae to assign the license. Jae refused and offered to license it to ClearMatch for a royalty. ClearMatch sued.

Under Vega, may ClearMatch obtain the license or its profits?

  1. No, because ClearMatch did not exist when Jae acquired the license and Jae paid the fee with his own funds.
  2. Yes, because Jae discovered and developed the opportunity while promoting ClearMatch and did not first present it to a fully informed board. (correct answer)
  3. No, because a promoter owes no fiduciary duty until the corporation is formed and has a board to receive the opportunity.
  4. Yes, but only if ClearMatch proves that the license would have produced actual monetary profit rather than a loss.
Explanation: 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.

Question 11

Rosen v. Summit Ventures, Inc. (Ct. App. 2022): A promoter's preincorporation services are not compensable from corporate funds unless, after full disclosure, the corporation expressly or by clear implication promises to pay for them. Ratification of contracts the promoter negotiated with third parties is not such a promise. In the absence of a post-incorporation promise, the promoter cannot recover the value of services or expenses in quantum meruit, even if those efforts enriched the corporation.

Lena spent 400 hours preparing a business plan, recruiting investors, and negotiating a supply agreement and a lease for Beacon Labs, Inc. She also paid $8,000 of filing and professional fees. After Beacon was incorporated, the board reviewed the supply agreement and lease, voted to ratify both, and passed a resolution thanking Lena for her 'extraordinary work.' No board action authorized paying Lena. Lena later demanded $40,000 for services and $8,000 for expenses.

Under Rosen, may Lena recover from Beacon?

  1. Yes, because Beacon ratified the contracts Lena negotiated and accepted the benefit of her work, so refusing to pay would unjustly enrich Beacon.
  2. 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. (correct answer)
  3. Yes, but only for the $8,000 of expenses, because restitution is available for a promoter's out-of-pocket expenditures made for the corporation's benefit.
  4. No, because a corporation can never compensate a promoter for preincorporation services, even if the board later expressly promises to pay.
Explanation: 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.

Question 12

In re Advar Teleservices, Inc. (Sup. Ct. 2021): A promoter who solicits subscriptions for shares owes prospective subscribers a fiduciary duty to disclose all material facts bearing on the investment, including any profit the promoter will make from selling property to the corporation. If the promoter fails to disclose that profit, a subscriber may rescind the subscription and recover the amount paid, even if the corporation's board later approved the transaction with full knowledge of the promoter's profit.

Bianca promoted Novell Wireless, Inc. Before soliciting subscriptions, Bianca had contracted to sell her wireless spectrum licenses to the future corporation for $2 million; she had paid $500,000 for them. In the subscription materials sent to investors, Bianca said she would receive 'customary fees' for her promotion but did not disclose the spectrum sale or its $1.5 million profit. Investors subscribed. After incorporation, Bianca disclosed the spectrum sale to the board, which included two independent directors, and the board approved it. Investors later learned of the profit and sued Bianca to rescind their subscriptions.

Under In re Advar, are the investors entitled to rescind?

  1. No, because after incorporation Bianca disclosed the spectrum sale to the board and the independent directors approved it.
  2. No, because the investors received their shares and Novell received the licenses, so the investors cannot show any loss.
  3. 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. (correct answer)
  4. Yes, but only if the licenses were worth less than the $2 million Novell paid, so the investors can prove actual damages.
Explanation: 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.