Promoter Liability. Part 1: Theories. Rule. PROMOTERS ARE PERSONALLY LIABLE ON A CONTRACT UNLESS THE OTHER PARTY AGREES TO LOOK TO SOMEONE ELSE. CORPORATION CANNOT RATIFY ACTION AFTER THE FACT SINCE IT DID NOT EXIST AT THE TIME THE CONTRACT WAS ENTERED INTO. Primary Secondary Liability.
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Part 1: Theories
REVOCABLE OFFER TO A NONEXISTENT CORPORATE AND WILL BE A CONTRACT IF THE CORPORATION IS FORMED AND ACCEPTS CONTRACT.
Effect: Not personally liable but view transaction as a revocable offer that is binding only after corporation is formed and adopts the contract
IRREVOCABLE OFFER FOR A LIMITED TIME WITH THE CONSIDERATION AS A PROMISE TO FORM A CORPORATION IF CORPORATION IS FORMED THEN BINDING CONTRACT.
Effect: Not personally liable on the contract but irrevocable offer with promise to form the corporation. (Liable if fail to take steps to incorporation but not liable on the contract.)
1) Promoters must make full disclosure of the consideration paid for stock if they become shareholders in the new corporation. (Frick)
2) If a 3rd party agrees to look to the corporation to be formed for payment and not the promoter, the promoter is not liable. Look to 3rd party's action. (Quaker)
3) Shareholders can adopt the contract made by promoter by acquiescence if they know of the contract and fail to object.
MacArthur- Contract is effective on date of adoption, not original date before incorporation.
1)Corvette of Miami (typed)
Howard Betz (written & seal)
2) Supreme Construction co (typed)
By Sam Capitino, Sr. Pres. (written)
Sam Capitino Sr. Pres (written)
3) First Management Co. Inc. (typed)
By Katy Vallas, Secy
By Claude Wilson Jr. Personal
1) Does exchange between promoter & 3rd party constitute a binding contract or an offer?
- Expressions by the parties,
- Manner of signing, and
- Actions of parties impacting the expectations.
a) If it is a contract, will promoter remain liable?
b) If it is an offer, is there consideration to make offer irrevocable?
2) Does the promoter have an obligation to incorporate as part of offer?
3) Is the promoter also going to be a shareholder?
a) Has there been full disclosure to other shareholders or promoters?
b) Has a disinterested board approved action?
Part 2: Piercing the Corporate Veil
1. Defective incorporation: Court will extend protection of corporate entity if there was a good faith attempt to incorporate and carrying on as if are corporation, and statute permits to recognize-limited liability upheld.
2. Disregarding corporate entity: fraud perpetuated vs 3rd parties by sole shareholder-personal liability attach
3. Alter ego doctrine: Based upon actions of parties as individuals, attribute actions of corp. to individual-personal liability attach
1. De Jure: recognized by state as being incorporated because there is conformity with the mandatory conditions precedent under the statute, but there are minor statutory requirements that have not been fully complied with; certificate has been issued.
2. De Facto: defective incorporation which is defectively formed and is subject to attack by the Secretary of State
Must show 1) valid law under which to incorporate; 2) good faith effort to incorporate; 3) holding self out as corporation--States do vary on the specific language.
3. Corporation by Estoppel: equitable doctrine that relies upon the existence of defacto corporation but focuses on acts and intent of the parties;
--Defense where third party is estopped to deny the existence of corporation based on the actions and reliance of the party that is dealing with the corporation;
-Often requires a failure to hold individual as guarantor or primarily liable.
a. Undercapitalization or inadequate capital to run the corporate business;
b. Failure to observe corporate formalities (elect officers, hold meetings, resolutions, maintain corp. records);
c. Nonpayment of dividends;
d. Debtor/corporation is insolvent;
e. Siphoning funds by dominant shareholder /treating corporate assets as their own and withdrawing them;
f. Non-functioning officers and directors;
g. Corporation is a facade for the operations of a dominant shareholder; and/or
h. Hold yourself out as personally liable for corporate debts.
Person asserting claim must show unity of interest and ownership between the corporation and shareholder (dominant) such that no separate identities exists; and if the acts are treated as the corporation’s alone, it will lead to an inequitable result.
- Applies to contract claims
- In tort claims, must also show individual shareholder was negligent.