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Corporations • Pre-Corporation Formation
CORP#002
Legal Definition
The corporation becomes liable on a promoter's pre-incorporation contracts when the corporation adopts the contract either by: (1) express board of director resolution, or (2) implied adoption through knowledge of the contract and acceptance of its benefits.
Plain English Explanation
Promoters are people who act on behalf of a corporation before the corporation is officially born and formed. Thus, legally, if a promoter enters into a contractual agreement on behalf of the corporation, it wouldn't necessarily or automatically bind the corporation. After all, the corporation didn't yet exist to have an official say in the matter. However, there are a couple ways that a corporation can later become legally bound and liable for specific agreements that its promoters made before formation:
The first way is if the corporation's board of directors make an express resolution to adopt the contract. In other words, it's like if the people who run the corporation say, "Yeah, even though we didn't yet exist when this contract was made, we like it and agree to be bound to it as if we agreed to it ourselves."
The second way is if the corporation implicitly adopts the agreement. How does that happen? First, they are aware that it exists; and, second, they accept its benefits. In other words, if a corporation becomes aware of a contract and, rather than say, "Woah, I don't think this is a good idea." or object to it in any way, then their passive acceptance of the contract acts as a legally binding, implicit acceptance.
The first way is if the corporation's board of directors make an express resolution to adopt the contract. In other words, it's like if the people who run the corporation say, "Yeah, even though we didn't yet exist when this contract was made, we like it and agree to be bound to it as if we agreed to it ourselves."
The second way is if the corporation implicitly adopts the agreement. How does that happen? First, they are aware that it exists; and, second, they accept its benefits. In other words, if a corporation becomes aware of a contract and, rather than say, "Woah, I don't think this is a good idea." or object to it in any way, then their passive acceptance of the contract acts as a legally binding, implicit acceptance.
Hypothetical
Hypo 1: Sam and Bob form a corporation, BigLawn Inc. Their office has a large area of grass around it. Bob and Sam are on the board of directors. Before BigLawn was formed, Sam leased the office building on behalf of BigLawn and hired a landscaping company, MowCo, to mow the lawn each week and bill once per quarter. At the end of the quarter, MowCo sends a bill to BigLawn. BigLawn says, "Woah, this is an agreement you made with Sam, not us. We never agreed to pay you to mow our lawn." Result: Here, Sam was acting as a promoter for BigLawn Inc. Sam is on the board for BigLawn, so BigLawn was obviously aware that the contract existed. Moreover, BigLawn allowed MowCo to mow their lawn, week after week, for three whole months without objecting. Thus, a court will find that BigLawn implicitly adopted the contract that its promoter, Sam, entered into on its behalf with MowCo, meaning BigLawn is liable for the bill from MowCo.
