Promoters

A promoter is one who causes a corporation to be formed, organized, and financed. The promoter's function is to set up the corporation and establish it on a firm footing.

Promoters stand in a fiduciary relationship to the corporation and its subscribers for stock, and to those who it is expected will afterwards buy stock from the corporation.

If the cost and manner of acquisition of the assets by the promoter were fully disclosed to an independent board of directors and the board approved the transaction, the promoter has not breached his fiduciary duty and he can keep any profit from the sale.

If the only shareholders of the corporation are the promoters and no further issuance of stock is contemplated, failure to disclose their financial interest is not a violation of their fiduciary duty to the corporation.

If the original promotional scheme contemplates sale of stock to other investors, the corporation has an action for breach of fiduciary duty against a promoter who fails to fully disclose material facts about property transferred.

The promoter will not be liable to the corporation if he made full disclosure to all the original subscribers for shares and obtained their approval, or if he made full disclosure to the stockholders of the established corporation and they ratified the transaction.

In an action for breach of the promoters' fiduciary duty, the corporation may either avoid the transaction or may hold the promoters liable for the secret profits.

If there is more than one promoter of a corporation, the promoters are in effect joint venturers, and owe each other a fiduciary duty.

As fiduciaries, they cannot make a secret profit on assets which they transfer to the promoters as a group, and must fully disclose to each other information concerning the formation of the corporation. 

There is a mutual agency among the promoters, so that each can bind the others on contracts within the scope of the promotion.

Preincorporation Contracts

Generally, the promoter is personally liable on contracts he entered into in behalf of the prospective corporation, whether made in his name or in the corporation's name, unless the other party looked only to the corporation for performance.

Personal liability will continue even after the corporation is formed, unless there is a novation or an agreement to release liability.

If the promoter signs as agent, he is personally liable because he cannot be an agent for a nonexistent principal.

A promoter may be personally liable for obligations created by another promoter under normal agency principles, as when the promoters are joint venturers, or when ratification occurs.

Even if the promoter is personally liable on the contract, a novation will release him from that liability.  A novation occurs if all parties agree to substitution of the corporation as a party to the contract in place of the promoter.

If the promoter is liable on the contract, he may be entitled to reimbursement by the corporation, if he undertook the contract in good faith, to the extent that the corporation benefited from the contract.

Generally, a corporation is not liable on preincorporation agreements its promoters entered into on its behalf, unless it assumes liability by its own act after it comes into existence.

If the contract was made for the corporation's benefit, concerned a matter on which the corporation could legally contract, and full disclosure was made to an independent board, the new corporation may assume liability.

A corporation may become bound on a contract made in its name and in its behalf by afterwards accepting the benefits of the contract, at least to the extent of the value of the goods or services received.

A third party who entered into a contract with a promoter is liable from the contract's inception.

Subscriptions For Shares

A person may become a shareholder of a corporation by agreeing to buy shares pursuant to a subscription for shares, before or after incorporation.  A subscription is essentially a contract to buy shares that will be issued.

Under most statutes, a preincorporation subscription for shares is irrevocable for a period of time (six months under the Model Act) unless the subscription agreement provides otherwise or all subscribers agree to revocation.