Before a company is incorporated—that is before documents are formally filed with the proper government entity i.e., the Secretary of State—it may be necessary for the company to enter into a contract to preserve some advantage. Before incorporation, for example, a company may need to enter into a lease for office or storage space to take advantage of a lower rent or to take advantage of some other deal that will not be around after the company is incorporated.
Contracts that are signed before a company is incorporated are called pre-incorporation contracts.
Pre-incorporation contracts are often signed by promoters—i.e., individuals who act for the company before the company is formed. In New York, and elsewhere, the law is clear: “a promoter who executes a pre-incorporation contract in the name of a proposed corporation is himself personally liable on the contact unless the parties have otherwise agreed.” Clinton Investors Co. II v. Watkins, 146 A.D.2d 861 (3d Dep’t 1989); see also, Oost-Lievense v. N. Am. Consortium, P.C., 969 F. Supp. 874, 880 (S.D.N.Y. 1997) (recognizing that a promoter is personally liable for pre-incorporation contracts).
In this three-part series on Litigating Pre-incorporation Issues, we will make clear the concepts that come into play when a promoter is being held for a pre-incorporation contract, whether the contract is for the lease of an office space or for the subscription of shares in a corporation. We will explain New York, Colorado, and Delaware laws on the following concepts:
- De jure corporation
- De facto corporation
- Corporation by estoppel
- Novation
- Ratification (note that a corporation that was not in existence when the deal was made cannot ratify a contract. Ratification applies only if the corporation was in existence when the deal was signed)
- Agency principles (and their application to pre-incorporation contracts)
- Agreements to subscribe for shares
- And other related concepts
In articles that will follow, we will explain these concepts and show how we use them to benefit and defend our clients’ interests.