MBE Rules · Business Associations
Promoter Liability
Promoter liability (Cal.)
The rule
Promoters are personally liable on pre-incorporation contracts and remain so after incorporation unless a novation substitutes the corporation; the corporation is bound only if it adopts the contract.
In plain English
Promoters are individuals who take the initiative to form a corporation and are personally liable for contracts made on behalf of the corporation before it is officially formed. This liability continues even after the corporation is created unless the corporation formally assumes the contract through a novation, which releases the promoter from liability.
Worked example
Alice and Bob enter into a lease agreement for office space on behalf of their soon-to-be-formed corporation, Tech Innovations, Inc. After the corporation is incorporated, they fail to have the corporation adopt the lease or execute a novation. When the corporation defaults on the lease, the landlord can still hold Alice and Bob personally liable for the rent.
Memory hook
Promoters are on the hook until the corporation takes the hook off.
The trap
Exams often present scenarios where students must distinguish between personal liability and corporate adoption, leading them to overlook the need for a formal novation.
How examiners test it
Questions typically involve a fact pattern where a promoter enters into contracts before incorporation, requiring candidates to analyze the implications of liability and adoption by the corporation.
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