— Contract must also be one within the powers of the corporation to enter
Chapter V – Promoter’s Contracts
— Promoter: a person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives
consideration therefor
— Promoter’s contracts refer to contracts entered into with the parties knowing
fully well that a corporation does not yet legally exist
— GR: promoter’s contracts are not necessarily binding on the corporation once
formed
— Exception: When the corporation received benefits from the contract at the
time of its constitution
Types:
— A pre-incorporation subscription contract is a special contract, and a type of
promoter’s contract, and although these are contracts between the subscriber
and the corporation, they are at the same time deemed to be contracts among
the SHs of the corporation
— Contracts entered into in the name of the intended corporation by the
promoters or organizers of the corporation
Liability of corporation for promoter’s contracts.
— 60: any contract for the acquisition of unissued stock in an existing corporation
or one still to be formed shall be deemed a subscription even if the parties say
otherwise
— 61: GR: subscription for shares in a corporation still to be formed shall be
irrevocable for at least 6 mos from date of subscription
— exceptions:
— all other subscribers consent to the revocation
— incorporation fails to materialize within 6 mos or within a longer period
as stated in the subscription contract
— before submission of the AOI
— pre-incorporation agreement is a type of promoters contract
— The corporation may make these contracts its own and may become bound on
such contracts if after incorporation, it adopts or ratifies the same or accepts
the benefits with knowledge of the terms.
— Adoption need not be express and may even be implied by the acts of its
officers.
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(Builder’s Duntile case)
— Upon adoption or ratification, the corporation becomes liable
McArthur v Times Printing.
Where a contract is made in behalf of and for the benefit of a proposed
corporation, the corporation after is organization cannot become a party to the
contract either by adoption or ratification
The right of agents to adopt an agreement originally made by the promoters
depends on the purposes of the corporation and the nature of the agreement.
SC ruled that it cannot be a ratification because at the time of the making of the
promoter’s contract between Nimocks and McArthur, there was no corporation yet,
and it could not have ratified it if it were not a party thereto. There cannot be in
law, a ratification of a contract which could not have been made binding on the
ratifier at the time it was made, because the ratifier was not yet in existence. It is
adopted by the corporation as its own as of the date of adoption and not as of the
date of the making.
Cagayan Fishing v Sandiko.
Cagayan Fishing was not yet in existence when Tabora sold to it his lands. It was
not even a de facto corp at the time, thus not being in legal existence it does not
yet possess juridical capacity to enter into contracts. The Tabora contract was
entered into not only between him and a non-existent corporation, but between him
as owner and the same Tabora, his wife and others, as mere promoters of the
corporation. They could not have acted as agents for a projected corporation since
that which had no legal existence could have no agent.
A corporation, until organized, has no life and therefore no faculties. The SC
refused to extend the doctrine of ratification which would result in the commission
of injustice or fraud to third parties.
Even PNB treated Tabora as the owner, not the corporation. Thus Cagayan Fishing
never really purchased the lands, and thus it did not have the right to dispose by
sale to Sandiko.
Corporate rights under promoter’s contracts
— If the other party fails to perform under the pre-incorporation contract, the
corporation which adopts or ratifies it may sue for specific performance or
damages for breach of contract
— Bringing an action to enforce the contract has been held to be sufficient
adoption or ratification
Builders Duntile v Dunn.
GR: A corporation has the power to adopt a contract of its promoters, and one of
the effects of this adoption is that the contract becomes that of the corporation.
Exception: But the power to adopt must only be limited to such contracts as the
corporation itself can make or is authorized to make.
In this case it was clear that the contract was made by Samuels in behalf of the
projected corporation, and after it was formed, the incorporators took over the
whole thing and ratified all that had been done in its behalf. To deny the
corporation the right to sue for damages for breach of contract and the loss it
sustained by reason of the first agent’s negligence and improper acts would be to
deny it all remedy for the breach of contract, for Samuels did not make the
contract for himself, and he personally did not sustain any damages. It was the
corporation that sustained the damages resulting from the breach.
The contract, though made in the name of Samuels was, as all parties knew, made in
his name for the benefit of the corporation to be organized. He was one of the
promoters but had no intention of buying it for himself. Though there was no
formal assignment of the contract to the corporation, its action to bring suit were
an adoption of the contract.
Rizal Light v PSC and Morong Electric.
Until a corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it
cannot enter into any contract as a corporation. The certificate of incorporation of
the Morong Electric was issued by the SEC on October 17, 1962, so only from that
date, not before, did it acquire juridical personality and legal existence. Petitioner
concludes that the franchise granted to Morong Electric on May 6, 1962 when it
was not yet in esse is null and void and cannot be the subject of the Commission's
consideration. On the other hand, Morong Electric argues, and to which argument
the Commission agrees, that it was a de facto corporation at the time the franchise
was granted and, as such, it was not incapacitated to enter into any contract or to
apply for and accept a franchise. Not having been incapacitated, Morong Electric
maintains that the franchise granted to it is valid and the approval or disapproval
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thereof can be properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal
personality on May 6, 1962 when a municipal franchise was granted to it is
correct. The juridical personality and legal existence of Morong Electric began only
on October 17, 1962 when its certificate of incorporation was issued by the SEC.
Before that date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation. But the fact that
Morong Electric had no corporate existence on the day the franchise was granted
in its name does not render the franchise invalid, because later Morong Electric
obtained its certificate of incorporation and then accepted the franchise in
accordance with the terms and conditions thereof.
— “While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the company
is fully organized.”
— It is enough that organization is complete prior to the passage and acceptance
of the ordinance.
— Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or
accept a contract made by promoters in behalf of the corporation before its
incorporation.
Personal liability of promoter on pre-incorporate contracts.
3 possible situations between the promoter and the other party to a pre-
incorporation contract:
1. promoter makes a continuing offer in behalf of corp. If accepted, contract
perfected
a. promoter no personal liability
2. promoter makes contract binding himself. If accepted or adopted, he is
relieved of liability
3. promoter binds himself personally, but seeks reimbursement from
corporation.
GR: promoter is personally liable for contracts made by him in behalf of the
proposed corporation.
Exception: express or implied agreement to the contrary
Adoption or ratification of the contract does not release him from responsibility,
unless a novation was intended.

Quaker Hill v Parr.
GR: Promoters are personally liable on their contracts, though made in behalf of a
corporation to be formed. Exception—if the contract is made in behalf of the
corporation and the other party agrees to look to the corporation and not to the
promoters for payment. In this case, Quaker was well aware that the corporation
was not yet formed and even urged that the contract be made in the name of the
to-be formed corporation. The entire transaction contemplated the corporation as
the contracting party. Thus personal liability does not attach. There was clearly an
intent on the part of Quaker to contract with the corporation and not with the
promoters.
Compensation of promoters.
— GR: the corporation is NOT liable to pay such compensation because this would
be an imposition on innocent investors
— Exception: corporation may become liable after it is formed if:
o it expressly promises to do so
o it takes/receives the benefits of services rendered by the promoter partly
performed before and after incorporation
— note: Corpo Code silent on compensation of promoters
o but Securities Act authorizes a promotion fee (cf Villanueva on updates)
o may be in cash or shares. If shares, fair value of services=par or issued
value of shares
Fiduciary relationship between corporation and promoter.
— Promoters have the duty to exercise GF and fairness in all their acts and
transactions
— Promoters should not, in passing title to the corporation, later make secret
profits at the expense of the corporation
o They will make an accounting of all profits to the corporation when formed
Old Dominion Copper Mining and Smelting Co v Bigelow.
Notwithstanding this fiduciary relation, the promoter may sell property to the
company which he is promoting. In order that the contract may be absolutely
binding, the promoter must pursue one of 4 courses of action:
(1) provide an independent board of officers and make a full disclosure to the
corporation through the board;
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(2) make a full disclosure of all material facts to each original subscriber of
shares
(3) procure a ratification of the contract by vote of the SHs of the
established corporation
(4) subscribe himself in all the shares of the capital stock contemplated as
part of the promotion scheme
The starting point is that promoters stand in a fiduciary position toward the
corporation, as well as when as part of the scheme of promotion, uninformed SHs
are expected to come in after the wrong has been perpetrated, as when at the time
there are SHs to whom no disclosure was made. Promoters have in their hands the
creation and molding of the company, like clay in the hands of a potter. It is not
necessary to inquire how far he may be trustee also for shareholders and
associates. In the present case the inquiry relates wholly to his obligation to the
corporation. The fiduciary relation must continue until the promoter has completely
established according to his plan the being which he has undertaken to create. The
principle that one cannot rightfully sell property, belonging to him in his private
capacity, to himself in a trust capacity is universal.
The wrong which the promoters did in this case was in selling property worth $1M
and in the market at most $2M for $3.25 without revealing that they were making
a secret profit. The wrong was done to the corporation. It affected all its SHs,
present and future alike.
In buying the promoter’ property, the directors of the corporation acted for the
corporation.
— What is a promoter?
o Takes initiative in founding and organizing a business or enterprise of an
issuer
o Receives, directly or indirectly, consideration for services/property 10%
or more of shares or proceeds of sale thereof
 Except: consideration solely as underwriting commissions or solely
as property
— Promoters: principal-agent relationship
o Must directly or indirectly assume liability for services of promoters
— Elements:
o Party engaging services
o Nature of services
 o before, after or during incorporation
o consideration for services rendered
— questions:
o who engaged the services?
o For what?
o When? Does it apply to pre-incorp or post-incorp?
o Who benefited?
— Bigelow is an exception! From prior to post, promoters benefited!!
— Sandiko: adoption by SHs does not retroact! Adoption is not ratification
— Rizal Light: subject to suspensive condition
— Builders Duntile: the filing of suit is the act of adoption!