How a corporation becomes liable for a promoter's pre-incorporation contract

Outline (brief)

• Hook: The puzzle of promoter contracts and corporate liability

• Core rule: Adoption by the board after incorporation is what makes the corporation liable

• How adoption works in practice: board resolutions, formal action, and the timing

• What adoption is not: not automatic on formation, not always a novation, not always shareholder approval

• Practical implications: steps for corporate counsel, record-keeping, and typical pitfalls

• Real‑world analogy and quick example to ground the concept

• Takeaways: key points to remember in any deal involving pre‑incorporation promises

Now, the article

Let’s untangle a common knot in corporate law—the moment a promoter’s pre‑incorporation contract can bind a brand-new corporation. You’ve got a business idea, folks signing papers, and a promise on the line. The big question is: when does the corporate shield actually cover that promise? The answer is straightforward, but it hinges on one critical step: adoption by the board of directors after the corporation comes into existence.

The core idea is simpler than it sounds: a corporation is a separate legal person, even a newborn one. Before it exists, the promoter or promoters can bargain, negotiate, and commit to contracts in the hope that a future corporation will step in. But until the board says, “We’ll adopt this contract and assume the duties and rights,” the corporation itself isn’t on the hook. In other words, incorporation alone creates the legal personality, but liability for pre‑incorporation contracts doesn’t automatically ride along. Adoption is the key move.

Let me explain the flow with a practical picture. Suppose a group of founders signs a service agreement with a vendor in anticipation of forming a corporation. The deal looks attractive, and the vendor is ready to proceed when the new entity is formed. The moment of truth comes when the board meets after incorporation and adopts the contract. That adoption is the moment the corporation agrees to the contract as its own. The board’s formal approval hands the contract from the promoters to the corporate entity, with all the associated rights and obligations. It’s not a magic wand; it’s a deliberate, documented decision that the corporation will be bound by what was originally promised.

Here’s the thing about what adoption is not. It’s not automatic simply because the company exists. Creation or “registration” is essential for the entity to exist in the first place, but it does not, by itself, shoulder the liabilities that promoters incurred before there was a corporation. No automatic liability blanket drops onto the new entity just because the ink is dry on the charter. The board must actively take on the contract. This is why Corporate law academics and practitioners emphasize adoption as the pivotal mechanism.

It’s also useful to distinguish adoption from novation. Novation is a substitution process where a new party replaces an old one in a contract, with the consent of all involved. If the corporation adopts the contract, that’s not the same thing as novation. Adoption transfers the contract’s burden and benefit to the corporation without necessarily replacing the promoter or cancelling the original agreement. In many cases, adoption suffices to put the corporation on the hook, even where the promoter’s involvement fades from the legal story. However, if the parties intend to replace the promoter altogether, a novation might be used, but that’s a separate route, not a required step for most pre‑incorporation contracts.

Shareholder approval often mixes into corporate decisions, but it isn’t a prerequisite for adopting a pre‑incorporation contract. The board’s action is usually enough to bind the corporation, unless the contract itself or governing documents say otherwise. That said, there are big deals—mergers, related-party transactions, or contracts touching core business with high stakes—that can drum up shareholder involvement. In those scenarios, you’ll see governance layers layered on top of the basic adoption step. For most ordinary pre‑incorporation contracts, the board’s adoption is the decisive factor.

From a practical standpoint, what does a typical adoption look like in a real-world setting? It’s usually a board meeting, a motion, a resolution, and a formal vote. The resolution will state that the corporation adopts the contract dated before or after formation, that the contract’s terms are binding on the corporation, and that the corporation shall perform the obligations and enjoy the benefits thereunder. The minutes will reflect the decision, and the contract itself might be attached as an exhibit. Some firms draft a simple “adoption of pre‑incorporation contract” policy to avoid confusion later, especially if there are multiple such contracts on the table.

One practical note for counsel: timing matters. If the adoption happens after incorporation, you need to ensure the contract’s terms align with the corporate bylaws and with the entity’s authorized corporate purposes. If the contract touches a field outside the company’s stated purposes, the board may be obliged to address that misalignment, or risk challenge later. This is not about second-guessing the board’s judgment; it’s about ensuring the corporation acts within its legal boundaries and that the contract remains enforceable.

Let me offer a quick analogy to anchor the concept. Think of the contract as a road map created for a trip. The promoters are the mapmakers who drew the route. The corporation, once formed, is the vehicle that will travel that route. Adoption by the board is like the moment the company owner says, “Yes, we’re taking this route, and we’ll bear the costs and enjoy the scenery.” Without that approval, the map exists, and the vehicle is ready, but the company won’t be liable for the drive. It’s a neat way to see how a formal act translates into legal responsibility.

Of course, there are common pitfalls and areas where things can blur. One frequent misstep: assuming that mere awareness or acknowledgment by the board equates to adoption. A formal resolution is typically required, not a casual nod during a discussion. In the same vein, some folks assume that a contract signed by a promoter automatically binds the corporation because everyone’s excited about the venture. Not so. The corporation needs explicit adoption to take on liability.

Another pitfall is the confusion between pre‑incorporation contracts and post‑incorporation contracts. Once the corporation has adopted the pre‑incorporation contract, you’re dealing with a binding agreement that arises from the corporation’s own authority. That’s different from a contract the corporation negotiates after formation, which rests on the usual authority granted to officers or directors by statute and by bylaws. Knowing the difference helps keep the legal narrative clean and the governance process reliable.

For those who love the practical side, here are a few sound steps to ensure smooth adoption. First, compile a concise list of all pre‑incorporation contracts tied to a prospective corporation. Second, align each contract with the corporation’s intended business purpose and authorized powers. Third, prepare board‑level resolutions that clearly state: (a) adoption of the contract, (b) the terms being binding on the corporation, and (c) the effective date of adoption. Fourth, attach the contract copies to the adoption resolutions or reference them as exhibits in the minutes. And finally, file the resolutions with corporate records so the adoption event is verifiable and easy to track.

If you’re thinking about how this plays out in a real deal, consider a technology startup that signs a services agreement with a software vendor in the planning stage. The plan is to incorporate a month later. After incorporation, the board passes a resolution adopting the services agreement, the company ratifies the contract, and the vendor can now sue the corporation if services aren’t performed. The promoters aren’t left stranded, but the corporation assumes the risk and reward embedded in the deal. It’s a balanced transfer—one that supports growth while keeping governance transparent and predictable.

From a broader perspective, the adoption mechanism helps preserve the integrity of the corporate veil. It prevents promoters from acting as if the company is a mere afterthought, ready to shoulder liabilities at a moment’s notice. Instead, adoption creates a deliberate bridge between the promoter’s promises and the corporation’s legal identity. It’s a safeguard that says, “We mean business, and we’re willing to stand behind it.”

Key takeaways you can tuck into your mental toolbox:

• Adoption by the board is the critical step that makes a corporation liable for a promoter’s pre‑incorporation contract.

• Incorporation alone creates a separate legal entity, but liability for pre‑incorporation promises requires a formal adoption.

• Adoption is different from novation; it’s not automatically triggered by formation, and it doesn’t necessarily require shareholder approval unless a deal calls for it.

• Efficient governance and clear record‑keeping matter: have a written board resolution, attach the contract, and preserve minutes that show the decision.

• In practice, anticipate timing and alignment with the corporation’s purposes to keep the agreement enforceable and clean.

If you’re navigating a deal that started before the corporation existed, this framework makes the path clearer. The board’s adoption is the moment that transforms a promoter’s promise into the corporation’s liability—without fanfare, but with the weight of formal governance. And when that moment arrives, the contract’s duties and benefits become part of the company’s story going forward.

A final thought: contracts aren’t just dry legal instruments. They’re agreements that map collaboration, risk, and opportunity. Adoption is the moment the map becomes a road the company can actually travel on—together with its directors, officers, and stakeholders. It’s a small hinge, but it swings a big door in corporate life.