1. Explain the promoters\' liability to third parties before a corporation is fo
ID: 2743345 • Letter: 1
Question
1. Explain the promoters' liability to third parties before a corporation is formed.
2. Mention the matters that must be included in the articles of incorporation according to the Model Business Corporation Act (MBCA).
3. Under the revised Model Business Corporation Act (MBCA), who will be liable for the business debts if the business has been defectively incorporated?
4. Mention the requirements that are essential for a court to pierce the veil of a corporation.
5. Why might a U.S. investor choose to incorporate its business in the country where it is conducting its overseas operations? What special constraints might exist?
Explanation / Answer
1. In the stages before a corporation is formed, there is no existing legal entity for the corporation. However the promoter may have to enter into various contracts before the corporation is legally formed. For such contracts, the promoter will be personally liable. For example, if a promoter enters into a contract to take a property on lease before the corporation is formed, then the promoter will be personally liable for the payment of the leases.
The promoter can absolve himself/herself of such liabilities by making the corporation (after it has been formed) adopt the contract. The contract can be adopted either through a formal voting by the board of directors or by acting in such a manner that indicates that the corporation has adopted the contract. After the contract has been adopted by the corporation the third party will have to agree to novation. This will lead to creation of a new contract between the corporation and the third party.
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