McArthur v Times Printing.
CA Nimocks and others were engaged as
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.
— Promoter’s contracts are entered into prior to the corporation’s existence,
and the question that oftentimes comes up after its incorporation is the
liability of the corporation on these 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.
— Contract must also be one within the powers of the corporation to enter
(Builder’s Duntile case)
— Upon adoption or ratification, the corporation becomes liable
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promoters in procuring the organization of the Times Printing Company.
Nimocks, in behalf of the contemplated company, entered into a contract
with McArthur for the latter’s services as advertising solicitor for the period of
1 year from 1 Oct—the date when the company was to be formed. Times
commenced operations on 1 Oct, but had only formed on 16 Oct. McArthur
began performing his duties on 1 Oct, continuing in his work until discharged
the ff April. The corporation (officers, stockholders, directors) knew of the
contract but never took any formal action thereto; neither did they object to
or repudiate the same, but kept McArthur in its employ.
H: 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. While a corporation is not
bound by engagements made in its behalf by promoters before its
organization, it may thereafter make such engagements its own contracts,
through formal action of the board. It is not necessary that such adoption or
acceptance be expressed, but it may even be inferred from acts or
acquiescence on the part of the corporation or by its own agents. 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. Times also
claims that the promoter’s contract violates the SoF, because by its terms it
is not to be performed within one year from making thereof. 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. Tabora owned 4 parcels of land in
Aparri. He sold the 4 parcels to the Cagayan Fishing
Development Company, (of which he is a promoter) then under
the process of incorporation, for one peso, subject to the REM
ifo PNB, and under the condition that title shall not pass until
Cagayan pays Tabora’s debt to PNB. Cagayan Fishing was then
formed, and the Board adopted a resolution authorizing the
president to sell the lands to Sandiko for P42000. Cagayan
executed a deed of sale transferring and ceding all rights titles
and interests to the land to Sandiko. Sandiko failed to make
good on the PN. Cagayan Fishing sues Sandiko. TC dismisses
suit on the ground that the deed of sale is void.
H: 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. Tabora owned a majority of the shares subscribed
and paid. Tabor was also one of the directors, and title
remained under Tabora’s name. Sandiko the buyer dealt with
Tabora directly and considered him as the owner. 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.
— There are circumstances where the acts of promoters may be ratified by
the corporation, but in Cagayan the SC declined to extend the doctrine of
ratification which would result in the commission of injustice or fraud,
because the object of the contracts were treated as personal assets and
not corporate assets
— Ratification is the key element in upholding the validity and enforceability
of promoter’s contracts
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. WE Dunn Company manufactures machinery for
making duntile, a hollow building tile. Samuels told Gaston the agent of Dunn
that he was organizing a company to manufacture the duntiles. Samuels
preferred to organize the corporation and then make the contract for the
machinery. Gaston wanted to make the contract first, then form the
corporation after. Samuels then made the contract ordering the machinery
from WE Dunn, which also provided for the free services of an experienced
serviceman (Aaron) for 5 years to insure proper installation. WE Dunn
accepted the contract, and the machinery was shipped to Samuels. Aaron the
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serviceman began setting up the machinery. Meantime, the articles of the
Builder’s Duntile (Samuels’ company) was filed. Operations for the
manufacture of the duntiles then started. It turns out that the duntiles made
were so inferior in quality and practically value-less for building purposes,
because the machinery had been installed improperly by Aaron the service
guy, and had even used the wrong formula for the mixing. Builders (not
Samuels) sues WE Dunn Co. to recover on the contract made before the
corporation formed.
I: Can a corporation enforce or sue upon a contract made by its promoters in
its behalf and before its incorporation?
H: the case turns on the right of a corporation to sue upon a contract made in
its behalf by one of its promoters before it was organized. 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. 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 corporation was the real party in
interest, and brought suit in its own name. 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. Case involves two (2) petitions of
the Rizal Light & Ice Co., Inc., (1) to review and set aside the orders of
respondent Public Service Commission cancelling and revoking the certificate
of public convenience and necessity and forfeiting the franchise of Rizal, and
(2) to review and set aside the decision of the Commission granting a
certificate of public convenience and necessity to respondent Morong Electric
Co., Inc to operate an electric light, heat and power service in the
municipality of Morong, Rizal. Petitioner opposed in writing the application of
Morong Electric, alleging among other things, that it is a holder of a
certificate of public convenience to operate an electric light, heat and power
service in the same municipality of Morong, Rizal, and that the approval of
said application would not promote public convenience, but would only cause
ruinous and wasteful competition. The Commission, in its decision dated
March 13, 1963, found that there was an absence of electric service in the
municipality of Morong and that applicant Morong Electric, a Filipino-owned
corporation duly organized and existing under the laws of the Philippines, has
the financial capacity to maintain said service. The Commission found that
Morong Electric is a corporation duly organized and existing under the laws of
the Philippines, the stockholders of which are Filipino citizens, that it is
financially capable of operating an electric light, heat and power service, and
that at the time the decision was rendered there was absence of electric
service in Morong, Rizal. While the petitioner does not dispute the need of an
electric service in Morong, Rizal, it claims, in effect, that Morong Electric
should not have been granted the certificate of public convenience and
necessity because (1) it did not have a corporate personality at the time it
was granted a franchise and when it applied for said certificate; (2) it is not
financially capable of undertaking an electric service, and (3) petitioner was
rendering efficient service before its electric plant was burned, and therefore,
being a prior operator its investment should be protected and no new party
should be granted a franchise and certificate of public convenience and
necessity to operate an electric service in the same locality.
H: The bulk of petitioner's arguments assailing the personality of Morong
Electric dwells on the proposition that since a franchise is a contract, at least
two competent parties are necessary to the execution thereof, and parties
are not competent except when they are in being. Hence, it is contended that
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 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.
— “The fact that a company is not completely incorporated at the time the
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grant is made to it by a municipality to use the streets does not, in most
jurisdictions, affect the validity of the grant. But such grant cannot take
effect until the corporation is organized.”
— “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.”
— “An ordinance granting a privilege to a corporation is not void because
the beneficiary of the ordinance is not fully organized at the time of the
introduction of the ordinance. It is enough that organization is complete
prior to the passage and acceptance of the ordinance. The reason is that
a privilege of this character is a mere license to the corporation until it
accepts the grant and complies with its terms and conditions.”
The incorporation of Morong Electric on October 17, 1962 and its acceptance
of the franchise as shown by its action in prosecuting the application filed
with the Commission for the approval of said franchise, not only perfected a
contract between the respondent municipality and Morong Electric but also
cured the deficiency pointed out by the petitioner in the application of
Morong EIectric. Thus, the Commission did not err in denying petitioner's
motion to dismiss said application and in proceeding to hear the same. The
efficacy of the franchise, however, arose only upon its approval by the
Commission on March 13, 1963. The conclusion herein reached regarding the
validity of the franchise granted to Morong Electric is not incompatible with
the holding of this Court in Cagayan Fishing Development Co., Inc. vs.
Teodoro Sandiko, where it was held that a corporation should have a full and
complete organization and existence as an entity before it can enter into any
kind of a contract or transact any business. It should be pointed out,
however, that this Court did not say in that case that the rule is absolute or
that under no circumstances may the acts of promoters of a corporation be
ratified or accepted by the corporation if and when subsequently organized.
Of course, there are exceptions. It will be noted that American courts
generally hold that a contract made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by the corporation when
organized.
— Although a franchise may be treated as a contract, the eventual
incorporation after the grant of the franchise and its acceptance thereof,
as well as the efforts made to prosecute the application not only
perfected a contract but cured the deficiency
— 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.Parr et al while in the course of negotiations
with Quaker Hill Inc, a NY corporation, for the former to
purchase nursery stock, undertook to organize a separate
corporation to be known as the Denver Memorial Nursery Inc. 2
orders for nursery stock were signed by Parr in behalf of
Denver Memorial which to the knowledge of Quaker was not
yet formed. The nursery stock was then delivered to Parr and
was planted with the help of Quaker. A substitute order was
then made, with the name Mountain View Nurseries instead of
Denver Memorial, which never actually came into being.
Because of name confusion, it was subsequently called
Mountain View Nurseries. Its articles were filed but the
companies never functioned as going concerns. After Mountain
View was formed, a new note and contract was submitted to
Parr et al, containing the name Mountain View as contracting
party. Quaker then referred to the company as Mountain View.
Mountain View became financially troubled, and Quaker sues
Parr et al on the ground that the corporation was not yet
formed at the time the sales contract was made and that Parr
et al as promoters should be personally liable.
H: 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
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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.
— Promoters take so much risk in forming a corporation not only because of
the possibility of sharing in the corporate earnings as future SHs, but also
the expectancy of compensation for their services
— 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. Action to
recover secret profits made by Bigelow and Lewisohn, promoters of the Old
Dominion Copper. Bigelow and Lewisohn framed a scheme for the
capitalization of Old Dominion for $3,750,000, then sell to the corporation for
$3,250,000 their property worth $1M but having a market value of not over
$2M, and then sale to the general public at par for cash of the remaining
$500,000 of stock, and all this without providing Old Dominion with any
independent board of officers while making a huge secret profit. The court
has decided that such a transaction creates a liability on the part of the
promoters to account for the secret profits to Old Dominion. The corporation
seeks to recover a secret profit made by the promoters in the sale of their
own property to the corporation, basing its claim on the general rule that a
promoter cannot lawfully take a secret profit and will be held to account for it
if he does. Fundamentally the action is to recover profits obtained by a
breach of trust, as promoters have duties as fiduciaries to the company. A
promoter includes those who undertake to form a corporation and to procure
for it the rights, instrumentalities and capital by which it is to carry out the
purposes set forth in its charter and to establish it as fully able to do its
business. It is now established without exception that a promoter stands in a
fiduciary relation to the corporation which he is interested in, and that he is
charged with all the duties of GF which attach to other trusts.
I: W/N the rule that a promoter is in a fiduciary capacity with respect to the
corporation he helped in forming is applicable in this case, and w/n the
corporation is in a position to assert his claim for secret profits.
I: W/N the promoters, who owned all of the issued stock at the time of
incorporation, with the intention to immediately issue the same to the public
without disclosure, would be liable to the corporation if a substantial portion
of the stock remains unissued, and w/n a vote of ratification of this breach
would exonerate them.
H: 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;
(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
In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K
shares. They held all the shares issued at the time of ratification, but not all
which it was proposed to issue as part of their promotion scheme. There is a
liability of the promoter to the corporation when further original subscribers
to capital stock contemplated as an essential part of the scheme of
promotion came in after the transaction complained of, even though that
transaction is known to all the then SHs at the time—which are the promoters
themselves and their representatives. In the present case, the whole
purchase price was paid in stock, issued before any stock was issued to the
public although after a substantial public subscription. In other words, it is the
order in which the transaction is carried out, and not its substantial nature,
which makes the difference between liability and immunity of the promoter. It
is of know consequence whether in fact the dummy directors know of the
terms of sale and the breach of trust of the promoters. The point is that the
directors were selected with the purpose that they should be the mere
instruments of the promoter and they carried out the will of their masters. If
the assent of all SHs is good in one case, by the same token it should be
equally good in the other, and the breach of trust in one is equally a breach of
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trust in the other. 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 theory upon which corporations are founded is that they are entities,
separate and distinct from officers and SHs. Looking through the form of the
corporation to the SHs and treating them as the corporation is an exception
to the rule that the corporation is a separate legal entity for all purposes,
even though all its stock be held by a single interest and it be to all practical
intents merely the instrument of the SH. 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. It
is done directly to the corporation as an independent entity, and thus
indirectly the rights of those who are or will become SHs are affected. In
buying the promoter’ property, the directors of the corporation acted for the
corporation, as such, without reard to who were the then SHs. The wrong is
not done when the innocent public subscribes but when the sale was made to
the corporation at a grossly exaggerated price with secret profit. The
occasion for complaining of this wrong comes when the promoters issue to
the public the balance of stock in order to provide the money necessary to
set the corporation on its feet.
— 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!