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McArthur v Times Printing.

CA Nimocks and others were engaged as
promoters in procuring the organization of the Times Printing Company.
Chapter V – Promoter’s Contracts
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
— Promoter: a person who, acting alone or with others, takes initiative in 1 year from 1 Oct—the date when the company was to be formed. Times
founding and organizing the business or enterprise of the issuer and commenced operations on 1 Oct, but had only formed on 16 Oct. McArthur
receives consideration therefor began performing his duties on 1 Oct, continuing in his work until discharged
— Promoter’s contracts refer to contracts entered into with the parties the ff April. The corporation (officers, stockholders, directors) knew of the
knowing fully well that a corporation does not yet legally exist contract but never took any formal action thereto; neither did they object to
— GR: promoter’s contracts are not necessarily binding on the corporation or repudiate the same, but kept McArthur in its employ.
once formed H: Where a contract is made in behalf of and for the benefit of a proposed
— Exception: When the corporation received benefits from the contract at corporation, the corporation after is organization cannot become a party to
the time of its constitution the contract either by adoption or ratification. While a corporation is not
bound by engagements made in its behalf by promoters before its
Types: organization, it may thereafter make such engagements its own contracts,
— A pre-incorporation subscription contract is a special contract, and a type through formal action of the board. It is not necessary that such adoption or
of promoter’s contract, and although these are contracts between the acceptance be expressed, but it may even be inferred from acts or
subscriber and the corporation, they are at the same time deemed to be acquiescence on the part of the corporation or by its own agents. The right of
contracts among the SHs of the corporation agents to adopt an agreement originally made by the promoters depends on
— Contracts entered into in the name of the intended corporation by the the purposes of the corporation and the nature of the agreement. Times also
promoters or organizers of the corporation 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
Liability of corporation for promoter’s contracts. 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
— Promoter’s contracts are entered into prior to the corporation’s existence, could not have ratified it if it were not a party thereto. There cannot be in
and the question that oftentimes comes up after its incorporation is the law, a ratification of a contract which could not have been made binding on
liability of the corporation on these contracts. the ratifier at the time it was made, because the ratifier was not yet in
— 60: any contract for the acquisition of unissued stock in an existing existence. It is adopted by the corporation as its own as of the date of
corporation or one still to be formed shall be deemed a subscription even adoption and not as of the date of the making.
if the parties say otherwise
— 61: GR: subscription for shares in a corporation still to be formed shall be Cagayan Fishing v Sandiko. Tabora owned 4 parcels of land in
irrevocable for at least 6 mos from date of subscription
— exceptions:
Aparri. He sold the 4 parcels to the Cagayan Fishing
— all other subscribers consent to the revocation Development Company, (of which he is a promoter) then under
— incorporation fails to materialize within 6 mos or within a longer the process of incorporation, for one peso, subject to the REM
period as stated in the subscription contract ifo PNB, and under the condition that title shall not pass until
— before submission of the AOI Cagayan pays Tabora’s debt to PNB. Cagayan Fishing was then
— pre-incorporation agreement is a type of promoters contract
— The corporation may make these contracts its own and may become formed, and the Board adopted a resolution authorizing the
bound on such contracts if after incorporation, it adopts or ratifies the president to sell the lands to Sandiko for P42000. Cagayan
same or accepts the benefits with knowledge of the terms. executed a deed of sale transferring and ceding all rights titles
— Adoption need not be express and may even be implied by the acts of its and interests to the land to Sandiko. Sandiko failed to make
officers.
— Contract must also be one within the powers of the corporation to enter
good on the PN. Cagayan Fishing sues Sandiko. TC dismisses
(Builder’s Duntile case) suit on the ground that the deed of sale is void.
— Upon adoption or ratification, the corporation becomes liable 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

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not being in legal existence it does not yet possess juridical serviceman began setting up the machinery. Meantime, the articles of the
capacity to enter into contracts. The Tabora contract was Builder’s Duntile (Samuels’ company) was filed. Operations for the
manufacture of the duntiles then started. It turns out that the duntiles made
entered into not only between him and a non-existent were so inferior in quality and practically value-less for building purposes,
corporation, but between him as owner and the same Tabora, because the machinery had been installed improperly by Aaron the service
his wife and others, as mere promoters of the corporation. They guy, and had even used the wrong formula for the mixing. Builders (not
could not have acted as agents for a projected corporation Samuels) sues WE Dunn Co. to recover on the contract made before the
corporation formed.
since that which had no legal existence could have no agent. A I: Can a corporation enforce or sue upon a contract made by its promoters in
corporation, until organized, has no life and therefore no its behalf and before its incorporation?
faculties. The SC refused to extend the doctrine of ratification H: the case turns on the right of a corporation to sue upon a contract made in
which would result in the commission of injustice or fraud to its behalf by one of its promoters before it was organized. A corporation has
third parties. Tabora owned a majority of the shares subscribed 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
and paid. Tabor was also one of the directors, and title to adopt must only be limited to such contracts as the corporation itself can
remained under Tabora’s name. Sandiko the buyer dealt with make or is authorized to make. In this case it was clear that the contract was
Tabora directly and considered him as the owner. Even PNB made by Samuels in behalf of the projected corporation, and after it was
treated Tabora as the owner, not the corporation. Thus 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
Cagayan Fishing never really purchased the lands, and thus it
for breach of contract and the loss it sustained by reason of the first agent’s
did not have the right to dispose by sale to Sandiko. 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
— There are circumstances where the acts of promoters may be ratified by personally did not sustain any damages. It was the corporation that sustained
the corporation, but in Cagayan the SC declined to extend the doctrine of the damages resulting from the breach. The corporation was the real party in
ratification which would result in the commission of injustice or fraud, interest, and brought suit in its own name. The contract, though made in the
because the object of the contracts were treated as personal assets and name of Samuels was, as all parties knew, made in his name for the benefit
not corporate assets of the corporation to be organized. He was one of the promoters but had no
— Ratification is the key element in upholding the validity and enforceability intention of buying it for himself. Though there was no formal assignment of
of promoter’s contracts the contract to the corporation, its action to bring suit were an adoption of
the contract.
Corporate rights under promoter’s contracts
Rizal Light v PSC and Morong Electric. Case involves two (2) petitions of
— If the other party fails to perform under the pre-incorporation contract, the Rizal Light & Ice Co., Inc., (1) to review and set aside the orders of
the corporation which adopts or ratifies it may sue for specific respondent Public Service Commission cancelling and revoking the certificate
performance or damages for breach of contract of public convenience and necessity and forfeiting the franchise of Rizal, and
— Bringing an action to enforce the contract has been held to be sufficient (2) to review and set aside the decision of the Commission granting a
adoption or ratification certificate of public convenience and necessity to respondent Morong Electric
Co., Inc to operate an electric light, heat and power service in the
Builders Duntile v Dunn. WE Dunn Company manufactures machinery for municipality of Morong, Rizal. Petitioner opposed in writing the application of
making duntile, a hollow building tile. Samuels told Gaston the agent of Dunn Morong Electric, alleging among other things, that it is a holder of a
that he was organizing a company to manufacture the duntiles. Samuels certificate of public convenience to operate an electric light, heat and power
preferred to organize the corporation and then make the contract for the service in the same municipality of Morong, Rizal, and that the approval of
machinery. Gaston wanted to make the contract first, then form the said application would not promote public convenience, but would only cause
corporation after. Samuels then made the contract ordering the machinery ruinous and wasteful competition. The Commission, in its decision dated
from WE Dunn, which also provided for the free services of an experienced March 13, 1963, found that there was an absence of electric service in the
serviceman (Aaron) for 5 years to insure proper installation. WE Dunn municipality of Morong and that applicant Morong Electric, a Filipino-owned
accepted the contract, and the machinery was shipped to Samuels. Aaron the corporation duly organized and existing under the laws of the Philippines, has

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the financial capacity to maintain said service. The Commission found that grant is made to it by a municipality to use the streets does not, in most
Morong Electric is a corporation duly organized and existing under the laws of jurisdictions, affect the validity of the grant. But such grant cannot take
the Philippines, the stockholders of which are Filipino citizens, that it is effect until the corporation is organized.”
financially capable of operating an electric light, heat and power service, and — “While a franchise cannot take effect until the grantee corporation is
that at the time the decision was rendered there was absence of electric organized, the franchise may, nevertheless, be applied for before the
service in Morong, Rizal. While the petitioner does not dispute the need of an company is fully organized.”
electric service in Morong, Rizal, it claims, in effect, that Morong Electric — “An ordinance granting a privilege to a corporation is not void because
should not have been granted the certificate of public convenience and the beneficiary of the ordinance is not fully organized at the time of the
necessity because (1) it did not have a corporate personality at the time it introduction of the ordinance. It is enough that organization is complete
was granted a franchise and when it applied for said certificate; (2) it is not prior to the passage and acceptance of the ordinance. The reason is that
financially capable of undertaking an electric service, and (3) petitioner was a privilege of this character is a mere license to the corporation until it
rendering efficient service before its electric plant was burned, and therefore, accepts the grant and complies with its terms and conditions.”
being a prior operator its investment should be protected and no new party
should be granted a franchise and certificate of public convenience and The incorporation of Morong Electric on October 17, 1962 and its acceptance
necessity to operate an electric service in the same locality. 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
H: The bulk of petitioner's arguments assailing the personality of Morong contract between the respondent municipality and Morong Electric but also
Electric dwells on the proposition that since a franchise is a contract, at least cured the deficiency pointed out by the petitioner in the application of
two competent parties are necessary to the execution thereof, and parties Morong EIectric. Thus, the Commission did not err in denying petitioner's
are not competent except when they are in being. Hence, it is contended that motion to dismiss said application and in proceeding to hear the same. The
until a corporation has come into being, in this jurisdiction, by the issuance of efficacy of the franchise, however, arose only upon its approval by the
a certificate of incorporation by the Securities and Exchange Commission Commission on March 13, 1963. The conclusion herein reached regarding the
(SEC) it cannot enter into any contract as a corporation. The certificate of validity of the franchise granted to Morong Electric is not incompatible with
incorporation of the Morong Electric was issued by the SEC on October 17, the holding of this Court in Cagayan Fishing Development Co., Inc. vs.
1962, so only from that date, not before, did it acquire juridical personality Teodoro Sandiko, where it was held that a corporation should have a full and
and legal existence. Petitioner concludes that the franchise granted to complete organization and existence as an entity before it can enter into any
Morong Electric on May 6, 1962 when it was not yet in esse is null and void kind of a contract or transact any business. It should be pointed out,
and cannot be the subject of the Commission's consideration. On the other however, that this Court did not say in that case that the rule is absolute or
hand, Morong Electric argues, and to which argument the Commission that under no circumstances may the acts of promoters of a corporation be
agrees, that it was a de facto corporation at the time the franchise was ratified or accepted by the corporation if and when subsequently organized.
granted and, as such, it was not incapacitated to enter into any contract or to Of course, there are exceptions. It will be noted that American courts
apply for and accept a franchise. Not having been incapacitated, Morong generally hold that a contract made by the promoters of a corporation on its
Electric maintains that the franchise granted to it is valid and the approval or behalf may be adopted, accepted or ratified by the corporation when
disapproval thereof can be properly determined by the Commission. organized.

Petitioner's contention that Morong Electric did not yet have a legal — Although a franchise may be treated as a contract, the eventual
personality on May 6, 1962 when a municipal franchise was granted incorporation after the grant of the franchise and its acceptance thereof,
to it is correct. The juridical personality and legal existence of Morong as well as the efforts made to prosecute the application not only
Electric began only on October 17, 1962 when its certificate of incorporation perfected a contract but cured the deficiency
was issued by the SEC. Before that date, or pending the issuance of said — Cagayan rule is not absolute; a corporation once formed may adopt,
certificate of incorporation, the incorporators cannot be considered as de ratify, or accept a contract made by promoters in behalf of the
facto corporation. But the fact that Morong Electric had no corporate corporation before its incorporation
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 Personal liability of promoter on pre-incorporate contracts.
incorporation and then accepted the franchise in accordance with the terms
and conditions thereof. 3 possible situations between the promoter and the other party to a pre-
— “The fact that a company is not completely incorporated at the time the incorporation contract:

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1. promoter makes a continuing offer in behalf of corp. If accepted, the contract be made in the name of the to-be formed
contract perfected corporation. The entire transaction contemplated the
a. promoter no personal liability
2. promoter makes contract binding himself. If accepted or adopted, he corporation as the contracting party. Thus personal liability
is relieved of liability does not attach. There was clearly an intent on the part of
3. promoter binds himself personally, but seeks reimbursement from Quaker to contract with the corporation and not with the
corporation. promoters.
GR: promoter is personally liable for contracts made by him in behalf of the Compensation of promoters.
proposed corporation.
Exception: express or implied agreement to the contrary — 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
Adoption or ratification of the contract does not release him from the expectancy of compensation for their services
responsibility, unless a novation was intended. — GR: the corporation is NOT liable to pay such compensation because this
would be an imposition on innocent investors
Quaker Hill v Parr.Parr et al while in the course of negotiations — Exception: corporation may become liable after it is formed if:
with Quaker Hill Inc, a NY corporation, for the former to o it expressly promises to do so
purchase nursery stock, undertook to organize a separate o it takes/receives the benefits of services rendered by the promoter
corporation to be known as the Denver Memorial Nursery Inc. 2 partly performed before and after incorporation
— note: Corpo Code silent on compensation of promoters
orders for nursery stock were signed by Parr in behalf of o but Securities Act authorizes a promotion fee (cf Villanueva on
Denver Memorial which to the knowledge of Quaker was not updates)
yet formed. The nursery stock was then delivered to Parr and o may be in cash or shares. If shares, fair value of services=par or
was planted with the help of Quaker. A substitute order was issued value of shares
then made, with the name Mountain View Nurseries instead of
Fiduciary relationship between corporation and promoter.
Denver Memorial, which never actually came into being.
Because of name confusion, it was subsequently called — Promoters have the duty to exercise GF and fairness in all their acts and
Mountain View Nurseries. Its articles were filed but the transactions
companies never functioned as going concerns. After Mountain — Promoters should not, in passing title to the corporation, later make
secret profits at the expense of the corporation
View was formed, a new note and contract was submitted to
o They will make an accounting of all profits to the corporation when
Parr et al, containing the name Mountain View as contracting formed
party. Quaker then referred to the company as Mountain View.
Mountain View became financially troubled, and Quaker sues Old Dominion Copper Mining and Smelting Co v Bigelow. Action to
Parr et al on the ground that the corporation was not yet recover secret profits made by Bigelow and Lewisohn, promoters of the Old
Dominion Copper. Bigelow and Lewisohn framed a scheme for the
formed at the time the sales contract was made and that Parr capitalization of Old Dominion for $3,750,000, then sell to the corporation for
et al as promoters should be personally liable. $3,250,000 their property worth $1M but having a market value of not over
H: GR—promoters are personally liable on their contracts, $2M, and then sale to the general public at par for cash of the remaining
though made in behalf of a corporation to be formed. Exception $500,000 of stock, and all this without providing Old Dominion with any
—if the contract is made in behalf of the corporation and the 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
other party agrees to look to the corporation and not to the promoters to account for the secret profits to Old Dominion. The corporation
promoters for payment. In this case, Quaker was well aware seeks to recover a secret profit made by the promoters in the sale of their
that the corporation was not yet formed and even urged that 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
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if he does. Fundamentally the action is to recover profits obtained by a trust in the other. The starting point is that promoters stand in a fiduciary
breach of trust, as promoters have duties as fiduciaries to the company. A position toward the corporation, as well as when as part of the scheme of
promoter includes those who undertake to form a corporation and to procure promotion, uninformed SHs are expected to come in after the wrong has been
for it the rights, instrumentalities and capital by which it is to carry out the perpetrated, as when at the time there are SHs to whom no disclosure was
purposes set forth in its charter and to establish it as fully able to do its made. Promoters have in their hands the creation and molding of the
business. It is now established without exception that a promoter stands in a company, like clay in the hands of a potter. It is not necessary to inquire how
fiduciary relation to the corporation which he is interested in, and that he is far he may be trustee also for shareholders and associates. In the present
charged with all the duties of GF which attach to other trusts. case the inquiry relates wholly to his obligation to the corporation. The
fiduciary relation must continue until the promoter has completely
I: W/N the rule that a promoter is in a fiduciary capacity with respect to the established according to his plan the being which he has undertaken to
corporation he helped in forming is applicable in this case, and w/n the create. The principle that one cannot rightfully sell property, belonging to him
corporation is in a position to assert his claim for secret profits. in his private capacity, to himself in a trust capacity is universal.
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 The theory upon which corporations are founded is that they are entities,
without disclosure, would be liable to the corporation if a substantial portion separate and distinct from officers and SHs. Looking through the form of the
of the stock remains unissued, and w/n a vote of ratification of this breach corporation to the SHs and treating them as the corporation is an exception
would exonerate them. 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
H: Notwithstanding this fiduciary relation, the promoter may sell property to intents merely the instrument of the SH. The wrong which the promoters did
the company which he is promoting. In order that the contract may be in this case was in selling property worth $1M and in the market at most $2M
absolutely binding, the promoter must pursue one of 4 courses of action: for $3.25 without revealing that they were making a secret profit. The wrong
(1) provide an independent board of officers and make a full disclosure to was done to the corporation. It affected all its SHs, present and future alike. It
the corporation through the board; is done directly to the corporation as an independent entity, and thus
(2) make a full disclosure of all material facts to each original subscriber indirectly the rights of those who are or will become SHs are affected. In
of shares buying the promoter’ property, the directors of the corporation acted for the
(3) procure a ratification of the contract by vote of the SHs of the corporation, as such, without reard to who were the then SHs. The wrong is
established corporation not done when the innocent public subscribes but when the sale was made to
(4) subscribe himself in all the shares of the capital stock contemplated the corporation at a grossly exaggerated price with secret profit. The
as part of the promotion scheme occasion for complaining of this wrong comes when the promoters issue to
In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K the public the balance of stock in order to provide the money necessary to
shares. They held all the shares issued at the time of ratification, but not all set the corporation on its feet.
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 — What is a promoter?
promotion came in after the transaction complained of, even though that o Takes initiative in founding and organizing a business or enterprise of
transaction is known to all the then SHs at the time—which are the promoters an issuer
themselves and their representatives. In the present case, the whole o Receives, directly or indirectly, consideration for services/property
purchase price was paid in stock, issued before any stock was issued to the 10% or more of shares or proceeds of sale thereof
public although after a substantial public subscription. In other words, it is the  Except: consideration solely as underwriting commissions or
order in which the transaction is carried out, and not its substantial nature, solely as property
which makes the difference between liability and immunity of the promoter. It — Promoters: principal-agent relationship
is of know consequence whether in fact the dummy directors know of the o Must directly or indirectly assume liability for services of promoters
terms of sale and the breach of trust of the promoters. The point is that the — Elements:
directors were selected with the purpose that they should be the mere o Party engaging services
instruments of the promoter and they carried out the will of their masters. If o Nature of services
the assent of all SHs is good in one case, by the same token it should be o before, after or during incorporation
equally good in the other, and the breach of trust in one is equally a breach of o consideration for services rendered

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— 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!

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