Comparative Analysis of the Laws of Delaware and U.K Company Law on Enforcement of Pre-Incorporation Contracts

Abstract

A corporation, though regarded as an independent person in the eyes of law , never materializes by itself. Behind every company there are persons or association of persons who strive to actualize the being of a company. These persons are most times referred to as promoters. A promoter is “one who undertakes to form a company with reference to a given project, and who takes the necessary steps to accomplish that purpose.” A promoter, saddled with the responsibility of bringing the company into existence , may enter into certain agreements, or service contracts on behalf of the yet formed company, in order for the company when formed to have a smooth sail. These types of contracts are called “Pre-incorporation Contracts”. Example of such contracts include stock subscription agreement, Directors service contracts, contract for payment of promoters expenses, joint venture agreements, shareholders agreement. Pre-incorporation contracts perform a valuable function. By permitting valid and binding legal commitments with third parties, nascent companies are able to secure significant and sometimes essential services necessary to become a fully capitalized and stable corporation. There are, however, significant problems that plague pre-incorporation contracts, such as the spectre of fraud by entrepreneurs and promoters, as well as the possibility of pre-incorporation commitments being disregarded or voided after the fact. These problems give rise to certain legal issues and questions which include, could the company ratify or adopt a pre-incorporation contract so as to become liable upon it?; if the company cannot, were those who acted for the company before its incorporation personally liable on the contracts made by them? In these situations, parties look to legal statutes and case laws to determine the enforceability of such pre-incorporation contract, liability of parties if any, remedy available for parties to the contracts, and finally the issue of who bears the risk of loss. The age long binding authorities on pre-incorporation contracts were the common doctrines. The common law position on pre-incorporation contracts, were mostly based on principles of privity of contract and law of agency. However various jurisdictions have enacted their laws and have promulgated legal principles bothering on pre-incorporation contracts through case law and statues . For example, the state of Delaware, tackles legal issues arising from pre-incorporation contracts through case laws. It is safe to state that there is no outright statutory provision in Delaware laws with regards to pre-incorporation contracts. However under the UK laws, pre-incorporation contracts seem to be mostly governed by statute. This paper compares how the United States and United Kingdom approach the law of pre-incorporation contracts, to see which framework is more efficient. Part I of this paper examines the general landscape of pre-incorporation contracts (reference being made to the common law position on pre-incorporation contracts) with a particular focus on the different categories of problems that uniquely arise in this context, such as novation, adoption and ratification. Part II examines the law of Delaware, the leading American jurisdiction for contract/corporate law, with respect to pre-incorporation contracts. And Part III compares the law of Delaware with that of the United Kingdom.