Pre-incorporation contract

A buyer may sign an offer or letter of intent for the purchase of a business before the buying company has been formed. Under section 9 of the Canada Business Corporations Act, a corporation comes into existence on the date shown in its certificate of incorporation, so anything signed earlier in its name is a pre-incorporation contract.

What the statutes say

Under section 14 of the federal Act, a person who enters into, or purports to enter into, a written contract in the name of or on behalf of a corporation before it exists is personally bound by it and entitled to its benefits, subject to that section. The corporation may adopt the contract within a reasonable time after it comes into existence, by action or conduct signifying its intention to be bound. On adoption the person who purported to act ceases, except as provided in subsection (3), to be bound. Whether or not the contract is adopted, a party may, subject to subsection (4), apply to a court for an order on the obligations and liability of the corporation and the signer. If the written contract expressly says so, the signer is not bound.

Provinces differ

Ontario’s Business Corporations Act, section 21, covers oral or written contracts, not only written ones, and lets the signer assign, amend or terminate the contract until it is adopted, subject to its terms. This entry covers the federal and Ontario Acts only; check the corporate statute under which the company will be incorporated. Ask how the offer is signed and whether it says the signer is not bound. See buying through a newly incorporated company and articles of incorporation.