Anonymised, illustrative composite. Every commercial term of a $4,300,000 share purchase was settled. The defect was in who was party to it: the buyer on the signature page did not exist yet.
At a glance
An operating executive put together a management buy-in of an Ontario commercial laundry, backed by two passive investors. The share purchase agreement was signed in February at $4,300,000 for 100% of the shares: $2,600,000 of senior debt, a $600,000 vendor take-back note and $1,100,000 of equity.
The buyer named in the agreement was a federal numbered company, and on signing day it was a name and nothing more. Incorporation was filed sixteen days later. See also acquiring through a newly incorporated company.
The signature page read the way they usually do: the purchaser named, a parenthetical describing it as a corporation to be incorporated, and the executive signing under the word per. No and not personally beside his name and, the part that decided it, no clause saying he was not to be bound.
The 5% deposit went with it. The company had no existence, so it had no bank account, and the $215,000 left the executive’s personal account; the trust receipt was issued to him by name. Those two facts describe the transaction: the party on the buy side of a $4,300,000 agreement was a human being.
The inversion is the point. He had spent six weeks arguing the lender’s personal guarantee down from unlimited to $250,000, the boundary he believed he had drawn around his own risk. On the same day he signed an uncapped personal covenant to the vendor for the whole price. See also the lender who required a bigger equity cheque.
Four numbers describe the exposure and they do not combine the way a first reading suggests. The performance obligation is the price, $4,300,000, because s.14(1) binds the signer to the contract and the covenant to pay sits in it. The buyer’s indemnity cap was 20% of price, $860,000; a $150,000 reverse break fee was payable on a financing failure; the $215,000 deposit was gone.
Those four do not stack. The break fee is an alternative to damages for failure to close, not an addition, and the deposit is credited against the price, not held beside it. Adding all four gives $5,525,000 and overstates the exposure by $1,225,000. The single honest number is the $4,300,000 obligation.
The other measurement is the window: sixteen days from signing to the certificate of incorporation, three more to the adopting resolution — nineteen days in which the agreement had no corporate party at all. Every figure here is illustrative; no published source states them.
CBCA s.14(1), marginal note Personal liability, reads: “Subject to this section, 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 comes into existence is personally bound by the contract and is entitled to its benefits.” It does not suspend the contract; it puts a different party into it, because CBCA s.2 confines the word to a body corporate incorporated or continued under that Act, and on signing day there was none. Three units decide how far it reaches.
The unit is the whole contract, not the money already moved. The person is “personally bound by the contract”, unqualified: price, indemnity, covenants, lease guarantee. It runs both ways, because he was equally “entitled to its benefits” — so absent adoption the vendor’s warranties ran to him, not to the company that would own the shares.
Adoption is a discharge subject to the court’s power, not an absolute one. Section 14(2) lets the corporation adopt within a reasonable time, whereupon the signer “ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract”. Those six words — “except as provided in subsection (3)” — carry the point, because s.14(3) applies “whether or not a written contract made before the coming into existence of a corporation is adopted by the corporation”, letting any party ask a court to settle both obligations. Only s.14(4) is unconditional: “If expressly so provided in the written contract”, the signer “is not in any event bound by the contract or entitled to the benefits thereof”. A parenthetical naming the buyer as a corporation to be incorporated is not that clause.
The statute the vehicle is incorporated under decides the rule and the remedy. The federal text catches a written contract; Business Corporations Act (Ontario) s.21(1) reaches “an oral or written contract in the name of or on behalf of a corporation before it comes into existence”. British Columbia is not a variant: under Business Corporations Act (British Columbia) s.20 the signer is a facilitator, not bound by the agreement; instead “the person is deemed to warrant to the other parties to the purported contract that the company will” come into existence and adopt within a reasonable time — a warranty-of-authority claim measured under s.20(2)(c), not a covenant to pay the price. And s.20(8) requires that “the parties to the pre-incorporation contract have, in writing, expressly so agreed”.
The defect surfaced on the pre-closing document review: no resolution authorised a signature dated before the corporation existed. At the first meeting of directors, three days after the certificate issued, the board passed a resolution expressly adopting the agreement under s.14(2). That was inside a reasonable time and did two things: it discharged the individual prospectively and moved the vendor’s warranties to the company. Adoption by conduct would probably have been found anyway, but a dated resolution is a fact rather than an argument; see registering share transfers and updating records.
The step that answered s.14(3) was a written release of the individual, delivered at closing. The vendor’s counsel priced it, giving the release in exchange for a personal guarantee of the $600,000 vendor note. That left $850,000 of deliberate exposure, counting the lender’s $250,000, in place of an uncapped covenant nobody intended. See personal guarantees and limiting your exposure.
The version that ends badly is the one where the deal breaks and the vehicle is never incorporated: no corporation, so no s.14(2) route out and nothing to release against. The Ontario Court of Appeal decided that case on the provincial equivalent in Szecket v. Huang (1998), 42 O.R. (3d) 400 (C.A.): an agreement signed for a company to be incorporated abroad, the company never formed, the signer held personally liable to perform, s.21(4) unavailable for want of an express provision. Those reasons could not be fetched from this environment, so nothing here is quoted from them.
The tell was on the deposit receipt, and it was there on day one. A trust receipt issued to an individual, for money that left a personal account, on a deal where the buyer is supposed to be a company, is the file telling you who the party is.
The second tell is the closing agenda, which lists a directors’ resolution authorising execution. If it cannot be dated on or before the agreement, somebody else signed it.
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