Incorporators often establish companies with specific goals, such as acquiring certain assets, pursuing business opportunities or realising commercial advantages. Prior to committing any resources towards a company prior to the formal incorporation and registration of such company, it is only natural for the company’s incorporators to then seek certain assurances that these objectives can indeed be achieved upon incorporation. Potential new investors may also find greater confidence in business ventures where the incorporators have already taken the requisite legal steps to secure the assets or advantages for which the company is to be established. As a result, a binding legal agreement may be necessary before incorporating a company. In this article we will analyse the formalities related to concluding a pre-incorporation contract.

Pre-incorporation contracts:

Section 21 of the Companies Act No. 71 of 2008 (“Companies Act”) enables a person to enter into a written agreement in the name of, or purport to act in the name of, or on behalf of, an entity that is yet to be incorporated or come into existence. Since such a company is not yet in existence, it cannot have a person acting on its behalf and for this reason, the Companies Act refers to a person who “purports” to act on its behalf.

Once the pre-incorporation contract has been entered into, within three months after the date on which a company is incorporated, the board of that company may then elect to completely, partially or conditionally ratify or reject the pre-incorporation contract or any other action purported to have been made or done in its name or on its behalf. Any failure by the board to ratify or reject a particular pre-incorporation contract, or other action purported to have been made or done in the name of the company, or on its behalf, will be regarded to have been ratified.

The pre-incorporation contracts do not come without their own risks. Persons who enter into a pre-incorporation contract or purport to act in the name of, or on behalf of, an entity that is yet to be incorporated, are jointly and severally liable for the liabilities created as provided for in the pre-incorporation contract while so acting, if:

  1. the entity is not subsequently incorporated; or
  2. after being incorporated, the board rejects any part of such an agreement or action.

Distinguishing a pre-incorporation contract in terms of the Companies Act from that of a stipulatio alteri:

In summary, a stipulatio alteri refers to an arrangement where a third party, who is not one of the contracting parties in an agreement, is given certain rights and/or benefits in terms of the agreement and which rights and/or benefits such third party has a legal standing to enforce upon its election. This is a deviation from a typical agreement where only the contracting parties have the right to enforce the terms of the agreement.

Although they are seemingly very similar, the main differences between a pre-incorporation contract in terms of the Companies Act and a stipulatio alteri therefore lie in their purpose and context. A pre-incorporation contract is about planning and organising the terms of a contract on behalf of a future entity before its formal incorporation. The intention is therefore to transfer the rights and/or obligation from the person entering into the pre-incorporation to the future entity upon incorporation. On the other hand, stipulatio alteri involves an agreement where a third party is merely granted certain rights and/or benefits which it may elect to enforce. The remaining contracting parties are therefore not released form the remaining duties and obligations of the agreement.


It is clear that pre-incorporation contracts can play a crucial role in the business environment, allowing incorporators to secure assets, advantages, and specific business opportunities even before the formal incorporation takes place. These agreements provide a level of assurance to both the incorporators and potential investors that their objectives can be realised upon incorporation. Pre-incorporation contracts can clearly be a valuable tool in realising business objectives, but they also require a thorough understanding of the potential legal implications involved.

VDMA’s team of experts is at your disposal for any company law assistance that you or your business may require.

Published: 10 June 2024