c.l*
UNIVERSITY
OF CALIFORNIA
LOS ANGELES
SCHOOL OF LAW
LIBRARY
A TREATISE ON THE LAW
IN RELATION TO
PROMOTERS AND THE PROMOTION
OF
CORPORATIONS.
KF
A
"
TREATISE ON THE LAW
IN RELATION TO
PROMOTERS AND THE PROMOTION
OF
BY
ARTHUR M. ALGER.
m
BOSTON:
LITTLE, BlfcwN, AND COMPANY.
189T.
Copyright, 1897,
BY ARTHUR M. ALGEK.
SSnibersitg
JOHN WILSON AND SON, CAMBRIDGE, TI. S. A.
PREFACE.
THE public is constantly responding to the invitations of
promoters of corporate enterprises to contribute the funds
necessary for their prosecution. Very large sums of money
in the aggregate are annually invested in such ventures by
persons who must necessarily rely more or less upon the
good faith and integrity of those engaged in promoting
them. The promoters " have in their hands the creation
and moulding of the corporation ; they 'have the power to
define how and when, and in what shape, and under what
supervision, it shall start into existence and begin to act
as a corporation." The material facts in relation to the
undertaking are often exclusively within their knowledge.
In view of these conditions, it is apparent that the question
of the reciprocal rights and obligations of the promoter
and the corporation, and of the shareholder and the pro-
moter, is of great practical importance ; and it would seem
to be worthy of fuller treatment than that which has been
accorded to it in the text-books on the law of corporations.
In the absence of any treatise on the subject, the writer
761470
VI PEEFACE.
submits this work to the profession, in the hope that the
attempt to do what so far has been left, to a great extent,
undone, namely, to analyze the cases and to state and
classify the principles deducible from the cases, may prove
useful.
A. M. A.
MAY 1, 1897.
CONTENTS.
CHAPTER I.
NATURE OP PROMOTERSHIP AND RELATION OF PROMOTERS
TO THE CORPORATION
§ 1. Explanation of term "pro-
moter."
2. Term not applicable to one
acting as an agent only.
3. In re The Great Wheal Pol-
gooth Co., 53 L. J. Ch. 42.
4. One who is an agent may be a
promoter also.
6. Agent may be promoter, al-
though compensation does
not come from corporation.
6. Central Land Co. v. Obenchain,
92 Va. 130.
7. Tests to ascertain who are
promoters.
8. Ex-Mission Land & Water Co.
v. Flash, 97 Cal. 610.
9. St. Louis & Fort Scott R. R. Co.
v. Tiernan, 37 Kan. 606.
10. Question of fact whether one
is a promoter.
11. Emma Silver Mining Co. v.
Lewis, 4 C. P. D. 396.
12. Bagnall v. Carlton, 6 Ch. D. 37 1 .
13. Nant-y-Glo & Blaina Iron Works
Co. v. Grave, 12 Ch. D. 738.
§ 14. Twycross v. Grant, 2 C. P. D.
469.
15. Lydney & Wigpool Iron Ore
Co. v. Bird, 33 Ch. D. 85.
16. Mere intent or agreement to
promote does not make one
a promoter.
17. Absolute purchase of prop-
erty with view to resale
to projected corporation as
evidence of promotership.
18. Ladywell Mining Co. v.
Brooks, 35 Ch. D. 400.
19. Conditional purchase of prop-
erty with view to resale to
projected corporation as evi-
dence of promotership.
20. Promotership not limited to
period anterior to organiza-
tion of corporation.
21. Fiduciary relation of pro-
moters to corporation.
22. Existence of such relation es-
ta"blished by authorities.
23. Consequences of fiduciary re-
lationship.
CHAPTER II.
DUTIES OF PROMOTERS TO THE CORPORATION
25
§ 24. Duties of promoters in organ-
ization of corporation.
25. Erlanger v. New Sombrero
Phosphate Co., 3 App. Cas.
1218.
. 26. Judgment of Lord Cairns.
§ 27. Exception to rule laid down
by Lord Cairns.
28. Promoters must disclose their
interest in transactions with
corporation.
vm
CONTENTS.
§ 29. As vendo* of corporation not
always bound to disclose
cost of property to them.
30. Under some circumstances
must disclose such cost.
31. Trustees not permitted to
make secret profit in matter
of trusteeship.
32. Similar rule applies to pro-
moters.
33. Mere declaration that pro-
moter is interested not
enough when made to the
directors only.
34. Imperial Mercantile Credit
Association v. Coleman, L.
R. 6 H. L. 189.
35. Disclosure of interest only
sufficient if made to the
shareholders.
§ 36. Full disclosure must be made.
37. In re Westmoreland Green &
Blue Slate Co., 2 Ch. (1893)
612.
38. To whom disclosure must be
made and by whom acted
upon.
39. Effect of disclosure to, and
consent by, all the share-
holders representing entire
capital stock.
40. Effect of disclosure to and
consent by all the existing
shareholders, when entire
capital stock not issued.
41. Ultra vires acts not validated
by disclosure to and con-
sent by all the shareholders.
CHAPTER III.
PAGE
ACCOUNTABILITY OP PROMOTERS TO THE CORPORATION FOR
PROFITS, GIFTS, AND COMMISSIONS 41
ARTICLE I. — ACCOUNTABILITY OF PROMOTERS FOR PROFITS OBTAINED
BY THEM AS VENDORS OF THE CORPORATION.
§ 42. Right of corporation to claim
benefit of purchase made
by promoters while such.
43. Tyrrell v. Bank of London,
10 H. L. C. 26.
44. Mere fact that property pur-
chased by promoters while
such does not entitle cor-
poration to benefit of pur-
chase.
45. Benson v. Heathorn, 1 Y. &
C. 326.
46. Right of corporation to claim
benefit of purchase made
by promoter before he be-
came such.
§ 47. In re Ambrose Lake Tin and
Copper Mining Co., 14 Ch.
D. 390.
48. Ladywell Mining Co. v.
Brooks, 35 Ch. D. 400.
49. Colorable transfer of property
to promoter to be by him
sold to the corporation.
50. Whaley Bridge Calico Print-
ing Co. v. Green, 5 Q. B. D.
109.
51. Acts and declarations of pro-
moter giving corporation
right to claim benefit of
purchase made by him.
CONTENTS.
IX
§ 52. Simons v. Vulcan Oil Co., 61
Penn. 202.
53. Burbank v. Dennis,101 Cal.90.
54. Eight of corporation to ben-
efit of optional purchase
made by promoter before
becoming such.
55. Offer by promoter to corpo-
ration entitling it to benefit
of his purchase.
56. Plaquemines Tropical Fruit
Co. v. Buck, 52 N. J. Eq. 219.
57. Pittsburg Mining Co. v.
Spooner, 74 Wise. 307.
58. Right of corporation to bene-
fit of optional purchase
made by third persons con-
federating with promoter.
§ 59. Fountain Spring Park Co. v.
Roberts, 92 Wise. 345.
60. Right of corporation to re-
cover the profit made by
promoter on a sale of his
property to it. Definition
of term "profit."
61. Recovery of profit when prop-
erty sold is a commodity
having a current market
price.
62. Recovery of profit when prop-
erty sold is not a com-
modity with current market
price.
ARTICLE II. — ACCOUNTABILITY OF PROMOTERS FOR GIFTS AND
COMMISSIONS 71
§ 63. Explanation of term " promo-
tion money."
64. Accountability of promoters
for promotion money.
65. Hichens v. Congreve, 4 Russ.
562 ; 1 Russ. & Myl. 150, n.
66. Beck v. Kantorowicz, 3 Kay
& J. 230.
67. Lyclney & Wigpool Iron Ore
Co. v. Bird, 33 Ch. D. 85.
68. Bagnall v. Carlton, 6 Ch. D.
371.
69. Emma Silver Mining Co. v.
Grant, 11 Ch. D. 918.
70. Emma Silver Mining Co. v.
Lewis, 4 C. P. D. 396.
71. McElheney's Appeal, 61 Penn.
188.
72. Chandler o. Bacon, 30 Fed.
Rep. 538.
§ 73. In re Westmoreland Green &
Blue Slate Co., 2 Ch. (1893)
612.
74. Yale Gas Stove Co. v. Foley,
64 Conn. 105.
75. Right of corporation to re-
cover from vendor promo-
tion money which he has
secretly agreed to pay to
promoter.
76. Accountability to corporation
of persons confederating
with promoters.
77. Right of corporation to re-
cover from promoters gifts
and commissions not ob-
tained at its expense.
78. In re North Australian Terri-
tory Co., 1 Ch. (1892) 322.
CONTENTS.
CHAPTER IY.
MEASURE OP PROFITS RECOVERABLE BY CORPORATION. —
STATUTE OF LIMITATIONS AS A BAR TO SUIT FOR THEIR
RECOVERY. — SURVIVAL OF CAUSE OF ACTION
89
§ 79. View that net profit only re-
coverable.
80. Modification of this view. —
No allowance for expendi-
tures ultra vires the corpo-
ration.
81. English decisions based on
provisions of the Compa-
nies Acts.
82. Interest recoverable.
83. Rule when gift, commission,
or profit is in form of shares
of corporation's stock.
84. Statute of Limitations as a bar
to suit to recover profits.
§ 85. Metropolitan Bank v. Heiron,
6 Ex. D. 319.
86. Statute runs from time of dis-
closure to or knowledge by
corporation.
87. In re Fitzroy Bessemer Steel
Co. v. Smith, 50 L. T. Rep.
N. s. 144.
88. Right of action not divested
short of period of statute
without accord and satisfac-
tion or release under seal.
89. Right of action survives
against personal represen-
tatives of promoters.
CHAPTER V.
BREACH OF DUTY OR FRAUD BY PROMOTERS AS GROUND
FOR RECOVERY OF DAMAGES FROM THEM BY CORPORA-
TION, AND FOR PROCURING THE SETTING ASIDE OF EXE-
CUTED CONTRACTS ENTERED INTO BY IT . . 98
ARTICLE I. — LIABILITIES OF PROMOTERS IN DAMAGES TO THE
CORPORATION.
90. Rule laid down in Taylor on
Corporations.
91. Damages recoverable for
breach of duty damnifying
corporation.
§ 92. Instances where promoters
liable to corporation in
damages.
CONTENTS.
ARTICLE II. — RESCISSION BY CORPORATION OP CONTRACTS EN-
TERED INTO BY IT WITH OR THROUGH PROMOTERS . 102
93. Rescission an elective rem-
edy.
94. Rescission of contracts on
ground of breach of duty
by promoters.
95. Erlanger v. New Sombrero
Phosphate Co., 3 App. Cas.
1218.
96. Atwool v, Merryweather, 5
Eq. 464, n.
97. Phosphate Sewage Co. v.
Hartmont, 6 Ch. D. 394.
98. Caveat emptor not applicable
to dealings by promoters
with corporation.
100.
101.
102.
103.
104.
Rescission by corporation of
transactions with third per-
sons on ground of partici-
pation by such persons in
frauds of promoters.
Election by corporation to con-
firm or rescind contract.
Right to rescind barred by
laches.
Return of consideration re-
ceived ordinarily condition
precedent to right to re-
scind. Exceptions.
Partial rescission not allowed.
Burden of proof in suit for
rescission.
CHAPTER VI.
SUITS BY SHAREHOLDERS TO COMPEL REDRESS FOR WRONGS
BY PROMOTERS TO THE CORPORATION 114
§ 105. As general rule suit can be
brought only by corpora-
tion.
106. Exceptions to this rule.
107. Proof necessary to establish
disability of corporation
to sue.
108. Transactions on account of
which shareholders may
or may not bring suit.
109. Exposition of rule on this
subject by Lords Justices
James and Mellish.
110. Right of minority sharehold-
ers to sue to rescind trans-
action voidable for fraud,
when majority are the
wrong-doers.
§ 111. Atwool v. Merryweather, 5
Eq. 464, n.
112. Mason v. Harris, 11 Ch. D.
97.
113. Right of minority, where
majority are not the
wrong-doers, to sue to
rescind contracts voidable
for fraud.
114. Foss v. Harbottle, 2 Hare,
461.
115. Right of minority to sue to
rescind a voidable trans-
action where there is no
fraud.
116. Right of minority to sue for
recovery of secret profits
obtained by promoters.
Xll
CONTENTS.
§ 117. Majority not allowed to
retain profits wrongfully
obtained at expense of
minority.
118. Bight of minority to sue
for recovery of promoter's
profits on sale to corpora-
tion at fraudulently ex-
cessive price.
§ 119. Shareholder whose shares
have been voted on in
favor of a transaction can-
not maintain suit based
upon it.
120. Rule in Federal Courts.
121. Shareholders' suit may be
barred by laches.
122. Form of shareholders' suit. —
Necessary parties.
CHAPTER VII.
PAGE
LIABILITY OF PROMOTERS TO ACCOUNT FOR PROFITS, COM-
MISSIONS, AND GIFTS, OR IN DAMAGES TO SHAREHOLDERS
OF THE CORPORATION . . 131
ARTICLE I. — LIABILITY TO ACCOUNT FOR PROFITS, GIFTS, AND
COMMISSIONS.
123. Effect of invitation by pro-
moters to others to join
them in acquiring property,
and to become shareholders
in corporation to be formed
to purchase it.
§ 124. Emery v. Parrott, 107 Mass.
96.
125. Getty v. Devlin, 54 N. Y.
403 ; 70 N. Y. 504.
126. Rule as to joinder of plain-
tiffs in suit against pro-
moters for an accounting.
ARTICLE II. — LIABILITY IN DAMAGES WHEN IN A FIDUCIARY
POSITION TOWARD SHAREHOLDERS 135
§ 127. When such relation exists
between promoters and
shareholders, former li-
able to latter in damages
for breach of fiduciary
duty to them.
§ 128. Brewster v. Hatch, 122 N.
Y. 349.
129. Teachout v. Van Hoesen, 76
Iowa, 113.
CONTENTS.
Xlll
ARTICLE III. — PROMOTERS' LIABILITY IN DAMAGES WHEN NOT IN A
FIDUCIARY POSITION TOWARD SHAREHOLDERS 140
§ 130. Promoters ordinarily not in
fiduciary position toward
subscribers for shares.
131. When action will lie in favor of
subscribers against promo-
ters for misrepresentations.
132. Misrepresentation must be
assertion of fact.
133. Mere commendatory expres-
sions privileged.
134. Representation as to value in
exceptional circumstances
not privileged.
135. Representation as to price
paid by third persons for
shares or as to cost of
company's property not
privileged.
136. Commendatory expressions
in prospectuses.
137. Expressions of opinion, al-
though untrue, not action-
able.
138. Representations as to the law.
139. Representation must be of a
material fact.
140. Promoters as a rule not lia-
ble to purchasers of shares
for misrepresentation in
prospectus addressed by
them to prospective sub-
scribers for shares.
141. But connection between pro-
moters issuing prospectus
and persons purchasing
shares in reliance upon it
may be shown.
142. Andrews v. Mockford, 1 Q. B.
(1896), 372.
143. Representation must be
fraudulent as well as false.
Facts to be proved to es-
tablish fraud.
144. False representation made as
of one's own knowledge
deemed fraudulent.
145. Absence of reasonable
grounds for belief in repre-
sentation evidence that it
is fraudulent.
§ 146. Effect of subsequent discov-
ery by one who has made
representation that it is
untrue.
147. Fraud may be inferred from
concealment as distin-
guished from non-disclos-
ure of material facts.
148. Circumstances under which
non-disclosure of facts may
make facts stated false.
149. Omission of facts from pro-
spectus not ground for
action of deceit, unless it
makes facts stated false.
150. Peek v. Gurney, L. R., 6 H.
L. 377.
151. Statement of portion of truth
with suggestions and infer-
ences rendered credible
only by suppression of
other portions of truth.
152. Rules as to misrepresentation
and non-disclosure not the
same in actions ex-delicto
as in suits for equitable
relief.
153. No legislation in this country
requiring promoters' agree-
ments to be disclosed in
prospectuses.
154. English statute on subject.
155. Right of subscriber to rely on
representations addressed
to him.
156. Liability of promoters on sale
of shares issued to them at
discount or in payment for
property at overvaluation.
157. Liability of promoters for
misrepresentations made
by co-promoters.
158. Conflicting views as to meas-
ure of damages.
159. Rule in Massachusetts and
other jurisdictions.
160. Rule in New Jersey.
161. Rule laid down in England
and by Supreme Court of
United States.
XIV
CONTENTS.
CHAPTER VIII.
LIABILITY OF PROMOTERS TO SUBSCRIBERS FOR SHARES IN
A PROJECTED CORPORATION WHICH PROVES ABORTIVE .
169
§ 162. Promoters, in such case, may
be liable to refund moneys
paid in advance on shares
by subscribers.
163. No deduction allowed for ex-
penses, unless subscriber
has authorized deposit to
be applied thereto.
164. What subscriber must prove
in order to recover from
promoters.
§ 165. Burnside v. Dayrell, 3 Ex.
224.
166. Criticism of Burnside v. Day-
rell.
167. Subscriber has no lien on
moneys advanced as
against creditors of com-
pany.
168. Subscriber's remedy is at
law, unless fraud shown,
or accounting necessary.
169. Apperly v. Page, 1 Phill. 779.
CHAPTER IX.
PAGE
REMEDIES OF SUBSCRIBERS FOR SHARES AGAINST CORPO-
RATION WHEN MISLED BY MISREPRESENTATIONS MADE
BY PROMOTERS OR BY THEIR NON-DISCLOSURE OF
MATERIAL FACTS . . 176
ARTICLE I. — LIABILITY OF CORPORATION IN DAMAGES FOR
FRAUDULENT MISREPRESENTATIONS MADE BY PROMOTERS.
§ 170. Action of deceit will lie
against a corporation.
171. Corporation not liable in
damages for frauds com-
mitted by promoters prior
to its formation.
§ 172. Effect of insolvency of cor-
poration on right of suit
by subscriber against it to
recover damages.
CONTENTS.
XV
ARTICLE II. — MISREPRESENTATION OR NON-DISCLOSURE OF MA-
TERIAL FACTS BY PROMOTERS AS GROUND FOR RESCISSION OF
SUBSCRIPTIONS FOR SHARES, OR AS A DEFENCE TO SUITS THEREON
BY THE CORPORATION 179
§ 173. Responsibility of corpora-
tion for misrepresentation
or non-disclosure by pro-
moters before corporation
formed.
174. Subscribers' remedies
against corporation for
fraudulent misrepresenta-
tion by promoters.
175. Remedy when misled by
non-disclosure of facts by
promoters.
176. Dicta of Vice Chancellor
Kindersley.
177. Dicta of Lord Chelmsford.
178. Standard of duty as to dis-
closure required by dicta
quoted. Whether legal or
moral duty.
179. Peek v. Gurney, L. R. 6
H. L. 377.
180. Duty to disclose material
facts not a legal duty,
when omission does not
make facts stated false.
181. Absence of direct decisions
on this point. Reasons
for and against require-
ment of disclosure.
182. Contracts to take shares
governed by maxim caveat
emptor.
183. Views of Brett, J., expressed
in Gover's Case, 1 Ch. D.
182.
185.
186.
187.
188.
189.
190.
191.
193.
Relief obtainable in Equity,
and in some jurisdictions
at law, against innocent
misrepresentation.
No relief at law where dis-
tinction in procedure be-
tween action at law and
suit in Equity adhered to.
Principle on which Equity
rescinds or refuses to en-
force contract induced by
innocent misrepresenta-
tion.
Proof necessary to obtain re-
scission of contract of sub-
scription on ground of in-
nocent misrepresentation.
Laches as a bar to rescis-
sion of contract of sub-
scription.
Waiver of right to avoid
subscription on ground of
misrepresentation.
Burden of proof on question
of laches or waiver.
Rule in England as to effect
of corporate insolvency
on right to rescind con-
tract of subscription.
Tendency of decisions in
this country.
Repudiation of contract of
subscription without suit
for rescission effective,
although corporate insol-
vency proceedings subse-
quently begun.
XVI
CONTENTS.
CHAPTER X.
PAGE
RIGHTS AND LIABILITIES OF CORPORATION ON PROMOTERS'
CONTRACTS 198
ARTICLE I. — ENFORCEMENT BY OR AGAINST THE CORPORATION OP
CONTRACTS MADE IN ITS NAME AND FOR ITS BENEFIT BY ITS
PROMOTERS BEFORE IT COMES INTO EXISTENCE.
§ 194. Such contracts as a rule
primarily not binding
upon or enforceable by
the corporation.
195. Penn Match Co. v. Hapgood,
141 Mass. 145.
196. Long v. Citizens' Bank, 8
Utah, 104.
197. Gooday v. Colchester, &c.
Ry. Co., 17 Beav. 132.
198. Buffington v. Barden, 80
Wise. 635.
199. By weight of authority, cor-
poration cannot ratify
contract made for it be-
fore its creation.
200. Doctrine held by Lord Cot-
tenham.
201. Decisions of Lord Cottenham
questioned.
202. Corporation may accept or
adopt contracts made for
it prior to its creation.
203. Effect of such adoption or
acceptance.
204. Acceptance or adoption may
be express.
205. Stanton v. New York &
Eastern R. R. Co., 59
Conn. 272.
206. Acceptance or adoption by
corporation may be in-
ferred from its acts.
§ 207. Taking benefit of contract
may be evidence of ac-
ceptance or adoption.
208. Circumstances under which
it establishes acceptance
or adoption.
209. Battelle v. Northwestern
Cement & Concrete Pave-
ment Co., 37 Minn. 89.
210. Pittsburg & Tennessee Cop-
per Co. v. Quintrell, 91
Tenn. 693.
211. Acceptance by corporation
of subscriptions for shares
made before its forma-
tion.
212. Cases in which term ratifica-
tion used in sense of adop-
tion or acceptance.
213. Paxton Cattle Co. v. First
National Bank of Arrapa-
hoe, 21 Neb. 621.
214. Distinction between ratifica-
tion and adoption or ac-
ceptance.
215. English doctrine as to pro-
moter's contracts.
216. Howard v. Patent Ivory
Mfg. Co., 38 Ch. D. 156.
217. Corporation cannot adopt
or accept ultra vires con-
tracts.
CONTENTS.
XV11
ARTICLE II. — LIABILITY OF CORPORATION TO PAT ITS PROMOTERS
' OR PERSONS EMPLOYED BY THEM, FOR SERVICES AND EXPENSES
INCIDENT TO ITS FORMATION 220
§ 218. Statutory liability.
219. Liability under the English
Companies Acts.
220. Melhado v. Porte Allegre,
New Hamburgh. & Brazil-
ian Ry. Co., L. R. 9 C. P.
603.
221. Liability on quantum meruit.
§ 222. Doctrines held in this coun-
try as to liability of corpo-
ration.
223. Liability to pay for services
and expenses in obtaining
subscriptions for shares.
224. Doctrine held in Vermont
and New Hampshire.
CHAPTER XI.
RIGHTS AND LIABILITIES OF PROMOTERS UNDER CONTRACTS
MADE BY THEM, OR BY THEIR Co-PROMOTERS, IN BEHALF
OF OR FOR THE BENEFIT OF A PROJECTED CORPORA-
TION.— CONTRACTS BETWEEN PROMOTERS ...... 228
§ 225. Promoter not liable on con-
tract made in name of in-
tended corporation, unless
he agreed to be so.
226. Presumption as to intent of
parties.
227. Landman v. Entwistle, 7 Ex.
632.
228. On written contract question
of intent is for the Court.
— Kelner v. Baxter, L. R.
2 C. P. 174.
229. Scott v. Ebury, L. R. 2 C. P.
255.
230. Promoter usually not liable
on contract made in name
of corporation. — Liable
for misrepresentation as to
existence of corporation.
231. Effect of adoption by corpo-
ration of contract on which
credit was given to pro-
moter.
232. Abbott v. Hapgood, 150
Mass. 248.
233. Promoters not prima facie
partners.
§ 234. English cases as to liability
of promoters on contracts
made by co-promoters.
235. Ordinarily promoter not li-
able from allowing his
name to appear in pro-
spectus or signing articles
of incorporation, if he does
not act in undertaking.
236. Statements in prospectus
in which promoter allows
his name to be used may
impose liability upon
him.
237. When promoter has acted in
undertaking, question for
jury whether he has au-
thorized co-promoters to
bind him.
238. Riley v. Packington, L. R.
2 C. P. 536.
239. Promoter's liability on con-
tract made before he be-
came a promoter. — Effect
of admission of liability.
240. To hold promoter, credit must
have been given to him.
XV111
CONTENTS.
§ 241. Joint liability of promoters.
— Effect of release of one.
242. Right of promoter to indem-
nity from co-promoters.
243. Right of promoter to contri-
bution from co-promoters.
244. Batard v. Hawes, 2 El. & B.
287.
245. In absence of agreement,
promoter cannot enforce
payment for services from
co-promoters.
§ 246. No contract between pro-
moters to go forward im-
plied from their association
together.
247. Legality of agreements be-
tween promoters as to
formation of corporation
and its future management
and control.
248. Agreement between promo-
ters restricting sale of
their stock.
CHAPTER XII.
RIGHTS AND LIABILITIES UNDER CONTRACTS MADE BY
PROMOTERS CLAIMING TO BE INCORPORATED WHEN
THE PROCEEDINGS TAKEN TO INCORPORATE HAVE BEEN
DEFECTIVE OR ILLEGAL . 250
§ 249. Question as to consequences
of illegal or defective in-
corporation by promoters.
250. Theory that corporation can-
not come into existence
without substantial com-
pliance with enabling stat-
ute.
251. Conclusiveness of certificate
of incorporation.
252. Nature and attributes of a
de facto corporation.
253. Promoters and stockholders
of a de facto corporation
not liable for its debts.
254. What is necessary to consti-
tute a de facto corporation.
255. A valid enabling statute.
256. Color of apparent organiza-
tion under statute and user.
257. Effect of apparently real but
in fact sham or fraudulent
compliance with require-
ments of statute.
258 Construction of statute by
courts of State where en-
acted followed by courts
of other States.
§ 259. Incorporation for apparently
lawful, but in reality un-
lawful purpose, will not
protect promoters.
260. Rule when corporation
formed in good faith for
lawful purpose.
261. Estoppel to deny corporate
existence. Estoppel of the
alleged corporation.
262. Estoppel of stockholders and
promoters.
263. Estoppel of persons dealing
with association as a cor-
poration.
264. Estoppel to deny corporate
existence of association in
order to hold members in-
dividually liable on its
contracts.
265. Rights and liabilities under
contracts by or with asso-
ciation acting as a corpo-
ration, when there is no
estoppel and no corporate
existence even de facto.
INDEX
277
TABLE OF CASES.
[References are to Sections.]
AARON'S Beefs Co. v. Twiss 136, 151,
155, 178, 188, 190
Abbott v. Hapgood 194, 199, 21 5, 232
v. Merriam 105
v. Omaha Smelting Co. 250, 265
Adamantine Brick Co. v. Woodruff
107
Addlestone Linoleum Co., In re 172
JEtna. Ins. Co. v. Reed
Aldham v. Brown 163
Alexander v. Searcy 107, 119
Allen v. Curtis 105, 107
v. Long 256
Ambrose Lake Tin & Copper Min-
ing Co., In re 28, 39, 46, 47, 156
American Loan & Trust Co. v.
Minnesota & N. W. R. R. Co. 255
American Mortgage Co. of Scot-
land v. Ternilfe 250
American Salt Co. v. Heidenhei-
mer 253, 257, 264
Anderson v. Hill 133
Andrew v. Ted ford 225
Andrews v. Mockford 142
Angus v. Clifford 143
Apperly v. Page 169
Arkwright v. Newbold 63, 130, 146,
148, 149, 180
Ashley's Case 188
Ashmead v. Colby 192
Ashpitel v. Sercombe 163
Ashuelot Boot & Shoe Co. v. Hoit 211
Ashurst's Appeal 84
Atchison, Topeka & Santa Fe
R. R. Co. v. Davis 260
Athol Music Hall Co. v. Carey 211
Atlantic Bank v. Harris 86
Attorney General v. Hanchett 250
Atwool v. Merryweather 96, 111, 112
Auburn Academy v. Strong 107
Avery v. Chapman 144
v. Ryan 246
BABCOCK v. Case 102
Bagnall v. Carlton 12, 32, 64, 68, 77,
79
Bailey v. Birkenhead Ry. Co. 122
v. Burgess 245
v. Macaully 235, 238, 239, 240
Baird o. Ross 163
Bank of Scotland v. Addie 170
Bank of Shasta v. Boyd 263
Barker v. Stead 235
Barr v. New York, Lake Erie &
Western R. R. Co. 100, 119
Barry v. Croskey 140
Bartholomew o. Bentley 140
v. Bushnell 144
Bartlett v. Tucker 230
Batard v. Hawes 244
Battelle v. Northwestern Cement
& Concrete Pavement Co. 194,
202, 209
Batthyany v. Walford 89
Baxter v. Moses , 84
Bay v. Cook 225
Bayless w. Orne 107
Beal v. Bass 262
Beale v. Monk 239
Beck v. Kantorowicz 66
Bedford v. Bagshaw 137
Beetenn v. Burkholder 102
Belav v. Bryan 173
Bell's Appeal 211
Bell's Gap R. R. Co. v. Christie 222
Bellairs v. Tucker 155
Bennett v. Gibbons 155
Benson v. Heathorn 31, 45
Bentinck v. Fenn 61, 62, 91,
104
Bergen v. Porpoise Fishing Co. 194
Berry v. Whitney 138
Bethell v. Bethell 138
Bigelow v. Gregory 250, 265
Bird's Case 251
Bird v. Kleiner 144
Bivleh-y-plom Lead Mining Co. v.
Baynes 174
Bjorngaard v. Goodhue County
Bank 107
Blain v. Agar 168
Blanchard v. Kaull 266
Bloomer v. Gray 134
XX
TABLE OF CASES.
[References are to Sections.]
Bluehill Academy v. Witham 194
Bodley v. McChord 102
Bonaparte v. Baltimore, Hampden
& Lake Roland R. R. Co. 250
Boomer v. American Spiral Co.
202, 210
Bosher v. Richmond & Harrison-
burg Land Co. 1, 174
Bosley v. National Machine Co. 170
Boston v. Simmons 59, 76, 91
Boston Rubber Shoe Co. v. Boston
Rubber Co. 251
Boughton v. Standish 188
Boulton v. Peplow 243
Bower v. Fenn 144
Boyce v. Trustees of Towsonton
Station of M. E. Church 250,
261
Boyd v. Sims 107
Bradenstein v. Hoke 255, 263
Bradford v. Harris 162
Bradley v. Poole 137
Brampton Ry. Co., In re 194
Brewer v. Boston Theatre Co. 107,
113
Brewster v. Hatch 128
Brickley v. Edwards 263
Briggs v. Withey 99
Bright v. Hutton 233, 243
British Seamless Paper Box Co.,
In re 40
Broughton v. Broughton 78
Brown v. Castles 133
v. Duluth, &c. R. R. Co. 119
Browne v. La Trinidad 219
Browning v. Great Central Mining
Co. 210
Brownlow v. Cauthers 155
Bruner v. Brown 212
Bryant v. Ocean Ins. Co. 132
Buffalo & Allegheny R. R. Co. v.
Cary 256
Buffalo & Jamestown R. R. Co. v.
Gifford 211
Buffalo & Pittsburgh R. R. Co. v.
Hatch 249, 261
Buffington v. Barden 194, 198
Burbank v. Dennis 29, 46, 53
Burbridge v. Morris 238
Burgess v. Sherman 241
Burnes v. Pennell 173
Burns v. Lane 138
Burnside n. Dayrell 165, 166
Burr v. McDonald 107
Buschman v. Codd 161
Bushnell v. Consolidated Ice Ma-
chine Co. 256
Butchers & Drovers' Bank v. Mc-
Donald 263
Butt v. Monteaux 168
CABOT v. Chester 144
Caldwell v. Henry 144
Caledonian, &e. Ry. Co. v. Hellens-
burg 194, 201
Callender v. Plainsville & Hudson
R. R. Co. 261
Campau v. Van Dyke 101
Campbell v. Fleming 137
Cape Breton Co., In re 46, 61, 62
Capel v. Sims Ships Compositions
Co. 80
Capper's Case 233
Carey v. Des Moines Coal & Min-
ing Co. 194
Cargill v. Bower 157
Carling v. London & Leeds Bank
172, 191
Case Mfg. Co. v. Soxman 226, 231
Caseaux n. Mali 140
Casey v. Galli 251, 262, 263
Cassidy v. Globe Rubber Co. 170
Castner v. Walrod 101
Caswell v. Hunton 135, 139
Catlin v. Green 121
Cedar Rapids Ins. Co. v. Butler 188
Central Agricultural & Mechan-
ical Association v. Alabama
Gold Life Ins. Co. 252
Central City Savings Bank v.
Walker 265
Central Land Co. v. Obenchain 6
Central Ry. Co. of Venezuela v.
Kisch 136, 148, 155, 177, 188
Chandler v. Bacon 32, 72, 83
Chaplin v. Clark 162
Charles River Bridge Co. v. War-
ran Bridge 257
Chatham Furnace Co. v. Moffatt
144
Cheney v. Gleason 92, 98, 127, 129
Chester v. Comstock 144
Chicora Co. v. Crews 255
Childs v. Kurd 250
Chubb v. Upton 192
Clark v. American Coal Co. 119
v. Jones 264
Clarke v. Dickson 102, 135
Clegg v. Hamilton & Wright
Grange Co. 250, 265
Clements v. Bowes 169
Clinch v. Financial Corporation 113
Close v. Glenwood Cemetery 263
Clough v. London & Northwestern
Ry. Co. 100
Cochran v. Arnold 253, 257
Coil v. Pittsburgh Female College
130
Cole v. O'Brien 225
Coleman v. Coleman 265
Coles v. Kennedy 139, 148
TABLE OF CASES.
[References are to Sections.]
XXI
Collen v. Wright 230
Collingwood v. Berkley 236
Collins v. Townsend 188
Colorado Land & Water Co. v.
Adams 205
Colt v. Clapp 123
v. Woolaston 168
Colton v. Stamford 155
Columbia Electric Co. v. Dixon 252
Commercial Bank of Keokuk v.
Pfeiffer 263
Concha v. Marietta 89
Cook v. Tullis 199
Coolidge v. Goddard 135
Cooper v. Schlesinger 144
Cornell v. Hay 154
Cortes v. Thanhauser 98
Cowley v. Smith 144
Cox v. Montgomery 101
Coxe v. State 255
Craig v. Phillips 154
Craigie v. Hadley 170
Cross v. Sackett 140, 141, 156
Grossman v. Penrose Ferry Bridge
Co. . 137
Crow v. Green 246
Crown v. Brown 144
Croyle v. Moses 147
Crump v. U. S. Mining Co. 174
Cunningham v. Edgefield & Ken-
tucky R. R. Co. 192
v. Pell 122
Gushing v. Wyman 102
DALE & Plant Co., In re 199
Danforth v. Gushing 155
Davis v. Betz 138
v. Dexter Butter & Cheese
Co. 205
v. Gemmell 121
v. Hamlin 42
v. Montgomery Furnace &
Chemical Co. 212
v. Stuard 100
Dawe v. Morris 132
De Bussche v. Alt 85, 88
De Ruvignes' Case 83
Demarest v. Flack 257
Deming v. Darling 133
Denny v. Gilman 151
Densmore Oil Co. v. Densmore
27, 29, 38, 39, 46, 62
Denton v. Great Northern Ry. Co.
140
v. MacNeil 136, 168
Deposit Life Ins. Co. v. Ayscough
174
Derry v. Peek 130, 143, 181
Dimmock v. Hallett 133
Dimpfel v. Ohio & Mississippi Ry.
Co. 120, 121
Dole v. Wooldredge 123, 126, 233,
235
Dooley v. Cheshire Glass Co. 261
Doran v. Eaton 133
Dorris v. French 54, 181
Dorsey Match Co. v. McCaffrey
170, 172
Drouet v. Taylor 165
Duffield v. E. T. Barnum Wire &
Iron Works 188, 192
Duggan v. Colorado Mortgage &
Investment Co. 252, 253, 256, 257
Duke v. Taylor 264, 265
Duncan v. Niles 230
Dunphy v. Traveller Newspaper
Association 107, 108, 121
Duranty's Case 173
Duvergier v. Fellows 156
Dynes v. Schaffer 188
EAGLESFIELD v. Londonderry 138
Eakright v. Logansport, &c.
R. R. Co. 249
Earl Lindsey v. Capper 201
v. Great Northern Ry. Co. 201
Earl of Shrewsbury v. North
Staffordshire Ry. Co. 194, 201
East Norway Lake Church v.
Froislie 256
Eaton v. Walker 255, 264, 265
Eden v. Ridsdale's Ry. Lamp &
Lighting Co. 83
Edgington y. Fitzmaurice 132, 139
Edwards v. Grand Junction Ry.
Co. 200
Eichbaum v. Irons 226
Eley v. Positive Assurance Co. 194,
219
Elizabethtown Gas Co. v. Green
250
Ellis v. Andrews 133
Ely v. Hanford 46. 62
Emery v. Parrott 59, 76, 124
Emly v. Lye 207
Emma Silver Mining Co. v. Grant
32, 69, 79
v. Lewis 1, 10, 11, 32, 70
Empire Mills v. Allston Grocery
Co. 263, 264, 265
Empress Engineering Co., In re 194,
199, 215, 216, 221, 222
Ennis Cotton Oil Co. v. Burks 225,
231
Erie City Iron Works v. Barber 144,
170
XX11
TABLE OF CASES.
[References are to Sections.]
Erlanger ?>. New Sombrero Phos-
phate Co. 1, 5, 17, 21, 25, 27, 28,
38, 42, 46, 62, 95, 100, 101, 154
Eschweiler v. Stowell 107
Essex Bridge Co. v. Tuttle 211
Evenson v. Ellingson 255
Excelsior Pebble Phosphate Co.
v. Brown 107
Exchange Bank of Kentucky v.
Gaitskill 159
Ex-Mission Land & Water Co. v.
Flash 1, 8, 46, 53
FAIRBANKS' Executors v. Hum-
phreys 230
Fairchild v. McMahon 134
Farlow v. Ellis 100
Farmers' Co-operative Trust Co.
v. Floyd 225
Farmers' Loan & Trust Co. v.
New York & Northern Ry. Co. 110
Farmers' Stock Breeding Ass'n
v. Scott 144
Farnham v. Benedict 257
Farrar v. Walker 188, 193
Farwell v. Great Western Tele-
graph Co. 107
Faure Electric Accumulator Co.,
In re 80
Fawcett v. Charles 107
v. Whitehouse 123
Fay v. Noble 264, 265
Fear v. Bartlett 193
Felgate's Case 173
Ferris v. Thaw 250, 265
Field v. Cooks 250
Finch v. Ullman 252
Finnegan v. Knights of Labor
Building Ass'n 253, 254, 256
First Nat. Bank v. Almy 265
First Nat. Bank of Ft. Scott v.
Drake 117
Fish v. Cleland 138
Fisher v. Worrall 137
Fitzroy Bessemer Steel Co., In re
38, 83, 87
Flagler Engraving Co. v. Flagler 156
Flemming v. Weagley 188
Fogg v. Griffin 170
Ford v. McComb 144
Forrester v. Bell 233
Foss v. Harbottle 105, 109, 114
Foster v. Mansfield R. R. Co. 101
v. Seymour 39
Fountain Spring Park Co. v.
Roberts 59, 76
Frankfort v. S. T. Co. 210
Franklin Fire Ins. Co. v. Hart 194,
223
Fredenhall v. Taylor
Fritts v. Palmer
Frost v. Belmont
Fuller v. Rowe
238
250
222
265
GALIGHER v. Jones 83
Gamble v. Queen's County Water
Co. 115
Garnett v. Richardson 250, 265
Gartside Coal Co. v. Maxwell 253
Garwood v. Ede 163
Gay v. Alter 102
Gent v. Manufacturers' Mutual
Ins. Co. 194, 202
George Newman & Co., In re 41
Gerhard v. Bates 141
Getty v. Devlin 46, 125, 128
Gilmore v. Bradford 230
Glassier v. Rolls 143
Gold Co., In re 39, 156
Gooday v. Colchester, &c. Ry. Co.
197
Goodin v. Cincinnati & Whitewater
Canal Co. 62
Goodrich v. Reynolds 185
Goodwin v. Home 132
v. Mass. Loan & Trust Co. 184
Gordon v. Parmelee 133
Cover's Case 17, 19, 42, 54, 55, 154,
183
Gower v. Andrew 42
Graham v. Nowlan 144
Grand Rapids Safety Deposit Co.
v. Cincinnati Safe & Lock Co. 92
Grand River Bridge Co. v. Rollins
202, 210
Grand Trunk Ry. Co. v. Brodie 162,
168
Granger's Ins. Co- v. Turner 174
Grant v. Law 103
Grape Sugar & Vinegar Mfg. Co.
*>. Small 212
Grappengeisser v. Lake 184
Gray v. Suspension Car Truck
Mfg. Co.
v. Lewis 107
Great Luxembourg Co. v. Mag-
nay 62, 100
Great Wheal Polgooth Co., In re 3
Green v. Barrett 168
Greene v. People 250
Greenhalgh v. Manchester, &c.
Ry. Co. 200
Greenly v. Hopkins 82
Gregory v. Patchett 121
Guckert v. Hacke 250, 264, 265
Gunn v. London & Lancashire
Ins. Co. 199, 215
TABLE OF CASES.
[References are to Sections.]
XX111
HAAS v. Bank of Commerce 256
Haase v. Mitchell 102
Haight v. Hayt 155
Hall ». Grand all 225, 228, 230
v. Johnson 139
v. Vt. & Mass. R. R. Co. 222, 224
Hambly v. Trott 89
Hamilton c. Clarion R. R. Co. 252
v. Granger's Ins. Co. 174, 192
Hammett v. Emerson 144
Harrington v. Victoria Graving
Dock Co. 75
Harris v. McGregor 250
Haskell v. Worthington 193
Hussletnan r. U. S. Mortgage Co.
256
Hatchard v. Mege 89
Hatcher v. Hall 101
Hause v. Hamenheimer 263
Haven v. Foster 138
Havens v. Hoyt 115
Hawes v. Oakland 107
Hawk v. Brownell 242
Hay's Case 78
Hayes v. Stanley 166
Hazard v. Durant 117
Heath v. Erie Ry. Co. 107
Hedden v. Griffin 139
Henninger v. Heald 99, 187
Hereford Engineering Co., In re 199
Hereford South Wales Wagon
Co., In re 221,222
Hersey v. Tully 225
v. Veazie 107
Hess Mfg. Co., In re 46
Heymann v. European Central
Ry. Co. 181, 188
Hicliens v. Congreve 65
Higgins v. Crouse 137
v. Hopkins 226
v. Lansingh 39, 46, 62, 103
v. Senior 225, 228
Hill v. Beach 257
v. Hobart 188
v. Nisbett 115
Hirslifield v. London, Brighton &
South Coast Ry. Co. 138
Holbrook v. Burt 188
v. Connor 133, 134, 137
Holdom v. Ayer 144
Holmes v. Higgins 233
Home's Appeal 186
Hornblower v. Crandall 157, 233
Houghton v. Butler 89
Houldsworth v. City of Glasgow
Bank 170, 172
Houston v. R. R. Co. 170
Hovenden v. Lord Annesley 84
Howard v. Patent Ivory Mfg. Co.
216
Howard v. Turner 192
v. Yunker 225
Hubbard v. Weare 143
Hubbell v. Meigs 159
Hudson v. Green Hill Seminary 256
Hudson Real Estate Co. v. Tower 211
Hughes v. Antietam Mfg. Co. 137
Humphrey v. Merriam 144
Humphreys v. Mooney 265
Hungerford Nat. Bank v. Van
Nostrand 264
Hunt v. Silk 102
Huntington & Broad Top Ry. &
Coal Co. v. English 83
Huron Printing & Binding Co. v.
Kittleson 202, 210
Hurst v. Salisbury 228, 250
Button v. Thompson 233
v. Uphill 233
IMPERIAL Mercantile Credit Ass'n
v. Coleman 30, 34, 35, 54
Indianapolis, Peru & Chicago Ry.
Co. v. Tyng 144
Insurance Co. v. Harbor Protec-
tion Co. 265
Ives v. Carter 134
JACKSON v. Stockbridge 144
Jaggar v. Winslow '138
Jefts v. York 230
Jenkins v. Pye 101
Jennings v. Broughton 155
Jersey City Gas Co. v. Dwight 257
Jessop v. Ivory 189
Jessup v. Carnegie 258
Jewell v. Rock River Paper Co. . 192
Jewett v. Davis 187
Johnson v. Corsner 235, 265
v. Goslett 162, 166
v. Smith 225, 228, 230
Johnston v. Gumbel 264
Jones v. Aspen Hardware Co. 263
v. Harrison 163
v. Johnson 105
17. Smith 101
Jordan v. Money 132
KAISER v. Lawrence Savings Bank
250
Kankakee & Seneca R. R. Co. v.
Horan 260
Karberg's Case 139, 171, 173, 174, 184
Keener v. Harrod 230
Kelner v. Baxter 194, 199, 215, 220,
228
XXIV
Kennedy v. McKay
v. Panama Mail Co.
v. Thorp
Kenner v. Harding
Kilgore v. Bruce
Kilpatrick v. Reeves
Kimber v. Barber
King v. Barnes
v. Eagle Mills
TABLE OF CASES.
[References are to Sections.]
171
185
100
147
135
144
61
247
185
o. Sioux City Loan & Inv. Co.
134
Kingston Cotton Mills Co., Re 91
Koop v. Bohmrich 107
Kost v. Bender 134
Kountze v. Kennedy 143, 144, 184
LADYWELL Mining Co. v. Brooks
10, 17, 18, '28, 42, 46,48, 61, 62, 74
Lagrone v. Timmerman 230
Lake v. Argyll 234
Lake Ontario Shore R. R. Co. v.
Curtis 211
Lamning v. Galusha 256
Landis v. Sea Isle City Hotel Co.
107
Landman v. Entwistle 226, 227
Lands Allotment Co. v. Broad 92
Larned v. Beal 253
Law v. Grant 173
Learing v. Wise 188
Lefray v. Gore 243
Lehman v. Warner 252
Le Lievre v. Gould 143
Lewis v, Tilton 230
Lindsay Petroleum Co. v. Hurd
99, 101, 135, 190
Long v. Citizens' Bank 194, 196
i). Woodman 132
Lord v. Copper Miners Co. 105, 109
v. Essex Building Ass'n 250
Lord Burns' Case 107
Lorillard v. Clyde 194
Loverin v. McLaughlin 265
Low v. Bouviere 143
v. Conn. & Passumpsic R.R.
Co. 224
Lucas v. Beach 233
Lydney & Wigpool Iron Ore Co.
v. Bird 1, 2, 4, 15, 21, 32, 67, 80
Lynde v. Anglo-Italian Hemp
Spinning Co. 173
MACDOUGALL v. Gardiner 109
Mackall v. Chesapeake Canal Co.
252
Mackay v. Bank of New Bruns-
wick 170
Maddick v. Marshall 238
Mahan v. Wood 211
Maitland's Case 166
Manahan v. Noyes 102
Mann v. Edinburgh Northern
Tramways Co. 41
Manning v. Albee 134
Manufacturers' Nat. Bank v. Perry
82
March v. Eastern R, R. Co. 107
Marchand v. Loan & Pledge Ass'n
222
Marriner v. Dennison 187
Marsh v. Falker 144
Marten v. Paul 0. Burns Wine
Co. 189
Mason v. Harris 107, 112, 118
v. Waite 82
Matthews v. Bliss 147
Mayor, &c. of Salford v. Lever
76,92
McAIeer v. Horsey 134, 139
r. McMurray 156
McArthur v. Times Printing Co.
199, 202, 203, 210, 214
McClellan v. Scott 155
McClinch v. Sturgis 252
McCully ?>. Pittsburgh & Connells-
ville R. R. Co. 189
McCurdy »:. Rogers 225, 230
McElheney's Appeal 32, 71
McFadden v. Robinson 134
McGrew v. City Produce Ex-
change 259
McKay's Case 83
McKeon v. Boudard, Peveril Gear
Co. 183
McKnight v. Pittsburgh 205
McTighe v. Macon Construction
Co. 255, 256
Mead v. Bunn 155
Medbury v. Watson 134
Medenhall, In re 255
Medill v. Collier 257, 265
Meeker v. Winthrop Iron Co. 110
Melhado v. Port Allegre, New
Hamburg & Brazilian Ry. Co. 194,
199, 215, 219, 220
Menier v. Hooper's Telegraph
Works 107, 117
Merchants' Bank v. Stone 264
Merchants' & Planters' Line v.
Wagoner 107
Merriman v. Magiveny 256
Methodist, &c. Church v. Pickett
256
Metropolitan Bank v. Heiron 84, 85
Metropolitan Coal Consumers Ass'n
v. Scrim geour 80
Meyer v. Staten Island Ry. Co.
110
TABLE OF CASES.
[References are to Sections.]
XXV
Michener v. Payson 192
Miller K. Barber 148
v. Murray 107
v. Wild Cat Gravel Road Co.
171, 211
Ming v. Woolfolk 155
Mitchell !'. Zimmerman
Mohler v. Carder 184
Mokelumne Hill Mining Co. v.
Woodbury 249, 250
Montgomery v. Forbes 250, 257, 264
Montreal River Lumber Co. v.
Milhils 144
Moore v. Explosives Co. 139
v. Silver Valley Mining Co. 107
Moore & Handley Hardware Co. v.
Tower's Hardware Co. 194
Morehouse v. Yeager 157
Moreland v. Atchison 138
Morgan v. McKee 188
v. Skiddy 140, 141
v. Thetford 100
Moriarty v. Stafferan 102
Morse v. Hutchins 159
v. Shaw 139
Morton v. Hamilton College 222
Moseley v. Cressey's Co. 167
Mozley v. Alston 107, 109
Munson v. Syracuse, &c. Ry. Co. 194
NANT-Y-GLO & Blainalron Works
Co. v. Grave 13, 83, 91
Nash v. Minnesota Title Ins. &
Trust Co. 133, 140, 144, 170
National Debenture & Assets Co.,
In re 250, 251
Neall v. Hill 107
Neblett v. Macfarland 101, 102
Nebraska Nat. Bank of York v.
Ferguson 264
Newbiggin v. Adam 184
New Brunswick & Canada Ry.
Co. v. Muggeridge 176
New Sombrero Phosphate Co. v.
Erlanger 21, 30, 54, 89
Newton v. Belcher 233, 239
v. Blunt 241
v. Liddiard 239
Newton Nat. Bank v. Newbiggen 193
New York Nat. Exchange Bank
v. Crowell 264, 265
New York & New Haven R. R.
Co. v. Ketchum 223
Nockels v. Crosby 162, 163, 166
Norbury's Case 238
Norris v. Cottle 233, 235
North v. Phillips 83
v. State 262
North Australian Territory Co.,
In re 78
Northumberland Hotel Co., In re
194, 199, 215
North West Transportation Co.
v. Beatty 115
OAKES v. Cattaraugus Water Co. 212
v. Turquand 148, 188, 191, 251
Ogilvie v. Knox 192
Ohio v. Bryce 107
PADDOCK v. Fletcher 129
v. Franklin Ins. Co. 217
Page v. McMillan 188
v. Parker 144, 157
Panama & South Pacific Tel. Co.
v. India Rubber, Gutta Percha
& Tel. Works Co. 99
Pape v. Capital Bank 256
Parker v. Moulton 133, 134
v. Nickerson 42, 61
Parkin v. Fry 245
Parmelee v. Adolphe 185
Parsons v. Hayes 39
v. McKinley 188
Pasley v. Freemaa 155
Patrick v. Reynolds 235
Patterson v. Arnold 257
v. Lippencott 230
Paxton v. Bacon Mill, &c. Co. 194
Paxton Cattle Co. v. First Nat.
Bank of Arrapahoe 213
Payson r. Withers 138
Peabody v. Flint 107, 121
Pearson's Case 64, 78, 83, 238
Pease v. Gloaheck 101
Peebles v. Patasco Guano Co. 170
Peek's Case 188
Peek v. Derry 161, 184
v. Gurney 89, 130, 140, 148, 150,
179, 187
Peel's Case 251
Peninsular R. R. Co. v. Duncan 211
Penn Match Co. v. Hapgood 194,
195, 202, 214, 215
Penn. Mutual Life Ins. Co. v.
Crane 139
Penobscot R. R. Co. v. Dummer 211
People v. Central Pacific R. R.
Co. 138
v. Cheeseman 249
v. Higgins 107
v. La Rue 252
v. Montecito Water Co. 250, 256
v. Stockton & Visalia R. R.
Co. 249
XXVI
TABLE OF CASES.
[References are to Sections.]
Perley v. Balch 102, 188
Perrine u. Grand Lodge 261
Perry v. Little Rock & W. S. R.R.
Co. 221
Petre v. Eastern Counties Ry.
Co. 200
Pettis v. Atkins 254
Philadelphia, Wilmington & Balti-
more R. R. Co. v. Co well 189
Phillips v. Homfray 89
Pliinizy v. Augusta & K. R. Co. 262
Phosphate Sewage Co. v. Hart-
mont 64, 77, 97, 102
Pinto Silver Mining Co., In re 101
Pittsburg Mining Co. v. Spooner
57, 262
Pittsburg & Tenn. Copper Co. v.
Quintrell 202, 210
Planters' & Miners' Bank v. Pad-
gett 264
Plaquemines Tropical Fruit Co.
v. Buck 19, 22, 26, 64, 56
Pratt v. Oshkosh Match Co. 199,
202, 204
Presby v. Parker 171
Preston v. Liverpool, &c. Ry. Co.
200, 201
Price v. Mulford 84
Priest v. White 156
Pulsford v. Richards 181
QUEEN City Furniture & Carpet
Co. v. Crawford 199, 202, 231
RAGAN v. McElroy 263
Railroad Gazette v. Wherry 235
Ramsey v. Thompson Mfg. Co. 192
Ramskill r. Edwards 89
Rand v. Webber 103
Randell v. Taimen 225
Rathbone v. Parkersburg Gas Co.
107
Rawson v. Harzan 144
Redding v. Godwin 161
Redgrave v. Hurd 184, 186
Reeder v. Maranda 192
Reese River Silver Mining Co. v.
Smith 191
Reichwald v. Commercial Hotel
Co. 205
Rennie v. Clark 226
Reynell v. Lewis 233, 235, 238
v. Sprye 146
Rice v. Nat. Bank of Common-
wealth 251
Richlieu Hotel Co. v. International
Military Encampment Co. 211
Rickhoff v. Brown's Sewing Ma-
chine Co. 252, 263
Riley v. Packington 238
Roberts, Ex parte 235
Roberts Mfg. Co. v. Schlick 238
Robertson v. Parks 144
Robinson ;>. Smith 105, 107
Rockford, Rock Island & St. Louis
R. R. Co. v. Sage 223
Rogers v. Danby Universalist So-
ciety 249
v. New York & Texas Land
Co. 202, 210, 212
Roseman v. Canovan 147
Rotherham Alum & Chemical Co.,
In re 218, 219, 221
Royal Bank of Liverpool v. Grand
Junction R. R. 101
Russell v. Wakefield Waterworks
Co. 107
Rutherford v. Hill 233, 235
SALEM Mill Dam Co. v. Ropes 185
Salem Rubber Co. v. Adams 155
Salford, Mayor, &c. of, v. Lever 76, 92
Salomon v. Salomon & Co. 27, 39
Samuel v. Holladay 105
Sandy River R. R. Co. v. Stubbs 44
Sanford v. Handy 174
Sanger v. Upton 192, 211
v. Wood 100
Saunders v. Farmer 252
Savage v. Bartlett 192, 193
Schiffer v. Dietz 100
Schloss v. Trade Co. 252, 263
Schramm v. O'Connor 133
Schreyer v. Turner Flouring Mills
Co. 202, 210
Schwabocker v. Biddle 139
Scott v. Dixon 141
v. Ebury 215, 218, 229
Scottish Northeastern Ry. Co. v.
Stewart 201
Scottish Petroleum Co., In re 188, 191
Seacord v. Pendleton 265
Searcy v. Yarnell 263
Seymour v. Spring Forest Ceme-
tery Ass'n 39
Shanks v. Whitney 133
Shaw v. Davis 115
Sheffield Nickel Co. v. Unwin 103
Sherman v. White 78, 81
Shields v. Clifton Land & Improve-
ment Co. 265
Shoe & Leather Nat. Bank v. Dix
226
Short v. Stevenson 123
Simons v. Vulcan Oil Co. 38, 52, 53
TABLE OF CASES.
[References are to Sections.]
XXV11
Skegnors v. St. Leonards Tram-
way Co. 218
Smith v. Bolles 161
«>. Brittenham 102
v. Chadwick 136, 155
v. Duffy 160
i;. Kurd 105
v. Newton 144
17. Sorby 99
v. Standard Laundry Machine
Co. 259
v. Warden 265
Snider's Sons' Co. 17. Troy 252, 253,
256, 264
Snow v. Alley 102
v. Boston Blank Book Mfg.
Co. 121
Snyder v. Studebaker 263
Society of Perun v. Cleveland 256
Society of Practical Knowledge
i7. Abbott 41
Sollund i7. Johnson 144
Solomon 17. Penoyer 225
Somers v. Richards 134
South Joplin Land Co. v. Case
15, 42, 54
Spahr v. Farmers' Bank 263
Speidel v. Henrici 84
Spiller v. Paris Skating Rink 199
Spottiswoode's Case 243
Sproat v. Porter 233, 235
Stafford Nat. Bank v. Palmer 265
Stanisby v. Fraser Metallic Life
Boat Co. 199
Stanley v. Chester & Birkenhead
Ry. Co. 200
Stanton v. New York & Eastern
R. R. Co. 205, 212
Starrett v. Rockland Ins. Co. 211
State v. Central Ohio Mut. Relief
Ass'n 249
v. Critchett 255
v. Jefferson Turnpike Co. 188
v. Trustees Vincennes Uni-
versity 107
Stetson v. Patten 225
Stevenson v. Newnham 101
Stewart's Case 189
Stewart v. Stearns 134
v. St. Louis & Fort Scott
R. R. Co. 40
Stewart Paper Mfg. Co. v. Rau 261
Stiles v. White 157
St. John's Mfg. Co. v. Munger 173
St. Louis & Fort Scott R. R. Co.
17. Tiernan 9, 40
Stofflett v. Strome 263
Stone v. Denny 144
Stout v. Zulick 253, 256, 264
Stowe 17. Flagg 223
Stumpf v. Stumpf
Suessenguth v. Bingenheimer 133
Sullivan v. Mitcalfe 154
Supreme Court Independent Or-
der Foresters of Canada v.
Supreme Court United Order
Foresters 252, 256
Swimm v. Bush 186
Swisshelni v. Swissvale Laundry
Co. 202, 210
Syracuse, Cheuango & New York
R. R. Co., In re 119
TAITE'S Case 188
Tamplin's Case 187
Tarbell v. Page 252
Tarkinson v. Purvis 100
Taylor v. Leith 144
Teachout v. Van Hoesen
Teague v. Irwin 139
Ten Eyck v. Pontiac, Oxford &
Port Austin R. R. Co. 261
Tennent v. City of Glasgow Bank 191
Terwilliger v. Murphy 225
Thompson 17. First Nat. Bank of
Toledo 240
v. People 249
v. Phoenix Ins. Co. 138
Tift v. Quaker City Nat. Bank 222
Tilson v. Warwick Gaslight Co. 194
Totten v. Burhans 144
Tuckaseegee Mining Co. v. Good-
hue 263
Turner v. Davies 241
v. Grangers' Life & Health
Ins. Co. 192
Tuscaloosa Mfg. Co. v. Cox 107
Twin Lick Oil Co. v. Marbury 101
Twy cross v. Grant 1, 14, 20, 89, 150,
153, 154, 160, 161, 181
Tyler v. Savage 147
Tyrrell v. Bank of London 3, 43
UNION Nat. Bank P. Hunt 133
Union Pacific Ry. Co. v. Barnes 144
Unity Ins. Co. v. Cram 250
Upton ?;. Englehart 138, 192, 193
v. Tribilock 138, 188, 192
VANE v. Cobbold 163
Van Epps v. Harrison 134
Vanneman v. Young 253, 256
Vawter v. Ohio, &c. R. R. Co. 133
Veazey v. Doten 133
Vigers v. Pike 100
Vredenburg v. Behan 255
xx vm
TABLE OF CASES.
[References are to Sections.]
WALKER v. Mobile & Ohio R. R.
Co. 165
Wallace t>. Lincoln Savings Bank 107
Walsham v. Stainton 89, 157
Walstab v. Spottiswoode 162, 166
Walton v. Oliver 250
Ward v. Brigham 233, 235, 265
v. Lord Lodensborough 162
Warner v. Benjamin 139, 159
v. Seymour 155
Warren v. Para Rubber Shoe Co. 89
Watson v. Earl of Charlemont 164
Watt's Appeal 121
Weare v. Gove 225
Weatherford Mineral Wells &
Northwestern Ry. Co. v. Gran-
ger 199, 202, 224
Webster v. Upton 192
Wechselberg v. Flour City Nat.
Bank 235
Weir v. Barnett 157
Weiseger v. Richmond Ice Co. 189
West London Commercial Bank
v. Kitson 138
West Point Foundry Ass'n v.
Brown 163
Western Screw & Mfg. Co. v.
Cowsley 194, 223
Westmoreland Green & Blue Slate
Co., In re 32, 37, 50, 73
Whalev Bridge Calico Printing
Co. v. Green 1, 32, 50, 75, 92
Wheeler v. Pullman Iron & Steel
•Co. 107
White v. Madison 225
Whitney v. Robinson 263
v. Wyman 212, 225, 252, 253
Wicker sham v. Lee 86
Wilcox v. Iowa Wesleyan Uni-
versity 184
Wilkinson's Case 188
Willey v. Parrott 163
Williams v. McFaddon 144
v. Montgomery 248
v. Page 168, 169
v. Salmond 168
Williamson v. New Jersey South-
ern R. R. Co. 100
Willoughby v. Chicago Junction
Railway 122
Wilson v. Curzon 245
v. West Hartlepool R'y Co. 216
Windram v. French 138, 155, 156
Wingettr. Quincy Building Ass'n 263
Winsor v. Bailey 122
Winters v. Hub Mining Co. 215
Wise v. Fuller 133
W. Laxon Co. No. 2 251
Wontner v. Sharp 189
Wood v. Argyll 233, 234
v. Cory Waterworks Co. 119
Woodbury Heights Land Co. v.
Lodenslager 16, 54, 65
Worth, Ex parte 173
Wright v. Bank of the Metropolis 83
Wylde v. Hopkins 233, 235
YALE Gas Stove Co v. Wilcox 22,
32, 74, 75
Yeates v. Hines 184
v. Prior
Young v. Alhambra Mining Co. 107
THE LAW OF PROMOTERS
AND THE
PROMOTION OF CORPORATIONS.
CHAPTER I.
NATURE OF PROMOTERSHIP AND RELATION OP PROMOTERS TO
THE CORPORATION.
§ 1. Explanation of term " pro-
moter."
2. Term not applicable to one
acting as an agent only.
3. In re The Great Wheal Pol-
gooth Co., 53 L. J. Ch. 42.
4. One who is an agent may be a
promoter also.
5. Agent may be promoter, al-
though compensation does
not come from corporation.
6. Central Land Co. v. Obenchain,
92 Va. 130.
7. Tests to ascertain who are
promoters.
8. Ex-Mission Land & Water Co.
v. Flash, 97 Cal. 610.
9. St. Louis & Fort Scott R. R. Co.
v. Tiernan, 37 Kan. 606.
10. Question of fact whether one
is a promoter.
11. Emma Silver Mining Co. v.
Lewis, 4 C. P. D. 396.
12. Bagnally. CarIton,6Ch.D.371.
13. Nant-y-Glo & Blaina Co. v.
Grave, 12 Ch. D. 738.
§ 14. Twycross v. Grant, 2 C. P. D.
469.
15. Lydney & Wigpool Iron Ore
Co. v. Bird, 33 Ch. D. 85.
16. Mere intent or agreement to
promote does not make one
a promoter.
17. Absolute purchase of pro-
perty with view to resale
to projected corporation as
evidence of promotership.
18. Ladywell Mining Co. v.
Brooks, 35 Ch. D. 400.
19. Conditional purchase of pro-
perty with view to resale to
projected corporation as evi-
dence of promotership.
20. Promotership not limited to
period anterior to organiza-
tion of corporation.
21. Fiduciary relation of pro-
moters to corporation.
22. Existence of such relation es-
tablished by authorities.
23. Consequences of fiduciary re-
lationship.
§ 1. Explanation of term "promoter." — The law imposes
serious responsibilities upon persons who become promoters
1
2 PROMOTERS AND PROMOTION OF CORPORATIONS.
of corporations, holding them to a high standard of con-
duct, and subjecting to careful scrutiny their dealings with
the corporation which they promote. It is accordingly
important to inquire what constitutes one a promoter of a
corporation. The first requirement would seem to be a
definition. But it has become apparent that it is not prac-
ticable precisely to define the term " promoter " as used in
connection with corporations. It is ambiguous, and it is
necessary to ascertain in each case what the so-called pro-
moter did, before his legal liabilities can be accurately
ascertained.1 Therefore, what is really to be looked to
is not a word or a name, but the acts and relations of the
parties.2 The term, however, is one of accepted use3 com-
monly employed to designate persons who take some part
in procuring the formation of a corporation, or in inducing
others to join it, and who in so doing assume such a
position that a relation of a fiduciary nature between
themselves and the corporation is created.4
1 Lindley, L. J., in Lydney $• Wigpool Iron Ore Co. v. Bird, 33 Ch.
D. 85.
2 Bowen, L. J., in Whaley Bridge Calico Printing Co. v. Green, 5
Q. B. D. 109.
8 " It is a term not of law, but of business." Bowen, L. J., in
Whaley Bridge Calico Printing Co. v. Green, 5 Q. B. D. 109.
4 The following explanations of the term may be found in the
cases : —
" The term ' promoter ' involves the idea of exertion for the pur-
pose of getting up and starting a company (or what is called ' float-
ing ' it), and also the idea of some duty towards the company
imposed by or arising from the position which the so-called promoter
assumes toward it." — Lindley, J., in Emma Silver Mining Co. v.
Lewis, 4 C. P. D. at p. 407.
" A promoter, I apprehend, is one who undertakes to form a com-
pany with reference to a given project, and to set it going, and who
takes the necessary steps to accomplish the purpose." — Cockburn,
Ch. J., in Twycross v. Grant, 2 C. P. D. at p. 541.
" A short and convenient way of designating those who set in
motion the machinery by which the Act enables them to create an
NATURE OF PROMOTEKSHIP. 3
§ 2. Term not applicable to one acting as agent only. — •
The term is not applicable to persons who do not put
themselves in a fiduciary position toward the corporation,
but act merely as agents of those who are forming or
floating it. Thus, printers, advertising agents, and law-
yers, employed by the projectors of a company to render
the usual trade or professional services incident to its
incorporation, or necessary to set it going, are not pro-
moters. In one sense their acts tend to promote the
company, but not in such a sense as to establish any
relation between it and them.1
§ 3. Illustrative case. — In the case of In re Great Wheal
Polgooth Co.? one of the promoters of a company sold to
it, for £300,000, property which he had but a short time
prior thereto purchased for .£10,000. The solicitor acted
as such in the incorporation of the company, and in the
transfer of the property to it. Prospectuses of the com-
pany were handed to and distributed by him ; and on
a certain occasion when attacks upon the company had
incorporated company." — Lord Blackburn, in Erlanger v. New Som-
brero Phosphate Co., 3 App. Gas. at p. 1268.
" The term ' promoter ' is a term not of law, but of business, use-
fully summing up, in a single word, a number of business operations
familiar to the commercial world, by which a company is generally .
brought into existence." — Bowen, L. J., in Whaley Bridge Calico
Printing Co. v. Green, 5 Q. B. D. 109.
In Bosher v. Richmond ty Harrisonburg Land Co., 89 Va. 455, and Ex-
Mission Land and Water Co. v. Flash, 97 Cal. 610, the following defini-
tion from Cook on Stockholders, sect. 651, was adopted: " A promoter
is a person who brings about the incorporation and organization of a
corporation. He brings together the persons who become interested in
the enterprise, aids in procuring subscriptions, and sets in motion the
machinery which leads to the formation of the corporation itself."
1 " No doubt a very little will make people promoters of a com-
pany, if it can be seen that they were really doing something for their
own interests, and not acting merely as agents for others." — Pearson,
J., in Lydney & Wigpool Iron Ore Co. v. Bird, 31 Ch. D. at p. 339.
2 53 L. J. Ch. 42.
4 PROMOTERS AND PROMOTION OF CORPORATIONS.
been made in a newspaper, lie prepared an answer which
he caused to be inserted in several newspapers. He had
no interest in the company except the right to be paid
for his labor. It was held that he was not a promoter.
" The duty which the solicitor bears to the company has,"
said the vice-chancellor, " nothing to do with promotion."
As to the sale of property to the company, the vice-
chancellor observed : " But what had the solicitor to do
with that? He did not manage the company. He was
not to advise them that it was not worth the money they
were going to pay for it." And as to the matter of the
prospectus, he observed : " Persons applying for pros-
pectuses would apply where they could get them, and
if they applied to him it was his business as the solicitor
of the company, not as a promoter, that he should have
the prospectuses to give them." 1
§ 4. One who is an agent may be a promoter also. — But
persons who act as agents for the projectors of a corpora-
tion may nevertheless become promoters, if they engage
in work of promotion. This is well brought out in the
case of Lydney $• Wigpool Iron Ore Co. v. Bird. At
the trial2 it appeared that the owners of some mines
employed James Bird to form and launch a company for
the purpose of purchasing the mines. Bird undertook
all the business connected with the issuing of the pros-
pectuses and the bringing out of the company. It was
agreed between him and the owners, by an agreement not
disclosed, that he should be paid a commission of £10,800
out of the purchase money of <£100,000, which was to be
given by the company for the mines ; and this payment
was made after the formation of the company. An action
1 For circumstances under which a solicitor became a promoter,
see Tyrrell v. Bank of London, 10 H. L. C. 26.
2 31 Ch. D. 328.
NATURE OF PROMOTERSHIP. 5
was subsequently brought by the company against Bird
to recover the commission retained by him. He alleged
that all which he did, he did simply as an agent for the
vendors ; that the commission which he received was in
payment for services rendered by him as agent to the
vendors. On the other hand, it was contended that he
was himself interested in the company, besides being
the agent of the vendors ; that the company was as much
his company as the company of the vendors ; and that
he was a promoter. The decision of the Court was made
to turn on the question whether the purchase price to be
given by the proposed company for the mines was pur-
posely raised or "loaded," so that Bird's commission of
£10,800 was paid out of the money of the company, and
not out of money which under any circumstances would
have gone to the vendors, or whether the purchase price
of £100,000 was in good faith agreed to be paid without
any regard to the sum which was to be paid Bird. On
the evidence, the Court found that Bird's commission
was to be paid by the vendors out of the purchase money
which they were to receive from the company ; that the
company was not to pay any portion of it ; and that
accordingly Bird was acting merely as an agent, and
not as a promoter. But the Court of Appeal1 took a
different view of the evidence, holding that although an
agent of the vendors to get up the company, he was acting
not in their interest but in his own by causing the pur-
chase price of the mines to be swollen, so that he might
covertly take his commission from the coffers of the
company ; and that, although in getting up the company
he was acting for the vendors, that did not absolve
him from obligation to the company attached to the
position which he assumed tow'ard it. He was the agent
i 33 Ch. D. 85.
6 PROMOTERS AND PROMOTION OF CORPORATIONS.
of the vendors, but he was also the promoter of the
company.
§ 5. Agent may be promoter, although compensation does
not come from corporation. — The fact that the commission
or compensation of an agent employed to form a corpo-
ration does not come, directly or indirectly, from the
corporation, is not conclusive that he is an agent only.
Notwithstanding this fact, he may be a promoter also ;
as, for example, if he brings the corporation into exist-
ence and controls its organization, in order that it may
purchase property or make some contract in which his
principal has an interest. He then enters into a fiduciary
relation with the corporation, and is responsible to it for
wrong-doing in that relation, although committed by him
for other people.1 The distinction is apparent between
such a case as this and the case of the broker, the printer,
or the lawyer, who act strictly as such, and are mere
agents, no relation being established between them and
the corporation.
§ 6. Illustrative case. — In Central Land Co. v. Obenchain?
Obenchain and Joliffe brought an action against the corpo-
ration to recover $500. Their claim was, that as agents of
one Felix they had sold to the corporation a tract of land
for the sum of $10,000 ; that Felix had agreed to pay them
a commission of five per cent for their services in effecting
this sale; that the corporation paid Felix $10,000, the
purchase price of the land, but afterwards collected from
him the commission of $500, which was due them. It was
contended by the corporation that when Obenchain and
Joliffe became the agents of Felix, they were engaged in
promoting the organization of the corporation, and in
securing control of the land of Felix and of other lands to
1 Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218.
* 92 Va. 130.
NATURE OF PROMOTERSHIP. 7
be purchased by the corporation when organized ; that for
these services they had been paid by the corporation under
an agreement, referred to in the prospectus, providing for
payment by the corporation to the promoters for their ser-
vices ; and that the corporation was entitled to collect and
retain the commission in question, as a commission which
Felix had without its knowledge agreed to pay to Oben-
chain and Joliffe for services in a transaction in which they
were acting not alone as his agent, but also as promoters
of the corporation. At the trial, the corporation requested
the Court to instruct the jury that if they believed that
Obenchain and Joliffe were instrumental in the organiza-
tion or creation of the corporation, and secured the option
from Felix for the purpose of aiding in the organization of
a company for the purchase of the land from Felix, and
that the corporation was subsequently organized by their
efforts, with the assistance of others, then Obenchain and
Joliffe were promoters of the corporation, and were not en-
titled to make a profit on the sale of the Felix land to the
corporation, without its knowledge and consent. The Court
refused to give this instruction. On appeal, it was held
that the refusal to give the instruction as requested was
error.
§ 7. Tests to ascertain who are promoters. — It has been
said that in seeking to ascertain who are the promoters
of a company it is useful to ask, " Who started the idea of
forming a company for the purpose in question ? " " Who
settled what was to be included in the preliminary papers,
or gave the lawyers instructions to prepare them, and in-
formation upon which they might be prepared ? " " Who
undertook the liability for the expense incident to the pre-
liminaries of incorporation?" And, lastly, the question,
" Cui bono ? " — " Who benefited by the formation of the
company ?" But none of these questions is decisive, for a
8 PROMOTERS AND PROMOTION OF CORPORATIONS.
man may have done one or more of these things as a mere
agent, and not as a promoter at all ; and on the other
hand, a man may have kept in the background and have
appeared to do none of these things, and yet be a promoter.
Frequently the vendors of a company are the promoters of
the company ; but the owners of property may have been
asked, " If a company is formed to acquire your property,
will you sell it ? and if so, at what price ? " If they have
done no more than agree to sell, they will not be pro-
moters. It is to be noted, however, that the Court will
look at the substance of the transaction, and vendors or
others who are in reality the promoters will not escape
liability by the interposition of a nominal vendor or a nom-
inal promoter .who professes to purchase and re-sell, or to
undertake the financial operations incident to forming and
floating a company.1
§ 8. Illustrative case. — In Ex-Mission Land $ Water Co.
v. Flash? the facts were substantially as follows : At a
judicial public sale of 4,500 acres of land belonging to the
estate of one Olivera, the defendants became the purchasers
at the price of $22,725, or $5.05 per acre. They paid down
ten per cent, the required cash payment ; the balance was
to be paid in a fixed time, the deed to be delivered when
this deferred payment was made. They then employed
Wilson and Coleman as their agents to effect a sale of the
lands at $25 per acre, or 1112,500. In case of such sale,
the defendants were to pay the agents a commission of
$5.00 per acre, or $22,500, payable partly in notes of a cor-
poration to be formed to purchase the lands. The agents
induced subscriptions for stock in the intended corporation,
1 Jordan & Browne on Joint Stock Companies, 62. The writer has
stated the matter in the above paragraph, substantially in the lan-
guage employed in the work cited.
2 97 Cal. 610.
NATURE OF PROMOTERSHIP. 9
by representations that the defendants held a contract for
the purchase of the lands in question from the estate of
Olivera, at the price of $25 per acre, which was the lowest
price at which the land could be purchased, and that the
subscribers for shares would " get in on the ground floor
at bed-rock prices." The facts that the defendants had
already bought the lands for $5.05 per acre, that Wilson
and Coleman were their agents, and were to receive from
them a commission of $22,500, if the sale to the corpora-
tion was brought about, were not disclosed. The corpo-
ration was formed under the promotion of the agents.
The sum of $37,500, which was paid in on subscriptions for
stock, before and after the incorporation, was turned over
to the defendants. From this sum the payment due under
the judicial sale of the lands was made to the Olivera
estate, and a deed was obtained, the title being taken in the
name of one of the defendants. A conveyance was then
made to a trustee for the corporation, which executed its
notes for $75,000, secured by a mortgage of the lands. In
this way the defendants received the purchase price agreed
upon, $112,500. In a suit subsequently brought to obtain
relief for the corporation from the fraud practised upon it,
it became material to determine whether the defendants
were promoters of the corporation. They contended, that
while Wilson and Coleman, who had promoted the corpo-
ration, were their agents to bring about a sale of the lands,
they were not their agents to promote the corporation, and
had no authority from them to promote it ; and it was not
shown, they contended, that they themselves had done any-
thing in the way of promotion. But the Court held, on all
the facts, that they had employed the agents to act as pro-
moters, and that in effect they had promoted the corpora-
tion through their agents. If Wilson and Coleman had, of
their own motion and on their own account, determined to
10 PROMOTERS AND PROMOTION OF CORPORATIONS.
form a corporation, and had gone to the defendants and
obtained an agreement from them to sell to the corpora-
tion, when formed, for $25 per acre, and to pay a commis-
sion of $5.00 an acre on the sale, the defendants, if they had
stopped there, would not have been promoters. But the
defendants themselves formulated a scheme to bring a
corporation into existence to buy their lands, and they em-
ployed agents to form the corporation, to procure subscrip-
tions for its stock, and to bring about the purchase of the
lands by it. They were the real promoters of the corpora-
tion, although keeping under cover as promoters, and
appearing openly only as vendors.
§ 9. In St. Louis & Fort Scott R. R. Co. v. Tiernan,1 — Tier-
nan and Ayers, as two of the incorporators of the plaintiff
corporation, signed and acknowledged the charter, January
20, 1880. They purchased a certain road-bed, February
17, 1880. The charter was filed and the corporation came
into existence February 23, 1880, Tiernan and Ayers being
among the first directors. In May, 1880, Tiernan and
Ayers sold the road-bed" to the corporation at a very
great advance over its cost to them. It was plain from
the facts found, that they bought the road-bed with intent
to sell it to the corporation, when formed. On the ground
that their position and interest were fully disclosed to
all the shareholders in the corporation at the time of the
transaction, the Court properly held that subsequent share-
holders, at a later period, could not compel Tiernan to
account to the corporation for his profit. But the Court
also held that Tiernan was not a promoter, inasmuch as
it did not appear that he had " advised or suggested the
organization of the corporation." Obviously, this is not
the exclusive test, as the Court apparently took it to be ;
and it seems clear that in holding that Tiernan was not a
1 37 Kan. 606.
NATURE OF PROMOTEKSHIP. 11
promoter, the Court was in error. " The word ' promoter,' "
said Simpson, J., " had its origin in the methods by which
joint stock companies were formed in England, where by
law they were declared partnerships." Describing then
the methods by which railroad corporations were formed in
England by special act of Parliament, he observed : " This
has no resemblance to our method of organizing corpora-
tions. It is true that the word has been found to have its
uses in our jurisprudence, but in a much more restricted
sense than that used in the English reports." The
learned judge apparently overlooked the fact that most of
the corporations in England are formed under a general
law, as they are in this country, and that it is only the un-
limited liability corporations that are regarded as partner-
ships. With the exception of certain statutory liabilities
which exist in England, the position of a promoter is sub-
stantially the same in our law as in the law of England,
and the word " promoter " is not used in any different sense
here than there.
§ 10. Promotership a question of fact. — It is a question
of fact whether a person is or is not a promoter, and it
may be left to the jury to determine.1 The following
cases are selected to illustrate more fully the nature of
promotership.
§ 11. Emma Silver Mining Co. v. Lewis. — A firm of metal
brokers who were selling ore of the Emma Silver Mine
in America, on a commission of two and one-half per
cent., arranged with Park, one of the owners of the mine,
to assist in its sale to a company to be formed by him in
England to purchase it. He was to secure their employment
as metal brokers of the projected company at the usual
rate of English commission, one per cent., and he prom-
1 Emma Silver Mining Co. v. Lewis, 4 C. P. D. 396; Ladywell
Mining Co. v. Brooks, 35 Ch. D. 400.
. \ . i
12 PROMOTEKS AND PROMOTION OF CORPORATIONS.
ised to pay them £ 5,000 for their assistance, and to
compensate them for the reduction in their commission.
They were, as he knew, acquainted with facts detrimen-
tal to the reputation of the mine, and his real motive
in promising payment of the large sum stated was to
insure their silence respecting such facts. He procured
the formation of a company, and the purchase by it of
the mine at a price paid partly in cash and partly in
paid-up shares. They assisted him in the sale of the
mine, and permitted themselves to be named in the com-
pany's prospectus as ready to answer any inquiries in
relation to the mine, and answered such inquiries, but
were silent in respect to the detrimental facts known to
them. They were appointed metal brokers of the com-
pany at the one per cent, commission,. and were secretly
paid the sum promised them by a transfer of two hundred
and fifty paid-up shares out of those received from the
company in payment of the purchase price of the mine.
It was held that they were promoters. As the Court
observed, " They left Park to get up the company, upon
the understanding that they as well as he were to profit
by the operation; they were behind him; they were in
the position of undisclosed joint adventurers. But they
not only left Park to do the best he could for them as
well as himself; they also assisted him. Moreover, by
the acceptance of the reference to them in the company's
prospectus, they undertook the duty of assisting to float the
company by answering the inquiries of persons proposing
to take shares in it." l
§ 12. Bagnali v. Cariton. — R. S. Bagnall, J. Nayler, and
W. S. Nayler were trustees under the will of James
Bagnall, and by the terms of the will were directed to
sell a colliery and iron works belonging to his estate.
1 Emma Silver Mining Co. v. Lewis, 4 C. P. D. 396.
NATUKE OF PKOMOTERSHIP. 13
Richard Bagnall, who was tenant for life of the property
under the will, promised Duignan, solicitor for the trus-
tees, XI, 500 as commission if he should find a purchaser
for the property. Duignau applied to the Messrs. Rich-
ardson, and was by them introduced to Carlton. An
arrangement was made between Duignan, on behalf of
the trustees, and Carlton, that Carlton should form a
company to purchase the collieries and business for
£290,370. If Carlton performed his part of the agree-
ment, he was to be paid £85,000 by the vendors; if he
failed, he was to pay £20,000 as liquidated damages,
and this sum was first to be deposited as caution money.
About this time Carlton applied to Grant to join him in
the enterprise, and it was agreed between Grant, Carlton,
and the Richardsons, that Grant should undertake the
whole risk and expense of getting up the company, and
should advance Carlton the deposit of £20,000; and that
as compensation for his services he should receive £65,000
and Carlton £20,000, out of which the latter was to
pay the Richardsons £10,000. This arrangement between
Grant, Carlton, and the Richardsons was not disclosed
to the trustees or to Duignan, who, on the face of the
transactions, dealt with Carlton and the Richardsons. A
contract was then executed between the trustees, who
agreed to sell the property, and Bytheny, as a trustee
on behalf of the intended company, who agreed to buy,
for the sum of £290,370. At the same time a secret
contract was made between the trustees and Carlton,
whereby it was agreed that Carlton should be paid
£85,000 from the purchase price when received. The com-
pany was then registered. The object of the company was
stated to be, among other things, the carrying into effect
the purchase agreement between the trustees and Bytheny.
As soon as the company was established, Grant circulated
14 PROMOTERS AND PROMOTION OF CORPORATIONS.
the prospectus and advertised and recommended the com-
pany. The shares were taken by the public, and the
company took possession and paid the purchase price of
the property. Out of this price Carlton was paid £85,000
by the trustees, and this sum was divided between the
Richardsons, Grant, and Carlton, as had been agreed upon,
and Duignan was paid £1,500 by Richard Bagnall. It was
held that the trustees, Grant, the Richardsons, Duignan,
and Carlton were promoters.1
§ 13. Nant-y-Glo & Blaina Iron "Works Co. v. Grave. —
Richardson and Carlton were promoters of the Nant-y-Glo
and Blaina Iron "Works Company, and received certain
paid-up shares as a secret commission on a sale of prop-
erty to the company. Being promoters of the company,
they cast about to find other promoters, and a letter was
addressed by Mr. Richardson to the defendant, Mr. Grave,
in which he explained to him that operation which he
then desired to effect for the promotion of the company,
and suggested the desirability of having for directors per-
sons whose names would be likely to inspire confidence
in the public, and asked him to become a director. Mr.
Grave agreed to become a director, in consideration,
among other things, of receiving fifty of the shares which
had been retained by Richardson and Carlton. " I do
not think it would be forcing the law of this case in the
slightest degree," said Bacon, Y. C., " to say, that from
the time that letter was received and adopted and acted
on, Mr. Grave became as much a promoter of this company
as any other person engaged in it." 2
§ 14. Twycross v. Grant. — The Duke de Saldanha, a
Portuguese nobleman, ambassador to England, had a con-
cession of powers to make and work tramways from
1 Bagnall v. Carlton, 6 Ch. D. 371.
2 Nant-y-Glo & Blaina Co. v. Grace, 12 Ch. D. 738.
NATUKE OF PROMOTERSHIP. 15
Lisbon to other places. Desiring to sell this concession,
he applied to the defendant, Grant, as a person who would
assist him. Grant applied to the other defendants, Clark
and Punchard, contractors and persons whose business it
was to make such tramways. The arrangements, among
others settled, were as follows : that a corporation should
be formed ; that Clark and Punchard should contract with
it to construct and equip certain lines of tramway for the
sum of & 309,810. Of this sum Clark and Punchard were
to give the Duke £22,000 in money and shares, Grant
£ 45,800 for services in obtaining the contract for them
and in the formation of the company and raising the
capital ; and Clark and Punchard were also to qualify
the directors, that is to say, to transfer to them or give
them the price of shares, free of expense, to such an
amount as to qualify them to be directors. The corpo-
ration was formed, and its capital raised ; directors were
found, mainly, if not wholly, by Clark and Punchard ; and
the contract for the construction of the tramways was
made by the corporation with Clark and Punchard. Grant
and Clark and Punchard, in a suit subsequently brought
against them by subscribers for shares, were held to be
promoters. " That the defendants were promoters of the
company from the beginning," said Cockburn, Ch. J.,
" can admit of no doubt. They framed the scheme ;
they not only provisionally formed the company, but
were, in fact, to the end its creators ; they found the
directors and qualified them ; they prepared the pros-
pectus ; they paid for printing and advertising, and the
expenses incidental to bringing the undertaking before
the world."1
§ 15. Lydney & Wigpool Iron Ore Co. v. Bird. — James
Bird, a member of a firm of iron merchants consisting
1 Twycross v. Grant, 2 C. P. D. 469.
16 PROMOTERS AND PROMOTION OF CORPORATIONS.
of himself and his brother William Bird, entered into
an agreement, in behalf of the firm, with the owners of
certain iron mines to form and launch a company for
the purpose of purchasing the mines. It was agreed
that they should receive a commission of £ 10, 800 out of
the purchase price of X 100,000 which was to be paid
by the company for the mines, and should have the con-
duct of the sale of the company's ore on a two per cent,
commission. All the negotiations were conducted by
James Bird, and William Bird took no part in them.
The latter, however, personally guaranteed the subscrip-
tion of the capital stock of the proposed corporation.
" James Bird," the Court found, " in fact procured the
formation of the company. He suggested its formation,
he took an active part in the preparation of its prospectus
and memorandum and articles of association, in the ap-
pointment of two of its first directors, in the appointment
of its secretary, and he procured his own firm to be
engaged to conduct the sales of the company at a large
commission. He fixed the purchase price at .£100,000,
and stipulated for the payment of XI 0,800 to his own
firm, and he procured the payment of that sum by the
company, of which he retained £5,800, paying £5,000 to
William Bird for his guarantee." It was held that he
was a promoter. William Bird, it was held, was not a
promoter, there being no evidence that he had taken
any such part in the formation of the company as to make
him accountable to it as a promoter. It did not appear
that he knew of the arrangement as to the £10,800, or
that he was in effect to be paid by the company for his
guarantee. He had retired from the firm on the day that
the company was registered, and the promotion of com-
panies was no part of the business of the firm when he
was a member of it. He therefore escaped liability, al-
NATURE OF PROMOTERSHIP. 17
though he had received £ 5,000 at the expense of the
company.1
§ 16. Mere agreement or intent to promote does not make
one a promoter. — It may be important to determine when
a promoter becomes or ceases to be such. For example,
the liability of a promoter to account to the corporation
for a profit secured by him on a sale of his property to
the corporation, may depend upon whether he acquired
the property before or after he became a promoter. A
person becomes a promoter only by taking, directly or
indirectly, in the formation or floating of a corporation,
some action of such a nature as to impose on him the
duty of protecting the interests of the corporation about
to be formed, so far as such interests may be actually or
constructively in his keeping.2 Accordingly an intention,
or even an agreement, to promote is not enough.
§ 17. Absolute purchase of property with view to resale
to projected corporation as evidence of promotership. — The
mere purchase of property outright, with intent to sell
the same to a corporation to be called into existence to
buy it, does not constitute the purchaser a promoter of a
corporation which may subsequently be formed and to
which the property is sold. The utmost that can be said
1 Lydney Sf Wigpool Iron Ore Co. v. Bird, 33 Ch. D. 85. See also
South Joplin Land Co. v. Case, 104 Mo. 572 ; Woodbury Heights Land
Co. v. Loudenslager (N. J. 1896), 35 At. Rep. 436.
2 " Something must, it is submitted, be done by the promoter to
impose upon him the duty of protecting the interest of those who
ultimately form the company. He assumes this duty if he assumes
to act for them, or if he induces them to trust him, or to trust persons
who are under his control, and who are practically himself, in dis-
guise ; he also assumes this duty if he calls the company into exist-
ence in order that it may buy what he has to sell ; but he does not
assume such duty by negotiating with persons who have themselves
assumed that duty, and who are in no way under his influence." —
2 Lindley on Partnership, 585.
2
18 PROMOTERS AND PROMOTION OF CORPORATIONS.
of him is that at the time of his purchase he was the
projector of a corporation which he intended to promote.
He may or may not become a promoter of the corporation.
He may advertise the fact that he has acquired the prop-
erty, and is willing to sell it to any corporation that
chooses to buy it of him ; then if any persons see fit to
promote a corporation to make the purchase, they are
promoters, but he is no promoter.1 On the other hand,
he may take such steps in the organization of a corpora-
tion for the purchase of his property, as to become a
promoter. But it is by taking such steps, and not by the
purchase, that he assumes the character of a promoter.2
§ 18. Illustrative case. — 111 Ladywell Mining Co. v.
Brooks? the following facts appeared : —
On the 1st of February, 1873, five persons purchased
a mine for £5,000, with the view of reselling it to a com-
pany to be formed, but they had at that time taken no
steps to form any company. They completed their pur-
chase on the 17th of March, 1873, the purchase price
being paid out of their own moneys ; and on the 4th of
April, 1873, they entered into a provisional contract with
a trustee for the intended company for the sale of the
mine to the company for £ 18,000. On the 8th of April,
1873, the company was registered under the Companies
Acts, its principal object being, as stated in the memo-
randum of association, the purchase of the mine; and
in its articles the contract of the 4th of April, 1873,
was adopted and four of the vendors were named as
directors ; but the contract of the 1st of February, 1873,
1 Bacon, V. C., in Gover's Case, 20 Eq. 122.
2 Gover's Case, 1 Ch. D. 182 ; Erlanger v. New Sombrero Phosphate
Co., per Lord Cairns, 3 App. Cas. at p. 1235; Ladywell Mining Co.
v. Brooks, 35 Ch. D. 400.
8 35 Ch. D. 400.
NATURE OF PROMOTERSHIP. 19
was not disclosed to the company. The whole of the
shares were placed by the vendors, and the share capital
(.£30,000) paid in in cash. At the same time they re-
ceived £18,000 from the company as the purchase money
for the mine. Subsequently a suit was brought by the
company to recover the secret profit made by them on
their sale to the company. It was held that the vendors,
when they purchased the mine, were not promoters of,
or in a fiduciary position towards, the company which
was ultimately formed.
§ 19. Conditional purchase of property with view to resale
to projected corporation as evidence of promotership. — The
acquirement of an option to buy property with intent to
sell the property to a corporation to be formed, and to
fulfil the condition of the option by means of the money
or shares of stock received on the sale to the corporation,
does not in itself constitute the holder a promoter of a
company subsequently formed, and to which the property
is sold. And this is so even if the intent of the holder
is to avail himself of his option only in the event of a
company being formed and capitalized to purchase the
property. The fact that he pays or agrees to pay his
vendor in shares of the company's stock, is a circum-
stance to be considered in determining whether or not
the purchase was made for the company, but it is not
conclusive. He may sell to the company and take his
pay in stock, without becoming a promoter of the com-
pany ; and this being so, he may properly agree to pay
his vendor in such stock. There is no distinction in
principle between the absolute title acquired in the case
of a purchase outright, and the conditional right acquired
under an option.1 But in either case, a corporation pro-
1 G over's Case, 1 Ch. D. 182 ; Plaquemines Tropical Fruit Co. v.
Buck, 52 N. J. Eq. 219.
20 PROMOTERS AND PROMOTION OF CORPORATIONS.
moted by the purchaser, and to which the property is
sold by him, may, under certain circumstances, become
entitled to the benefit of his purchase, as will be explained
hereafter.1
§ 20. Promotership not limited to period anterior to organ-
ization of corporation. — There is nothing to limit the word
" promoters " to persons acting before the company is formed,
at least till the share capital is engaged.2 The work of
promotion may go on in the direction of securing the
capital after the company has been incorporated, and
the question as to when one who in the outset was a
promoter continues or ceases to be so, becomes, therefore,
one of fact. This is explained by Chief Justice Cockburn
as follows : —
" So long as the work of formation continues, those who
carry on the work must, I think, retain the character of
promoters. Of course, if a governing body, in the shape of
directors, has once been formed, and they take, as I need
not say they may, what remains to be done in the way of
forming the company into their own hands, the functions
of the promoter are at an end. But so long as the pro-
moters are permitted by the directors to carry on the work
of formation, the latter remaining passive, so long, I think,
would a jury be warranted in finding that what was done by
them was done as promoters." 3
§ 21. Fiduciary relation of promoters to corporation. — The
analogy of the relation of promoter and corporation to that
of trustee and cestui que trust is quite close. There may be
trusts for unborn persons, enforceable by such persons
when they come into existence. But promoters are not
technically trustees. Nevertheless familiar principles of
1 See Sect. 55, et se.q.
8 Bramwell, L. J., in Twycross v. Grant, 2 C. P. D. 469, 503.
a Twycross v. Grant, 2 C. P. D. 469, 541.
NATUKE OF PROMOTERSHIP. 21
the law of trusteeship have been extended to meet their
case ; and it is held that a fiduciary relation exists between
them and the corporation which they promote. In the
opinion of Lord Justice Lindley, it is objectionable to talk
of there being a fiduciary relation to a company before the
company has any existence.1 Yet a non-existent person
may sometimes be treated as an existing person, with the
same rights in certain respects as if in existence. Take,
for example, the case of unborn persons who are repre-
sented by a guardian ad litem, and whose consent, through
such guardian, is given or withheld to a decree as to the
subject-matter of a controversy in which they may become
interested. The existence of a fiduciary relation between
the promoter and the corporation is fully established by the
authorities. " A promoter," declared James, L. J., " is,
according to my view of the case, in a fiduciary relation to
the company which he promotes or causes to come into
existence." 2 " Promoters," said Sir George Jessel, " stand
in a fiduciary relation to that company which is their crea-
1 Lydney fr Wigpool Iron Ore Co. v. Bird, 33 Ch. D. at p. 93.
"The real relation of promoters to companies," says Lord Justice
Lindley, " is difficult to define ; the relation is in truth SMI generis, and
is the result of dealings and transactions of a kind not known until
recent times. The term by which accurately to define such relation
has not yet been discovered. Familiarity with trusts and the lan-
guage employed in connection with them has led to the description
of the relation as a fiduciary relation, and, although this is not a very
happy expression, it is not easy to suggest a better. What is meant, is
that although there is no actual relation of trustee and cestui que
trust between a promoter and an unformed company, yet that when
he has succeeded in forming it, he is liable to it, in respect of frauds
practised by him upon it, planned by means of agreements entered
into before its formation and the real nature of which is carefully
concealed from every one, except those who profit by them. The
frauds thus perpetrated are obvious when discovered, and the doctrine
of fiduciary relation has been invented or extended in order to defeat
them." Lindley's Law of Companies, 5th ed. 348.
a New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73.
22 PROMOTEKS AND PROMOTION OF CORPORATIONS.
tion." l Speaking of the promoters in the well-known case
of Erlanger v. New Sombrero Phosphate Co.? Lord Cairns
said : " They stand, in my opinion, undoubtedly in a fiduci-
ary capacity." In the same case,3 Lord Blackburn, noting
the fact that throughout the Companies Act, 1862, the
word " promoters " is not used, said : " Neither does this
Act in terms impose any duty on those promoters to have
regard to the interests of the company which they are thus
empowered to create. But it gives them an almost unlim-
ited power to make the corporation subject to such regula-
tions as they please, and to create it with a managing body
whom they select, having such powers as they choose to
give those managers, so that the promoters can create such
a corporation that the corporation, as soon as it comes into
being, may be bound by anything, not in itself illegal, which
those promoters have chosen. And I think those who
accept and use such extensive powers, which so greatly
affect the interests of the corporation when it comes into
being, are not entitled to disregard the interests of that
corporation altogether. They must make a reasonable use
of the powers which they accept from the Legislature with
regard to the formation of the corporation, and that re-
quires them to pay some regard to its interests. And con-
sequently they do stand, with regard to that corporation
when formed, in what is commonly called a fiduciary rela-
tion to some extent."
§ 22. Existence of such relation established by authorities.
— " The case of a promoter," observes the author of one of
the leading English works on corporations, " seems ail ex-
ceptionally strong case of fiduciary relationship, inasmuch
as the trustee or agent, so far from being selected by his
1 New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73.
3 3 App. Cas. at p. 1236.
» At p. 1268.
NATUKE OF PflOMOTERSHIP. 23
cestui que trust or principal, here absolutely creates the
principal in whose affairs he acts ; so that if it could ever
be said by a fraudulent agent to a person whom he has de-
frauded, * You have only yourself to blame, you should not
have trusted me,' such an argument would here be ex-
cluded, for the company had no choice in the matter as to
who should call it into existence." l And in Yale Gas
Stove Co. v. Wilcox? the Court said : " That such persons
(promoters) occupy a fiduciary relation toward the com-
pany or corporation whose organization they seek to pro-
mote, is well settled by the decisions of both countries."
§ 23. Consequences of fiduciary relationship. — While the
promoters are in a fiduciary relation to the corporation,
they must, in all their dealings with or for it, act fairly and
in good faith. If they undertake to sell property to it, or to
make contracts with it, they must not only abstain from
misrepresentations, but they must fully disclose all material
facts within their knowledge. They cannot deal with it as
a stranger could ; they are not permitted to make secret
profits at its expense, and will be held accountable for such ;
and their transactions will be closely scrutinized by a Court
of Equity, and set aside for any unfairness or overreaching.
Yet, in passing on such transactions, some caution must be
employed. " In dealing with any particular case," said
Lord Justice Lindley, " care must be taken not to be misled
by words. Owing to the ambiguity in the meaning of the
word * promoter,' and the difficulty of defining his exact re-
lation to the company he procures to be formed, it is unsafe
to say that any particular person was a promoter of a par-
ticular company, and to infer from thence that he is liable
to account to it as if he had been its trustee. The question
1 Buckley's Companies Acts, 5th ed. p. 543.
8 64 Conn, at p. 119. See also Plaquemines Tropical Fruit Co. v.
Buck, 52 N. J. Eq. 219.
24 PROMOTERS AND PROMOTION OF CORPORATIONS.
in each case must be, what has the so-called promoter done
to make himself liable to the demand against him ? What
fraud or breach of trust has he committed or been party or
privy to ? If none, he is under no liability ; if any, he is
liable accordingly by whatever name he may be called, or
by whatever terms his relation to the company may be ex-
pressed." 1
1 Lindley's Law of Companies, 5th ed. 349.
DUTIES OF PKOMOTERS TO THE CORPORATION.
25
CHAPTER II.
DUTIES OP PROMOTERS TO THE CORPORATION.
§ 24. Duties of promoters in organ-
ization of corporation.
25. Erlanger v. New Sombrero
Phosphate Co., 3 App. Gas.
1218.
26. Judgment of Lord Cairns.
27. Exception to rule laid down
by Lord Cairns.
28. Promoters must disclose their
interest in transactions with
corporation.
29. As vendors of corporation not
always bound to disclose
cost of property to them.
30. Under some circumstances
must disclose such cost.
31. Trustees not permitted to
make secret profit in matter
of trusteeship.
32. Similar rule applies to pro-
moters.
83. Mere declaration that pro-
moter is interested not
enough when made to the
directors only.
§ 34. Imperial Mercantile Credit
Association v. Coleman, L.
R. 6 H. L. 189.
35. Disclosure of interest only
sufficient if made to the
shareholders.
36. Full disclosure must be made.
37. In re Westmoreland Green &
Blue Slate Co., 2 Ch. (1893)
612.
38. To whom disclosure must be
made and by whom acted
upon.
39. Effect of disclosure to, and
consent by, all the share-
holders representing entire
capital stock.
40. Effect of disclosure to and
consent by all the existing
shareholders, when entire
capital stock not issued.
41. Ultra vires acts not validated
by disclosure to and con-
sent by all the shareholders.
§ 24. Duties of promoters in organization of corporation. —
As promoters are bound to act fairly and with good faith
in availing themselves of the powers and opportunities
accorded to them by the law authorizing the creation of
corporations, it follows as a rule that in organizing, or in
procuring, through others under their control, the organiza-
tion of a corporation to purchase or take a lease of their
own property or property in which they have an interest,
or to enter into a contract in which they are interested, it
26 PROMOTERS AND PROMOTION OF CORPORATIONS.
is their duty, so far as they have the power and opportunity,
to see that a competent and disinterested board of directors
is chosen, in order that the corporation may have proper
protection when it comes to a determination of the ques-
tion whether or not it is expedient for it to enter into the
proposed transaction. And it is their duty not only to
provide a board of directors who can exercise an independ-
ent and intelligent judgment on the transaction, but to see
that they do exercise such judgment.
§ 25. In Erlanger v. New Sombrero Phosphate Co.,1 — the
facts were that a syndicate of which Baron Erlanger, a
Paris banker, was at the head, purchased for £55,000, from
the official liquidator of an insolvent company, an island
said to contain valuable mines of phosphate. Erlanger,
who managed the business of this purchase, proceeded to
get up a company to take over the island and to work the
mines. He named five persons as directors. Two were
abroad ; of the three others, two were persons entirely
under his control, and were furnished by him with the
shares necessary to qualify them for the office. One of
these two persons appeared to have acted as a business
agent for Erlanger; the other was a private friend of
Erlanger. The sale of the island was made, nominally, by
a person who had really no interest in the island, and was
made to the director who was the business agent of
Erlanger, and who appeared as the purchaser for the com-
pany. The price was £80,000 in cash and £30,000 in
paid-up shares of the company. The two directors, with
whom, through Erl anger's arrangement, a third person
(one entirely uninformed on the subject of the original
purchase and the subsequent sale) was associated, assum-
ing to act as directors of the company, accepted, on its
behalf, the purchase. The price paid by the syndicate for
1 3 App. Cas. at p. 1236.
DUTIES OF PROMOTEKS TO THE CORPORATION. 27
the island was not disclosed. Subsequently a bill filed by
the company to rescind the contract was sustained. " I
cannot," said Lord Cairns, " but regard a meeting at which
two of the principal directors did not and could not attend,
at which one who did attend and take part in the delibera-
tions was at once a person buying and selling, where the
legal adviser present and assisting was virtually another
vendor, and where the two remaining directors are not
shown to have had the means of exercising, or to have
exercised, any intelligent judgment on the subject, as little
else than a mockery and a delusion."
§ 26. Judgment of Lord Cairns. — Lord Cairns laid down
the duties of promoters in the position occupied by the
promoters in the above case, as follows : —
" They stand, in my opinion, undoubtedly in a fiduciary
capacity. They have in their hands the creation and mould-
ing of the company ; they have the power to define how and
when and in what shape, and under what supervision, it shall
start into existence and begin to act as a trading corporation.
If they are doing all this in order that the company may,
as soon as it starts into life, become, through its managing
directors, the purchaser of the property of themselves, the
promoters, it is, in my opinion, incumbent upon the pro-
moters to take care that in forming the company they
provide it with an executive, that is to say, with a board of
directors who shall both be aware that the property which
they are asked to buy is the property of the promoters, and
who shall be competent and impartial judges as to whether
the purchase ought or ought not to be made. I do not say
that the owner of property may not promote and form a
joint-stock company, and then sell his property to it ; but I
do say that if he does he is bound to take care that he sells
it to the company through the medium of a board of direc-
tors who can and do exercise an independsnt and intelli-
28 PROMOTERS AND PROMOTION OF CORPORATIONS.
gent judgment on the transaction, and who are not left
under the belief that the property belongs, not to the pro-
moter, but to some other person." 1
§ 27. Exceptions to rule laid down by Lord Cairns. — It IS
not an inflexible rule, however, that promoters who bring
a corporation into existence in order that it may enter into
some contract in the subject-matter of which they them-
selves have a personal interest, must under all circum-
stances provide the corporation with a disinterested board
of directors to guard its interests in the matter. A trustee
is not absolutely disqualified from acting in a transaction,
because he has an interest therein adverse to that of his
cestui que trust. If he acts with the knowledge and acqui-
escence of the cestui que trust, and is guilty of no deception
or unfairness, his acts are valid. Not infrequently in the
case of a purchase or contract, promoters act for themselves
on the one side, and for the corporation on the other, or
the corporation is represented in the transaction by persons
controlled by or subject to the influence of the promoters.
In such case, their doings are not subject to attack, pro-
vided they observe the rule in relation to disclosure, and
do not abuse their influence, or practise any unfairness or
imposition.2 Again, it may not rest with the promoters to
nominate the directors. In the majority of cases, perhaps,
the enabling act contemplates that the first directors shall
be named by the promoters or corporators, and they are so
named ; but in some instances, in the organization of the
corporation, the directors are chosen by the subscribers for
shares, and when this happens, and the subscribers consti-
tute an independent body, the rule laid down by Lord
Cairns is not applicable. The promoters may become the
1 See also Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq.
219.
2 Densmore Oil Co. v. Densmore, 64 Penn. 43.
DUTIES OF PROMOTERS TO THE CORPORATION. 29
original shareholders, owning all the shares of the capital
stock ; and then the rule is inapplicable.1
§ 28. Promoters must disclose their interest in transactions
with corporation. — The rule as to disclosure requires a
statement by the promoters of any interest they may have
in a transaction with the corporation. Occupying a double
position, where interest may conflict with duty, they must
make it known, and must state the nature of that
interest.2
If the promoters sell, or cause to be sold, to the corpora-
tion property purchased by them, or in which they acquired
an interest by purchase, when promoters, for the purpose
of resale to the corporation, they must disclose what they
paid for it ; because the benefit of the purchase belongs to
the corporation, and unless the corporation consents to
their retaining a profit, they must turn the property in
for what they gave for it.3
§ 29. As vendors of corporation, not always bound to dis-
close cost of property to them. — When the promoters have
purchased or acquired an interest in the property before
they begin to promote the corporation, they may, under
some circumstances, make a sale to the corporation at an
advance, without disclosing the price which they paid. It
1 See Sect. 39. Erlanger v. New Sombrero Co. " is a case which is
often quoted and not unfrequently misunderstood. Of course Lord
Cairus's observations were directed only to a case such as he had
before him, where it was attempted to bind a large body of share-
holders by a contract which purported to have been made between the
vendor and the directors before the shares were offered for subscrip-
tions, whereas it appeared that the directors were only the nominees of
the vendor, who had accepted his bidding, and exercised no judgment
of their own." — Lord Davy, in Salomon v. Salomon Sf Co., 75 L. T. Rep.
at p. 437.
2 Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218.
8 In re Ambrose Lake Tin fr Copper Mining Co., 14 Ch. D. 398 ;
Ladywell Mining Co. v. Brooks, 35 Ch. D. 400.
30 PROMOTERS AND PROMOTION OF CORPORATIONS.
was so held in Densmore Oil Co. v. Densmore,1 the Court
saying, through Sharswood, Ch. J. : " Any man or number
of men who are the owners of any kind of property may
form a co-partnership or association with others, and sell
that property to the association at any price which may
be agreed on between them, no matter what it may have
originally cost, provided there be no fraudulent misrepre-
sentations made by the vendors to their associates. They
are not bound to disclose the profit they may realize by the
transaction. They were in no sense agents or trustees in
the original purchase, and it follows that there is no confi-
dential relation between the parties which affects them
with any trust."2
§ 30. Under some circumstances must disclose such cost. —
It is to be noted that in the above case the fact that the
promoters of the corporation were the vendors, was made
known, the property was sold to the corporation at a fair
price, and there were no circumstances connected with its
acquisition by the vendors which rendered knowledge of
the anterior price paid by them material. Moreover, the
original holders of all the shares acquiesced in the transac-
tion. The cost price of property affords some evidence as
to its value, and in some cases it may be of much import-
ance, and a fact which promoters who occupy a fiduciary
position and are bound to the exercise of the greatest good
faith, ought to disclose. In New Sombrero Phosphate Co.
v. Erlanger? where the promoters sold to the corporation,
for .£110,000, an island which they had but a few days
1 64 Penn. 43. See also Burbank v. Dennis, 101 Cal. 90.
2 But because they did not occupy a position of trust toward the cor-
poration in their purchase, it does not follow that they were not in such
position on their sale to the corporation. See observations as to this
in Taylor on Corporations, 2ded. Sect. 83, n. 1. The true grounds for
the decision are those indicated in the succeeding section.
8 5 Ch. D. at p. 112.
DUTIES OF PROMOTERS TO THE CORPORATION. 31
before purchased for £55,000, Jessel, M. R., said : " I do
not think it is absolutely necessary that in all cases the
price given should be stated, but looking at the peculiar
position of the parties, I think it was necessary here."
If the fact that the promoters own the property, or
have an interest in it, should be disclosed to the share-
holders, it might suffice, without a statement of the
anterior price paid by them, when a similar disclosure
to the directors of the corporation would be regarded as
insufficient.1
§ 31. Trustees not permitted to make secret profit out of
trusteeship. — It is a familiar rule of Equity that a trustee
is never permitted to make a secret profit in the matter of
his trusteeship. "It is," said Knight Bruce, V.C., "the
danger of the commission of fraud in a manner and under
circumstances which, in the great majority of instances,
must preclude detection, that in the case of trustees, and
all parties whose character and responsibilities are similar
(for there is no magic in the word), induces the Court
(not only for the sake of justice in the individual case, but
for the protection of the public generally, and with a view
to assert and vindicate the obligation of plain and direct
dealing between man and man in all cases, but especially
in those where one man is intrusted by another) to adhere
strictly to the rule, that no profit of any description shall
be made by a person so circumstanced, . . . saying to the
person complaining that he has thus employed his time
and skill without- remuneration, that he has elected so to
treat the matter ; that he has had his reward, for he has
had the possibility, nay, the probability, of retaining to
himself that which he never ought to have retained ; that
1 See Lord Cairns's observation as to this in Imperial Mercantile
Credit Association v. Coleman, L. R. 6 H. L. at p. 206.
32 PROMOTERS AND PROMOTION OF CORPORATIONS.
he has been willing to run the risk, and cannot complain
if he happens to lose the stake."1
§ 32. Similar rule applies to promoters. — This rule is gen-
erally applicable to promoters. Consequently, it is their duty
to disclose to the corporation the nature and amount of any
profit or remuneration, whether in money, shares, or other-
wise, which they are to receive, in connection with the
promotion of the corporation, or in consideration of services
rendered by them in the course of such promotion. The
promoters are as a rule entitled to retain the profit or re-
muneration only when the corporation has assented thereto
after such disclosure.2
§ 33. Mere declaration that promoter is interested not
enough when made to directors only. — The requirement as
to disclosure is not satisfied by a mere declaration by the
promoter that he has an interest or that he is to obtain a
profit arising out of or in connection with the promotion
of the corporation. He must state the nature of his inter-
est, the amount he is going to receive. At least this is so
when the disclosure is made, not to the shareholders, but
to the directors, and the consent of the corporation is given
by the directors.
§ 34. Illustrative case. — Thus, in Imperial Mercantile
Credit Association v. Coleman,8 the- plaintiff corporation
was formed for the purpose of carrying into effect loans
and other financial operations. The defendant, Coleman,
1 Benson v. HeatTiorn, 1 Y. & C. 326.
2 Bagnall v. Carlton, 6 Ch. D. 371 ; Emma Silver Mining Co. v.
Grant, 11 Ch. D. 918 ; Emma Silver Mining Co. v. Lewis, 4 C. P. D.
396 ; Whaley Bridge Calico Printing Co. v. Green, 5 Q. B. D. 109 ;
Lydney fy Wigpool Iron Ore Co. v. Bird, 33 Ch. D. 85 ; In re West-
moreland Green if Blue Slate Co., 2 Ch. (1893) 612; Chandler v. Bacon,
30 Fed. Rep. 538 ; Yale Gas Stove Co. v. Wilcox, 64 Conn. 105 ;
McElheney's Appeal, 61 Penn. 188.
« L. R. 6 H. L. 189.
DUTIES OF PROMOTERS TO THE CORPORATION. 33
who carried on business as a stockbroker, was a director.
Having entered into an arrangement with the contractors
of a certain railway company to place its debentures for a
commission of five per cent., he proposed, at a meeting of
the directors of the plaintiff corporation, that the corpora-
tion should place the debentures at a commission of one
and one-half per cent. In doing so he stated that he had
an interest in the transaction, but was silent as to the
arrangement which he had made with the contractors.
The proposal was adopted, and debentures to a very large
amount were placed by the corporation. It was held that
inasmuch as his fellow-directors might have been under
the impression that he merely took his ordinary commis-
sion as a stockbroker, and thereupon confirmed the trans-
action, he was liable to refund all his profits, because it
turned out that he had made a large and extraordinary
profit, beyond the usual commission of a stockbroker ; and
it was decided that he was compellable to state not only
that he had an interest, but what interest it was, before he
could sustain the transaction.
§ 35. Disclosure of interest only, sufficient if made to the
shareholders. — It would seem that if promoters disclose to
the stockholders the fact that they are to receive compen-
sation or profit in the promotion of the corporation, and
the stockholders assent thereto, the disclosure will be suffi-
cient. Apparently, under such circumstances, it is not
necessary that the amount of the profit or compensation
should be stated. In the case above referred to, it was
contended, on the defendant's behalf, that having stated at
a director's meeting that he had an interest in the transac-
tion under consideration, it was open to the directors who
were there present to have cross-questioned him, and to
have elicited from him what his interest really was. Com-
menting on this, Lord Cairns said : " If this had been a case
8
34 PROMOTERS AND PROMOTION OF CORPORATIONS.
in which a person standing in a fiduciary relation to
another had, in the presence of another, stated that he had
an interest, and that other was able to ask some further
questions as to what his interest was, I should have thought
a good deal of weight might be attributed to this argument.
But it was not to the company, or even to a general meet-
ing of the company, that Mr. Coleman stated that he had
an interest. It was to some other persons, who were just
as much in a fiduciary position as he was himself, and in
my opinion it was not open to Mr. Coleman . . . merely to
state to those other trustees what might have led them to
make further inquiry, but to leave it open to the chance of
whether they would make that inquiry or not." 1
§ 36. Full disclosure must be made. — A provision in the
articles of association that the validity of a stated transac-
tion with the company shall not be impeached on the
ground that the promoters are interested therein, does
not obviate the necessity of full disclosure, by the pro-
moters, of their position and interest in respect to such
transaction.
§ 37. In In re Westmoreland Green and Blue Slate Co.,2 —
Poole and Binns were working a quarry in partnership.
Poole had the option of taking a lease of another quarry
known as Stone Dykes. Wishing to form a company to
work these quarries, they employed Ashworth and Bland
to assist them in getting up the company. On the 16th of
February, 1886, Poole, Binns, Ashworth, and Bland entered
into an agreement, in which they were called the vendors,
with a trustee for the intended company, to hand over the
quarries to the proposed company. It was agreed that the
vendors should sell, and the company should purchase,
1 Imperial Mercantile Credit Association v. Coleman, L. R. 6 H. L.
at p. 206.
2 2 Ch. (1893) 612.
DUTIES OF PKOMOTEKS TO THE CORPORATION. 35
"the interest of the vendors in Stone Dykes under the
lease," in addition to other properties, and that Bland and
Ashworth should each receive 120 of the paid-up shares
issued by the company in part payment of the purchase
price. On the same day a lease of Stone Dykes was
granted to the four promoters. The articles of the com-
pany referred to this agreement and provided that the
directors should adopt it on behalf of the company, with or
without modification. The fourth article was as follows :
" The validity of such agreement shall not be impeached
on the ground that the directors of the company or any of
them are interested therein as vendors or otherwise, or
that they are the promoters of the company, nor shall they
be accountable for the benefits secured to them, or which
they or any of them may obtain under such agreement,
and every member shall be deemed to have had notice of
the terms of such agreement and to approve and sanction
the same, modified or not as the case may be."
In accordance with the agreement the quarries were
transferred to the company, and Bland and Ashworth re-
ceived their shares. Subsequently, in the winding up of
the company, Bland was compelled to contribute to the
company's assets the par value of the shares received by
him. The Court, holding that the transaction in question
was an attempt to evade the law as to secret profits, Bland
and Ashworth not being real vendors, said : " Is there any-
thing in the articles to protect the transaction ? Article 4
is relied on by the appellant, and its words are very wide.
But though Poole, Binns, Ashworth, and Bland knew all the
facts of the case when the directors passed a resolution for
adopting the ' agreement, what did the company know ?
The company knew that Bland and Ashworth were among
the lessees of Stone Dykes, but they did not know that
making them lessees was merely machinery to obtain for
36 PROMOTERS AND PROMOTION OF CORPORATIONS.
them payment for their services. This prevents the appel-
lant from claiming protection under the 4th article."
§ 38. To whom disclosure must be made and by whom
acted upon. — Facts which it is incumbent upon promoters to
disclose to the corporation are sufficiently disclosed if com-
municated to a competent and disinterested board of direc-
tors, or, when the directors are interested or are under the
control of the promoters, if communicated to the share-
holders. There must ordinarily be an independent board
or body of shareholders to receive and act upon the in-
formation.1 But if the facts are made known through
prospectuses or otherwise, and the public then, with
notice, come in and subscribe for the shares, it will suffice.2
§ 39. Effect of disclosure to and assent by all the share-
holders representing entire capital stock. — It is no objection
that the shareholders to whom disclosure is made and who
acquiesce in the transaction, do not constitute an independ-
ent body, provided the entire capital stock of the corporation
has been issued and is held by such shareholders. In such
case the assent of all the shareholders is the assent of the
corporation, and subsequent shareholders will not be heard
to complain, unless the transaction was ultra vires the cor-
poration.3 Thus in Parsons v. Hayesf a mining corpora-
tion was formed under the general laws of the State of
New York, with an authorized capital of $2,000,000. The
1 Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218;
In re Fitzroy Bessemer Steel Co., 50 L. T. Rep. N. s. 144 ; Simons v.
Vulcan Oil Co., 61 Perm. 202.
2 Densmore Oil Co. v. Densmore, 64 Penn. 43.
8 Salomon v. Salomon fy Co., 75 L. T. Rep. 426 ; In re Ambrose
Lake Tin fr Copper Mining Co., 14 Ch. D. 390 ; In re Gold Co., 11
Ch. D. 701; Parsons v. Hayes, 14 Abb. N. C. 419; Seymour v.
Spring Forest Cemetery Association, 144 N. Y. 334 ; Densmore Oil Co.
v. Densmore, 64 Penn. 43 ; Higgins v. Lansingh, 154 111. 331 ; Foster
v. Sei/mour, 23 Fed. Rep. 65.
4 14 Abb. N. C. 419.
DUTIES OF PKOMOTEKS TO THE CORPORATION. 37
directors named in the certificate of incorporation issued
paid-up certificates for the entire capital stock, in payment
for a mine which they had purchased in behalf of the
corporation for $2,000,000, but which in reality and to
their knowledge was worth less than $150,000. Of the
stock thus issued, they received as a gift from the vendor
of the mine a certain number of shares, in accordance with
a previous arrangement. These shares were subsequently
acquired by an innocent purchaser, who, upon learning all
the facts, brought a shareholder's bill against the corpora-
tion and the directors who had authorized the original issue
of stock. It was sought by the bill to compel the individual
defendants to account to the corporation either for the
difference between the value of the mine and the nominal
value of the shares issued in payment therefor, or for the
profits which they had obtained from the sale of the shares
given to them by the vendor of the mine. It was held that
as the acts complained of were done with the consent of
the holders of the entire capital stock, neither the corpora-
tion, nor its shareholders, could complain. " The vendor
of the property," observes Mr. Morawetz, commenting on
the decision, " in truth took back what he gave. He placed
the property in the corporate name, and at the same time
practically became the corporation by becoming its sole
stockholder. Evidently, therefore, no person was injured
by that transaction. If subsequent transferees of shares
were deceived by the false representations that the amount
of the shares had in fact been paid into the treasury of the
company, their claim should have been for the damages
caused to themselves individually through the false repre-
sentations, and not for an infringement of the collective
or corporate rights of all the shareholders."1
1 Morawetz on Corporations, Sect. 290. And if the corporation is
a real one, and not a fiction or a myth, there is, in the absence of
38 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 40. Effect of disclosure to and assent by all the existing
shareholders, when entire capital stock not issued. — Even
when the entire capital stock has not been issued, if dis-
closure is made to the existing shareholders, and it is their
honest intention at the time not to take in new members, it
cannot be said that there is any secrecy or want of commu-
nication of facts, although shareholders may subsequently
come in without notice. Thus in In re British Seamless Pa-
per Box Co.,1 a company was formed with an authorized capi-
tal of <£ 50,000, and patents and machinery were transferred
to it in consideration of shares to the amount of £ 32,000.
The vendors transferred certain of the shares thus received
by them to four of the directors. The vendors and the direc-
tors, who were the promoters of the company, and who with
the solicitor assented to what was done, were then the only
shareholders of the company. They did not issue a pro-
spectus, nor did they invite other persons to take shares,
and it was not their intention to take in any other mem-
bers. Subsequently the company needed more capital, and
shares were issued and disposed of to third persons who,
upon the failure of the company, alleged that they were not
informed of the manner in which the original shares had
been allotted. It was held, in the winding up, that the
official liquidator, as representing the company, could not
call upon the directors to account for the shares which they
had received from the company's vendors.2
§ 41. Ultra vires acts not validated by disclosure to and
assent by all the shareholders. — The rule stated as to the
fraud, no liability to corporate creditors. See the recent important
case, Salomon v. Salomon Sf Co., 75 L. T. Rep. 426, reversing 2 Ch.
(1895) 323. For a discussion of the question of liability to corporate
creditors, see Cook on Stockholders, Sects. 46, 47.
1 17 Ch. D. 467.
2 See also Stewart v. St. Louis Sf Fort Scott R. R. Co., 41 Fed. Rep.
736; St. Louis if Fort Scott R. R. Co. v. Tiernan, 37 Kan. 606.
DUTIES OF PROMOTERS TO THE CORPORATION. 39
effect of acquiescence by the original shareholders is not
applicable when the transaction brought in question is ultra
vires the corporation. The unanimous consent of all the
shareholders cannot validate such a transaction as against
a subsequent dissenting shareholder.1 In Mann v. Edin-
burgh Northern Tramways Co.,2 the company named was
formed under a private Act of Parliament, for the purpose
of introducing a system of tramways into Edinburgh, and
entered into an agreement with a corporation called the
Cable Corporation for the construction of its lines, for the
sum of £93,000, the Cable Corporation undertaking to de-
fray the expenses of obtaining the A ct of Parliament. This
agreement was negotiated by Mann and Beattie, in behalf
of the Tramways Company, Mann being its solicitor and
Beattie its engineer, and both its chief promoters. At the
same time, Mann and Beattie entered into an agreement in
their own behalf with the Cable Corporation, by which they
themselves undertook, in consideration of the payment to
them by the Cable Corporation of the sum of £17,000, to
defray all the expenses of obtaining the Act. The £17,000
was paid to them by the Cable Corporation from the
£93,000 received by that company from the Tramways
Company ; but, as matter of fact, the expenses of obtaining
the Act were considerably less than £17,000, and Mann
and Beattie secured a large profit from the transaction.
The Act itself provided that the capital of the Tramways
Company should be expended in making a cable tramway,
the only other expenditure authorized being the cost of pro-
curing the Act. No power was conferred upon the company
to spend any of its assets, except for the purposes of the
1 Society of Practical Knowledge v. Abbott, 2 Beav. 559 ; Mann v.
Edinburgh Northern Tramways Co., 68 L. T. Rep. N. 8. 96 ; In re
George Newman & Co., 1 Ch. (1895) 674.
2 68 L. T. Rep. N. s. 96.
40 PROMOTERS AND PROMOTION OF CORPORATIONS.
Act. It was not within the power of the company to per-
mit Mann and Beattie to retain any surplus after discharge
of the expenses of securing the passage of the Act ; and the
agreement between them and the Cable Company was only
a circuitous way of taking such surplus from the funds of
the Tramways Company. It was held in the House of
Lords that Mann and Beattie were liable to account to the
company for their profit, and that they were not relieved
by the fact that their agreement with the Cable Corpora-
tion was known to all the shareholders of the Tramways
Company, and had been ratified by the directors. No ap-
proval by those who happened to be directors and share-
holders at the time, it was held, could give validity to it, it
being ultra vires the company.
ACCOUNTABILITY OF PEOMOTEES TO COEPOEATION. 41
CHAPTER III.
ACCOUNTABILITY OF PEOMOTEES TO THE COEPOEATION FOE
PEOFITS, GIFTS, AND COMMISSIONS.
AETICLE I. — Accountability of Promoters for Profits
obtained by them as Vendors of the Corporation.
AETICLE II. — Accountability of Promoters for Gifts
and Commissions.
ARTICLE I. — ACCOUNTABILITY OF PROMOTERS FOR PROFITS OB-
TAINED BY THEM AS VENDORS OF THE CORPORATION.
§ 42. Right of corporation to claim
benefit of purchase made
by promoters while such.
43. Tyrrell v. Bank of London,
10 H. L. C. 26.
44. Mere fact that property pur-
chased by promoters while
such does not entitle cor-
poration to benefit of pur-
chase.
45. Benson v. Heathorn, 1 Y. &
C. 326.
46. Right of corporation to claim
benefit of purchase made
by promoter before he be-
came such.
47. In re Ambrose Lake Tin and
Copper Mining Co., 14 Ch.
D. 390.
48. Ladywell Mining Co. v.
Brooks, 35 Ch. D. 400.
49. Colorable transfer of property
to promoter to be by him
sold to the corporation.
60. Whaley Bridge Calico Print-
ing Co. v. Green, 5 Q. B. D.
109.
61. Acts and declarations of pro-
moter giving corporation
right to claim benefit of
purchase made by him.
62. Simons v. Vulcan Oil Co., 61
Penn. 202.
§ 53. Burbank v. Dennis, 101 Cal.
90.
54. Right of corporation to ben-
efit of optional purchase
made by promoter before
becoming such.
55. Offer by promoter to corpo-
ration entitling it to benefit
of his purchase.
66. Plaquemines Tropical Fruit
Co. v. Buck, 52 N. J. Eq.
219.
67. Pittsburg Mining Co. v.
Spooner, 74 Wise. 307.
58. Right of corporation to bene-
fit of optional purchase
made by third persons con-
federating with promoter.
69. Fountain Spring Park Co. v.
Roberts, 92 Wise. 345.
60. Right of corporation to re-
cover the profit made by
promoter on a sale of his
property to it. Definition
of term "profit."
61. Recovery of profit when prop-
erty sold is a commodity
having a current market
price.
62. Recovery of profit when prop-
erty sold is not a com-
modity with current market
price.
42 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 42. Right of corporation to claim benefit of purchase
made by promoters while such. — A promoter who sells to
the corporation he promotes property which he purchased
while a promoter, and which at the time of his purchase
was available for the purposes of the corporation, is, as
a rule, liable to account to it for the difference between
the cost and the sale price, unless he has, prior to the sale,
disclosed to it his interest and the price which he paid.
When he purchases, he is in a fiduciary relation to the
projected corporation; he is in a position akin to that
of an agent, and is subject in the matter to similar duties.1
Although not in fact an agent to buy for the corporation,
his relation to it, and his peculiar means of knowledge
as to its needs, make it incumbent upon him not to take
a position antagonistic to its interests. As in the case
of an agent, he will not be permitted to abuse his influence
or to betray the confidence reposed in him. It makes
no difference that an agent was not directed by his prin-
cipal to purchase. If he has by means of his position
as agent acquired knowledge that his principal desires
to buy specific property, he will not be allowed to employ
that knowledge to obtain a profit at the expense of his
principal, and if he buys the property and then resells
it to his principal at an advance, he will be held to have
bought for his principal, and will not, without the prin-
cipal's consent, be permitted to retain any profit.2 Under
such conditions he is constructively in the same position
as an agent directly instructed to purchase for his prin-
cipal. " If a man is instructed as agent for another
to buy property, whatever price he buys it for, he must
1 Gover's Case, 1 Ch. D. 182; Erlanger v. New Sombrero Phos-
phate Co., 3 App. Gas. 1218 ; Ladyioell Mining Co. v. Brooks, 35 Ch.
D. 400 ; South Joplin Land Co. v. Case, 104 Mo. 572.
2 Goiver v. Andrew, 59 Cal. 119; Davis v. Hamlin, 108 111. 39.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 43
hand it over at that price to his principal, and he can-
not as between himself and his principal, when he
bought at a lower price, add to it by pretending to sell
to his principal that which he has already bought for his
principal."1
§ 43. in Tyrrell v. Bank of London,2 — Read was the owner
of an option to buy certain properties. Tyrrell was one
of the promoters of the company and acted as its solicitor
during its promotion and after its formation. Prior to
the actual formation of the company, but while Tyrrell
was acting as promoter and solicitor, he entered into an
agreement with Read by which he became jointly and
equally interested with him in the option. The company,
upon its organization, agreed to treat with Read for the
purchase of the property, and committed the conduct of
the treating to its solicitor, Tyrrell. Ultimately, it pur-
chased the property at the advice of Tyrrell, who carefully
concealed from it his interest in the property. Held, that
he must account to the company.
§ 44. Mere fact that property purchased by promoters -while
such does not entitle corporation to benefit of purchase. —
The mere fact, however, that the property which the pro-
moter has sold to the corporation was purchased by him
while a promoter, cannot in all cases confer on the cor-
poration the right to claim the benefit of the promoter's
purchase. If the corporation was not formed to acquire
that particular property, and the promoter purchased with-
out any intimation or assurance that the corporation would
take or need it, and not as a speculation from which he
might derive secret profits, there would seem to be no
reason for holding that he bought as a constructive agent,
1 Cotton, L. J., in Ladywell Mining Co. v. Brooks, 35 Ch. D. at
p. 413; Parker v. Nickerson, 112 Mass. 195.
3 10 H. L. C. 26.
44 PROMOTERS AND PROMOTION OF CORPORATIONS.
or that the corporation was entitled to the benefit of his
purchase.1 But if, in selling to the corporation, he con-
cealed his interest, and secured a secret profit, it would
be difficult to escape the conclusion that when he pur-
chased, he did in fact purchase in order that he might
unfairly obtain a personal benefit at the expense of the
corporation.
§ 45. Thus in Benson v. Heathorn,2 — the defendant being
a director of a corporation established for the building,
purchasing, hiring, and employment of steam vessels, pur-
chased a vessel, and afterwards sold it, at an advance,
to the corporation as from a stranger. In ordering him
to account to the corporation, Knight Bruce, V. C., said :
" Under these circumstances, is it possible for me, what-
ever may have been the secret intentions of Mr. Heathorn's
mind when he bought the vessel — is it possible for a
judge in a Court of Equity to hear him say that he
bought it otherwise than as agent ? I find it utterly
impossible to do so ; his own mode of proceeding has,
in my opinion, indelibly and inextricably fixed him
with the character of agent from the beginning of that
transaction."
§ 46. Right of corporation to claim benefit of purchase made
by promoter before he became such. — When a promoter sells
to the corporation property which he purchased before he be-
came a promoter, the corporation, as a rule, cannot, although
he fails to disclose to it his interest, claim the benefit of his
purchase. Buying for himself with his own funds, before
any steps are taken to promote a corporation, he is, in
making the purchase, in no sense a trustee or agent for
the corporation. Neither in fact nor in contemplation of
law is there at the time of purchase a cestui que trust or
1 Sandy River R. R. Co. v. Slubbs, 77 Me. 595.
2 1 Y. & C. 326.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 45
principal for whom it is his duty to buy. His rights in
relation to the proceeds of any sale he may make of the
property are the same as if the property had been given to
or inherited by him. The corporation has no greater right
to insist on having the property at the price at which he
bought, than it would have to claim the property for noth-
ing, in case he had acquired it as a gift. He may be re-
sponsible in damages to the corporation for a breach of his
fiduciary duty to it, as a promoter, to disclose his interest
in the property upon its sale to the corporation,1 and it is
perhaps a debatable question whether, when he has failed
to disclose his interest, he is not liable to hand over to the
corporation his profit, — that is to say, the difference be-
tween the value of the property at the time he sold, and
the price which he received ; but he is not ordinarily ac-
countable to the corporation for the difference between
what he paid and the price at which he sold.2
§ 47. In re Ambrose Lake Tin & Copper Mining Co. — The
rule stated in the preceding section is clearly explained in
In re Ambrose Lake Tin $• Copper Mining Co? In this
1 See liability of promoters in damages to the corporation, infra.
2 Ladywell Mining Co. v. Brooks, 35 Ch. D. 400 ; Erlanger v.
New Sombrero Phosphate Co., 3 App. Cas. 1218, per Lord Cairns;
In re Ambrose Lake Tin §• Copper Mining Co., 14 Ch. D. 390; In
re Cape Breton Co., 29 Ch. D. 795; Dc.nsmore Oil Co. v. Densmore, 64
Penn. 43; Ely v. Hanford, 65 111. 267; Higgim v. Lansingh, 154 111.
301, 378; Burbank v. Dennis, 101 Cal. 90 ; In re The Hess Mfg. Co.,
21 Out. App. 66.
In Getty v. Devlin, 54 N. Y. 403, and Ex-Mission Land Sf Water
Co. v. Flash, 97 Cal. 610, expressions may be found supporting a
view contrary to that expressed in the text ; but it will be found that
in these cases the corporation became entitled to the benefit of the
original purchase by reason of the subsequent acts and declarations of
the purchaser in relation to the property, and not merely because the
purchaser, subsequent to his purchase, became a promoter of a cor-
poration and sold the property to it.
8 14 Cb. D. 390.
46 PROMOTERS AND PROMOTION OF CORPORATIONS.
case officers of a corporation who had sold to it a mine
which they had purchased before they became officers,
were ordered to account to the corporation for the differ-
ence between the cost of the mine to them and the price
which they received on its resale. The order was reversed,
on appeal.
Cotton, L. J., said : " The principle of the order must be
this, that the company are at liberty to treat these persons
as trustees of the property for the company, and, treating
them as trustees, to allow them only what they paid for the
property, and if they got anything else out of the coffers of
the company, to make them account for that. Neither on
principle nor on authority can that be maintained, unless
at the time when the so-called vendor acquired the prop-
erty he either acquired it for the company, or was in such
a position of fiduciary relation to the company that any
purchase made by him of property available for the com-
pany must be considered as a purchase made by him as a
trustee for the company. In that case, what the Court does
is to go back to the original purchase made by the person
who afterwards purports to sell to the company at an ad-
vanced price, and to say, ' This was already the company's at
the price which you originally gave for it when you were a
trustee for the company. That price you are entitled to
receive out of the coffers of the company, and anything else
is a sum paid to you for nothing, which you are not entitled
to retain.' " After stating that when the original purchase
was made, the purchasers were not trustees for the com-
pany, that the suggestion is that they sold to the com-
pany, being both owners of the mine and trustees of the
company, and that therefore the company, not seeking to
set aside the transaction, may say, " We will take this at
its face value, and make you account for the difference,"
he continues : —
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 47
" How can that be done ? I can quite understand an
action to set aside the contract altogether, but that is not
the course adopted by the company. I can see no ground,
either on principle or authority, on which the company can
say, not seeking to set aside the contract, ' We will hold
you as passing this to the company, not because you origi-
nally acquired it for the company, but because you entered
into a contract to sell to the company which is not binding,
and therefore we make another contract to take it from you
for what it originally cost you, making you account for
whatever else, under that invalid contract, you stipulated
should be paid for it.' I am of opinion that this cannot
be maintained, and therefore the order we have to deal with
cannot stand."
§ 48. In Lady-well Mining Co. v. Brooks,1 — a lease of a
mine was purchased by four persons for £5,000, and paid for
out of their own moneys. At the time of the purchase they
contemplated the formation of a corporation to which to
sell the lease of the mine. About two months afterwards,
they began to promote a corporation, and entered into a
contract with a trustee for the intended corporation for the
sale of their interest in the mine at the price of .£18,000.
The company was formed with three of the four purchasers
as directors, and the sale was carried out by them, their in-
terest not being disclosed. It was held that the corpora-
tion was not entitled to the benefit of their purchase, and
that they were not liable to refund to it their profits.
* " The question is," said Lopes, L. J., " Did Palin and his
associates, on the 1st of February, stand in a fiduciary
position towards this company that was thereafter to be
formed, — or, in other words, were they then acting for the
company about to be formed ? If they were, the plaintiffs
are entitled to succeed. Now this is entirely a question of
1 35 Ch. D. 400.
48 PROMOTERS AND PROMOTION OF CORPORATIONS.
evidence, and the Court has to place upon the evidence
which is laid before it its proper effect and meaning.
The evidence, after very careful consideration of it, does
not satisfy me that Palin and his associates were acting on
the 1st of February for the company about to be formed.
According to my view, and the view that ought to be drawn
from this evidence, they bought the mine themselves and
paid for it out of their own pockets, no doubt with the in-
tention of selling to a company thereafter to be formed ;
but there is nothing to show that they were on the 1st of
February acting for a proposed company. No person is
called to say that they were asked to take shares by any of
the vendors because they were forming a company. There
is no evidence that, in any shape or way, they stood in such
a relation to the company thereafter to be formed as would
entitle that company, when formed, to say, ' You made this
contract for us, — it is our contract, and we can only be
required to pay the price which you, acting as our agent,
paid for it.' There is no evidence that can properly lead
the Court to such a conclusion."
§ 49. Colorable transfer of property to promoter, to be by
him sold to the corporation. — If the owner of property, as a
part of a scheme to sell it to a corporation to be formed,
nominally conveys the title to another for a price stated,
which is fictitious, in order that this fictitious price may be
held out as a price actually paid, and the corporation thus
induced to give more than it otherwise would, it being
secretly agreed that the real owner shall have the avails
of the sale, and pay therefrom to his associate a commis-
sion ; and then this associate promotes a corporation to
which the property is sold, the transfer to him, being a
mere sham, is not to be regarded as a purchase by him be-
fore he began to promote, and the corporation may recover
from him his secret commission or profit; but it cannot
ACCOUNTABILITY OF PKOMOTEKS TO COKPORATION. 49
recover from the real owner, although he joins in promot-
ing the corporation, the difference between what he paid for
the property and what he got on the sale to the corporation.1
§ 50. Thus, in Whaley Bridge Calico Printing Company v.
Green,2 — Robert E. Green was the owner of certain calico
printing works which he had purchased for the sum of
£15,000. Shortly after the purchase, he pretended to
sell the works to his manager, John Smith, for £20,000,
by a contract which the jury found was a sham contract,
and which was intended to be used for the purpose of
negotiating with a corporation to be formed to purchase
the works. It was secretly agreed between Green and
Smith, that the latter should have X 3,000 out of the pur-
chase money to be paid for the property by the corpora-
tion. The plaintiff corporation was then formed by Green
and Smith, and the works transferred to it for £20,000.
The board of directors consisted of their nominees, " and
in order to make the purchase run more smoothly, a
sham contract of purchase was flashed before the eyes
of the directors as if it were a real contract by both
Smith and Green." Smith had a right to agree with
Green that he should be remunerated to the extent of
£3,000, provided such agreement was made with the
knowledge and assent of the corporation ; but the cor-
poration had a clear right, it was held, to treat all profit
made by Smith out of such a transaction as profit
belonging to it. The claim put forward by the cor-
poration to have refunded to it the £5,000, the differ-
ence between the £20,000 purchase money, and the price
at which Green himself had bought, was not sustained.3
1 The real owner might be, however, by reason of his participation
in the fraud, liable in damages to the corporation.
2 5 Q. B. D. 109.
8 See also In re Westmoreland Green Sf Blue Slate Co., 2 Ch.
4
50 PKOMOTERS AND PROMOTION OF CORPORATIONS.
§ 51. Acts and declarations of promoter giving corporation
right to claim benefit of his purchase. — One who has pur-
chased and paid for property, prior to any steps to pro-
mote a company to take it off his hands, may, by his
acts and declarations in his subsequent relation of
promoter of the company, make it his duty to treat
the property as property bought for the company, and
not for himself alone. While such duty may not have
been incumbent upon him in making the purchase, it
is open to him to assume it if he sees fit, and if he vol-
untarily takes that position, he will be held to it. He
assumes the duty when he declares that he bought for
the company, and persons are induced to join the cor-
porate enterprise on the faith of his declaration. The
company is then entitled to the benefit of his purchase.
The same result follows if subscribers come in on his
assurance that the company is to acquire the property
at its cost. In these cases, he is accountable to the
company for any secret profit he may obtain.1
§ 52. in Simons v. Vulcan Oil Co.,2 — the defendants pur-
chased oil lands with a view to selling them to a corpora-
tion which they then had it in their minds to form.
(1893) 612, where a transfer of an interest in property was held to be
merely a device to evade the law as to promotion money.
1 In Ladywell Mining Co. v. Brooks, 35 Ch. D. at p. 411, Cotton,
L. J., puts this case, by way of illustration, in which the benefit of a
purchase of property, to be sold to a projected company, might be
claimed by the company when formed : " If in fact those who pur-
chased this mine had before the time they made the purchase invited
the public to come in and join the company to work this mine, then it
may well be that if the company was formed, and they had handed
over the mine to the company, the shareholders would have been en-
titled to say, ' As you have formed a company to work this mine, you
must admit that the purchase was not made in your individual ca-
pacity, but was made for the purpose of offering it to the public if
they came in and formed a company to work it.' "
2 61 Penn. 202.
ACCOUNTABILITY OF PROMOTEES TO CORPORATION. 51
The title was taken in the name of the defendant Simons,
and in the deeds the total consideration was expressed
to be $81,000, when in fact it was but $10,000. The de-
fendants, with others, then organized the Vulcan Oil Com-
pany, and the property was turned in to it for $81,000,
on their representations, orally and by prospectuses,
that they had purchased it for the company, and were
conveying it to the company at its original cost. They
were held liable to account to the company for the dif-
ference between the price at which they bought and the
price at which they sold. The case turned on the ques-
tion whether or not it was the duty of the defendants to
treat the property as bought for the company. This
was left to the jury to decide as a question of fact, and
was decided in the affirmative. The learned trial judge
(Judge Hare), among other things, instructed the jury
as follows : —
" In order to judge whether this title was acquired
by the defendants for themselves, or on behalf of the
corporation, we must turn from the deeds (of the prop-
erty) to the acts and declarations of the parties in the
relation in which they stand to the corporation, and see
whether looking at what they said and what they did,
it does or does not appear that they bought the land in
a way rendering it their duty to treat it as land bought
for the company, and therefore to be transferred to the
company at the price paid to the original owners, unless
the contrary was agreed upon with a full knowledge of
all the circumstances." (Evidence recited.) " This is
the evidence that these lands were in fact purchased
by the defendants, ostensibly for the Vulcan Oil Company ;
and if they represented this to be so ; if they held it out
to the world as the true state of the case, and induced
persons to subscribe on the faith of their declarations ;
52 PROMOTERS AND PROMOTION OF CORPORATIONS.
if they so dealt with the company and obtained their
price, — what their real purpose or object was is immaterial,
because it is impossible to read the secret purposes of
men, and in dealing with them we can only look at what
they avow. It is possible that their secret and avowed
purposes were at variance with each other; their secret
purpose was to buy the land for themselves as their own
property, with a view of transferring it to the company
at an advance; their avowed purpose, to hold it as the
property of the company with a view of obtaining sub-
scribers for the stock; but unless this secret purpose
was made known, it ought not to avail against the pur-
pose which was proclaimed and by which they were
believed by others to be actuated."
§53. in Burbank v. Dennis,1 — the defendant Sanborn
purchased certain lands and procured contracts for the pur-
chase of other lands, with a view to reap a profit by bring-
ing about the formation of a corporation which should buy
the lands at an advance over the prices paid or contracted
to be paid by him. In the negotiations as to some of the
lands in question, the defendant Dennis acted as an agent
for Sanborn, and also for the owners. It was the intention
of Sanborn to induce Eastern capitalists to become sub-
scribers for the stock of the contemplated corporation ; but
Dennis having suggested to him that home capitalists
would interest themselves in the venture, attention was
turned toward the latter class, and Dennis, with the co-op-
eration of Sanborn, had negotiations with various persons,
which culminated in a written agreement. In this agree-
ment, — which was drafted by Sanborn, — Dennis, Sanborn,
and the prospective shareholders of the proposed corpora-
tion, in consideration of one dollar received each from the
other, agreed to purchase the lands for $537,000, and forth-
1 101 Cal. 90.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 53
with to organize a corporation through which to carry out
the enterprise. The interest of each party to the instru-
ment was specified, Sanborn taking one quarter, and Dennis
one-fifth. When this instrument was signed, Sanborn and
Dennis agreed with their associates that all lands they then
had, or had a right under their contracts to acquire, should
be turned in to the corporation when formed, at the prices
they had paid or agreed to pay. The corporation was then
organized, and on the representation of the defendants that
$200,000 would be required to make first payments and to
keep alive Sanborn's options and contracts, that sum was
paid in by the subscribers and turned over to Dennis to
apply in the manner stated. Subsequently, Dennis reported
that he had paid $193,662.62 to Sanborn on account of the
purchase price of the lands. In truth, but $97,686.62 was
required and was applied to pay the cost price ; and the
balance was retained by the defendants as a secret profit.
It was held that, as promoters of the corporation, they must,
on the facts stated, account to the corporation for this
secret profit. Sanborn purchased the lands, either abso-
lutely or conditionally, prior to his becoming a promoter,
and, under ordinary conditions, the corporation would not
have been entitled to the benefit of his purchases, but by
his declarations, on which the corporation acted, he made
himself a trustee for it, as of the time when he bought.1
§ 54. Right of corporation to benefit of optional purchase
made by promoter before becoming such. — The general
rule laid down that a promoter who obtains a secret profit
1 Ex-Mission Land Sf Water Co., 97 Cal. 610, is, on the facts
therein found, within the principle on which Burbank v. Dennis and
Simons v. Vulcan Oil Co. were decided, although the Court seemed to
think that promoter vendors of a corporation are liable to account for
secret profits on a sale of property to the corporation, whether they
acquired the property prior or subsequent to becoming promoters.
For a statement of the facts in this case, see Sect. 8.
54 PROMOTERS AND PROMOTION OF CORPORATIONS.
on the sale by him of property which he acquired before he
began to promote is not accountable for the difference be-
tween what he paid and what he received, is settled when
the purchase is outright or absolute. There is some dif-
ference of opinion as to its application when a mere option
to buy is secured, which is to be exercised only in the event
of a company being formed and capitalized to purchase the
property from the holder of the option. The opposing
views are set forth with great clearness in Governs Case,1
in which the circumstances were, in the language of one of
the judges, as follows : —
" Mr. Skoines was the patentee of an invention relating
to gas-lighting. Mr. Mappin appears to have thought that
it was a thing which he could sell at a very high price, to a
joint-stock company which he might be able to form for the
purpose of buying and working the patent. He thereupon
bargains with Mr. Skoines, and in consideration of £1,000
paid down, he obtains from Skoines a contract binding the
latter, for a certain further price in money and paid-up
shares in a company to be formed, to convey his patent
right. If Mappin did not succeed, within a certain time, in
forming the company and obtaining for Skoines the further
money and the shares, Skoines was to be released from his
obligation, and he would retain the .£1,000 and the patent."
Subsequently, Mappin promoted and became a director of a
company which purchased the patent, and the agreement
between Skoines and himself was executed.
James, L. J., Bramwell, B., and Brett, J., were of opinion
that Mappin was not a promoter when the agreement was
made, and that the company was not entitled to the benefit
of it. James, L. J., said : —
" At the time when this agreement was made, there was
no company in existence, and no promoter, trustee, or
1 1 Ch. D. 182.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 55
director ; the company had not even an inchoate existence
except in the brain of Mappin ; and the utmost that could
be said of Mappin was that he was a projector of a com-
pany which he intended and had agreed to promote. Hav-
ing acquired this equitable right in or to the patent — this
dominion over it for his own purpose and benefit — having
bought what he did buy of Skoines for the lowest price he
could get the latter to accept, with the view to sell it at the
highest price which he could get, he did what, it appears to
me, he lawfully and rightfully might do — he advertised
his wares to the public in the following manner. In sub-
stance, he says : ' I have an article to dispose of ; I am will-
ing to allow persons to become partners and shareholders
with me on the following terms and conditions.' He had a
right to prescribe his own terms and conditions like any
other vendor with any other purchaser. The way in which
he made his offer was in the usual way, viz. : he entered
into a provisional contract with a person on behalf of the
intended company. The making of that provisional con-
tract was, in my opinion, the first period of time at which
it could be said that the company had even an inchoate ex-
istence, and it was from and after the making of that con-
tract that any fiduciary or other relation between Mappin
and the company began. In the making of that contract,
in presenting his own terms and conditions, he was, accord-
ing to my judgment, in the position of any ordinary vendor
with any ordinary purchaser. Everything anterior to that
was a matter relating to himself and to his own title as
vendor. It is surely open to any man, in point of law, to sell
his property to a joint-stock company, and to invite persons
to form themselves into a joint-stock company to purchase
from him, just as it is open to any man to sell to any per-
sons in the world the right to become his partners in any
property or undertaking. Until the formation of the part-
56 PROMOTERS AND PROMOTION OF CORPORATIONS.
nership he is simply a vendor of the wares ; he may ask
what price he likes, and obtain what price he can, and he is
under no obligation whatever to say what price he gave, or
has to give, for them in order to complete his title to the
goods.1 I really arn at a loss to understand on what prin-
ciples it can be said that Mappin's contract with Skoines
was a contract by the company or by any promoter, trustee,
or director of the company. It is conceded that if he had
bought the patent and paid down the price in money, or
contracted to pay down the price in money, he would have
been under no obligation to disclose his previous bargains
or contracts, though he would have been obliged to show a
good title to and to make a good conveyance of the thing
which he proposed to sell. And I cannot draw any distinc-
tion between a legal right and an equitable right — between
a conditional right and an absolute right — between a de-
feasible right and an indefeasible right ; all that was still
matters of title, and his obligation in any case would have
been the same to make a valid conveyance at the proper
time of the thing which he undertook to convey. It is
said, however, that when the bargain with Skoines is looked
at, it contains stipulations about the forming of the com-
1 This was subsequently qualified by Lord Justice James in New
Sombrero Co. v. Erlanger, 5 Ch. D. 118, by the explanation that if he
deals with a company as a promoter he must act fairly : —
" In this case the Vice-Chancellor appears to have proceeded to a
great extent upon what was supposed to have been said in Gover's Case.
Now I adhere entirely to what I said in Gover's Case, that is to say, it
is quite open to a man to buy property at any price he likes, with the
view or in the hope of selling that property to any company that he
can get to buy it, if that is the mode in which he intends to dispose
of it. A man may buy at any price and may sell at any price that he
can get fairly for it. But that has nothing whatever, as it appears to
me, to do with the question in this case, which is whether a man who
has so bought at a low price has obtained a higher price, fairly and
properly, in accordance with the view which the Court of Equity takes
of such transactions."
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 57
pany and the constitution of the company and the shares of
the company. I cannot myself see that the Court has, for
this purpose, any right to read these stipulations. They
were stipulations between Mappin and Skoines alone, and
obligations as between them. Even if they were stipula-
tions by Mappin to do something wrong in the company or
to the company, this might be evidence of that wrong, and
proper redress might be given for that wrong as a substan-
tive ground for complaint. But ... no impropriety in the
contract can make it the contract of the company, or the
contract of a promoter, trustee, or director of a company,
when at the date of the contract there was no company, no
promoter, no trustee, no director. The character of the
contract cannot operate as a transformation of the contract-
ing parties."
Lord Justice Mellish expressed the following view :
" I agree that if the contract between Skoines and
Mappin is to be looked at as an unconditional contract for
the sale of the patent from Skoines to Mappin, the com-
pany had no interest in the contract, and were not entitled
to have its contents disclosed to them. The contract, how-
ever, between Skoines and Mappin was a contract, as it
appears to me, upon the condition that Mappin should pro-
cure the patent to be sold to a company formed for the
purpose of working the patent, and if such sale was effected,
£64,000, partly in money and partly in shares, was to be
given to Skoines, and the residue of the price, whether
money or shares, was to be retained by Mappin. Now,
when the company became the purchaser of the patent,
that is to say, when the directors, after the formation of
the company, adopted the contract made by Mappin and
Wright, Mappin was both a promoter and director of the
company. The purchase of the patent by the company,
who were the only company then in existence formed for
58 PROMOTERS AND PROMOTION OF CORPORATIONS.
the working of the patent, enabled him without the knowl-
edge of the company to fulfil his contract with Skoines, and
to earn an enormous profit. It seems to me that there are
grounds for contending that under these circumstances
Mappin ought not to be considered as the owner of the
patent, but only as a person who by a contract with the
owner of the patent had the disposal of the patent, and in
that case, according to the decision of the House of Lords
in the Imperial Mercantile Credit Association v. Coleman?
he was bound to communicate his contract with Skoines to
the company, and as he did not do so, the company were
entitled to the benefit of that contract." 2
1 L. K. 6 H. L. 189.
2 Governs Case was an application by a shareholder to have her
name removed from the list of shareholders in a joint-stock company,
on the ground that the prospectus did not contain the date of and the
parties to the contract between Skoines and Mappin referred to in the
text. The application was based on a provision in the Companies Act
that every prospectus of a company shall specify the dates and the
names of the parties to any contract entered into by the company, or
the promoters, directors, or trustees thereof, before the issue of such
prospectus; and that any prospectus not specifying the same shall be
deemed fraudulent on the part of the promoters, directors, and officers
of the company knowingly issuing the same, as regards any person
taking shares in the company on the faith of such prospectus, unless he
shall have had notice of such contract. It was held that if the omission
to specify the contract in question was within the Act, the relief to
which the shareholder was entitled was a personal remedy against
those who had issued the prospectus, and not the relief to have her
name removed from the list of shareholders. This was sufficient to
dispose of the appeal, but two of the four judges also held that the
contract in question had not been entered into by a person who was
at the date thereof a promoter, director, or trustee of the company,
and that consequently it was unnecessary to mention it in the pro-
spectus ; from this conclusion the other two judges dissented.
In this aspect of the case, it was material to determine whether
or not, under the general law, Mappin was a promoter at the time
he entered into the contract in question, and whether or not the com-
pany was entitled to the benefit of the contract, as touching the ques-
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 59
§ 55. Offer by promoter to corporation entitling it to benefit
of his purchase. — It is clear that if one who has acquired
aii option to purchase property subsequently promotes a
company, and, instead of contracting in his own name to
sell the property to the company or inviting the company
to become shareholders in the property itself, invites them
expressly or impliedly to become shareholders with him in
the option, or to join with him on terms of equality in pur-
chasing the property from the owner on the best obtainable
terms, and they accept that invitation, then by the terms of
his offer, and by their acceptance of that offer, he makes
himself their agent, as from the date of the option, and any
bye or collateral contract made for his own benefit is a
contract by a trustee for the company,1 and any sum which
is secretly taken from the company, in excess of the real
cost of the property, belongs to it, and must be returned.2
§ 56. In Plaquemines Tropical Fruit Co. v. Buck,3 — the
defendant Buck secured from White an option for the pur-
tion of Mappin's duty under the statute to disclose the contract. The
case is, therefore, of value in connection with the point considered in
the text.
The view taken by Lord Justice James was quoted with approval
in the opinion of Green, V. C., in Plaquemines Tropical Fruit Co. v.
Buck, 52 N. J. Eq. 219, while that advanced by Lord Justice Hellish
appears to have been adopted by Pitney, V. C., in Woodbury Heights
Land Co. v. Londenslager (N. J. 1896), 35 At. Rep. 436. See Dorris
v. French, 4 Hun, 292; South Joplin Land Co. v. Case, 104 Mo. 572.
1 James, L. J., in Goner's Case, 1 Ch. D. at p. 188.
2 It has been suggested that this result should follow in a case
where nothing has been paid on the option, and there is no obligation
to purchase. There can be no application here, it is said, of the
equitable notion that in cases of executory contracts for the purchase
and sale of land, the title is, in equity, to be treated as being in the
vendee, and the purchase price as a debt due the vendor. Pitkin,
V. C., in Woodbury Heights Land Co. v. Londenslager (N. J. 1896), 35
At. Rep. 436.
8 52 N. J. Eq. 219.
60 PROMOTERS AND PROMOTION OF CORPORATIONS.
chase of certain lands at the price of $25,000, to be paid
$5,000 in cash, $10,000 in three months, and $10,000 in
shares of the stock of a corporation to be formed for the
development of the lands. Buck then became the sole pro-
moter of the intended corporation ; but at no time, either
before or after the corporation was formed, did he disclose
to it the fact that he had entered into the contract referred
to with White. On the contrary, in a prospectus prepared
and issued by him, White was spoken of as the grantor in
the proposed sale of the lands in question to the corporation.
At a meeting of the stockholders, Buck being present, a
resolution was passed that the directors purchase the lands
from White for $150,000, payable, $120,000 in shares of
stock of the corporation at par, $10,000 in cash, and the
balance, $20,000, by the corporation's notes secured by a
mortgage on the lands. Certificates in blank for 12,000
shares were then delivered to Buck to effect the purchase.
But White refused to carry out his contract with Buck,
who thereupon brought suit for specific performance. This
led to an agreement by which White was to convey four
thousand acres more than was originally stipulated, reserv-
ing the right for one year to cut willows and to clear the
land, and was to receive $27,000 instead of $25,000. This
agreement was carried out by a conveyance of the lands
from White to Louque, the attorney of Buck, Louque giving
the required note for $20,000 and mortgage. Louque then
conveyed the lands to the corporation subject to the mort-
gage. Buck paid White $5,000 in cash and transferred to
him 700 shares of stock. White then gave up to Buck one
of the notes referred to for $5,000, and Buck turned it over
to a person who had assisted him in his bargaining. The
balance of the 12,000 shares Buck retained, distributing
part among the other defendants, who were directors and
officers of the corporation. On a bill brought by the cor-
ACCOUNTABILITY OF PKOMOTEKS TO CORPORATION. 61
poration against the defendants to compel the surrender for
cancellation of the shares of stock thus obtained by them,
the foregoing facts having been shown by affidavits, it was
ordered that an injunction should issue to restrain the de-
fendants from parting with the stock or voting thereon,
until the final hearing of the cause. The Vice-Chancellor,
taking the view that " no rights, legal or equitable, arise in
favor of a corporation in respect of transactions, whether
complete or inchoate, merely because entered into in con-
templation of the creation of such corporation," held that,
on the facts shown, Buck must be considered as having
made the contract with White, not for himself, but on
account of the corporation, and could not be permitted to
retain any increase in the price. The fact that part of the
consideration to be paid White was, by the terms of the
contract, to be paid in stock of the proposed corporation,
was considered by the Vice-Chancellor, while not conclu-
sive, as important in determining the question whether the
purchase was made for the corporation.
§57. In Pittsburg Mining Co. v. Spooner,1 — the defend-
ants procured an option to purchase certain mining rights
for $20,000. They then proceeded to obtain subscriptions
for the shares of stock of a proposed company which was to
be formed to purchase the mining rights. They represented
to subscribers that the price demanded by the owners of
the mining rights was $90,000, and that the property could
not be bought for less ; that they, the defendants, were
themselves desirous of purchasing, but were unable to pay
so much money, and had therefore determined to organize
a corporation to make the purchase ; that they would be-
come subscribers for stock to the extent of their ability ;
that there was no speculation in the purchase price ;
that they were making nothing out of it — not even their
1 74 Wise. 307.
62 PROMOTERS AND PROMOTION OF CORPORATIONS.
expenses, unless the corporation, when formed, should
see fit to reimburse them — except what all stockholders
would make alike, through the mining operations to be car-
ried on by the corporation ; and that $100,000 was required
in the enterprise, $90,000 for the purchase of the mining
rights from the owners and $10,000 to work the mines.
The defendants then caused a subscription paper to be
drawn up, by the terms of which subscribers agreed with
the defendant Main, who was described as the owner of
the mining rights, to take the number of shares in the
Pittsburg Mining Company, " proposed to be formed," set
opposite their respective names, and to pay for the same
$2.50 per share as soon as the company was incorporated.
The capital of the company was to be $100,000 divided
into 40,000 shares of $2.50 each. The entire subscription
was written on the terms set forth. The defendants then
organized the plaintiff company, being the sole incorpora-
tors. Upon the organization, Main subscribed for all the
stock, with the exception of two shares subscribed for by
the defendants Spooner and Oakley. At the same time, a
vote was passed by the defendants, as the sole incorporators
and directors, authorizing the issue of the shares subscribed
for by Main to him or to such persons as he might desig-
nate, upon his transfer of the mining rights to the company.
The mining rights were then transferred by the owners to
Main, and by Main were transferred to the company. The
shares subscribed for by Main were issued to the persons
who had agreed with him to take shares, and $100,000
was paid by them therefor to the company. The defend-
ants from this sum paid the original owners of the mining
rights $20,000, kept $10,000 in the treasury, and divided
the remaining $70,000 among themselves. It was held
that they must account to the company for the $70,000 as
secret profit to which the company was entitled.
ACCOUNTABILITY OF PEOMOTERS TO CORPORATION. 63
§ 58. Right of corporation to benefit of optional purchase
made by third persons confederating with promoter. — The
promoters may, instead of acquiring in their own name an
option for the purchase of property to be sold to the corpo-
ration at an advance, induce others to acquire the option,
in pursuance of a scheme by which the property is to be
sold at an advance to the corporation, the interest of the
promoters being concealed, and the profits thereby secured
secretly divided among the promoters and such third per-
sons as their confederates. In this case they are all alike
liable to account to the corporation. The persons con-
federating with the promoters, although not taking part or
assisting in the formation of the corporation or in obtain-
ing its capital, and therefore not promoters or in a fiduciary
position towards the corporation, are nevertheless account-
able to it on the principle of law that when several persons
combine in a fraudulent conspiracy to cheat another, and
each takes some part in carrying it out, they are all liable
to the defrauded party for the wrong done, and each is
liable without reference to the degree of his activity or to
the amount of profit which he has reaped from the fraud.
§ 59. In Fountain Spring Park Co. v. Roberts,1 — the plain-
tiff corporation sought to recover certain secret profits ob-
tained by the defendants on a sale of land to the corporation.
The complaint alleged in substance the following facts :
The defendants, Carrick and Willis, were promoters of the
corporation which they brought into existence in order that
it might purchase a certain tract of land, and that they
might secure a secret profit in this purchase when made.
One Webber held an option for the purchase of the land in
question from the owner at the price of $12,750. The
defendants, Russell and Roberts, agreed to assist Carrick
1 92 Wise. 345. See also Boston v. Simmons, 150 Mass. 461; Emery
v. Parrott, 107 Mass. 95.
64 PROMOTERS AND PROMOTION OF CORPORATIONS.
and Willis in carrying out their fraudulent scheme to
secure a secret profit at the expense of the corporation, and
it was agreed that the profit should be divided among the
four. Carrick and Willis then procured the formation of the
corporation and the subscription of its capital, representing
to the subscribers that the land would cost $23,000. While
subscriptions were being obtained, Russell and Roberts
purchased Webber's option for $600, and held it subject to
the order of Carrick and Willis. Shortly afterward, the
land was conveyed to the corporation for $23,000, and the
profit on the real purchase price of $12,750 was secretly
divided among the defendants. It was held that the facts
stated were, if proved, sufficient to sustain the complaint
against all the defendants, and a demurrer, which they had
interposed, was overruled.
§ 60. Right of corporation to recover profit obtained by pro-
moter on sale of his property to it. — Definition of term "profit."
— When the promoter of a corporation, without disclosing
his interest, sells to it property which he purchased, abso-
lutely or conditionally, before he became a promoter, ordi-
narily the corporation cannot, as we have seen, claim the
benefit of the purchase, and recover the difference between
the price paid by it and the price paid by the promoter. But
whether or not the corporation may recover the profit made
by the promoter on the sale to it, is another question. This
profit is not the difference between the price that the pro-
moter gave and that which he got from the corporation, —
the promoter may have got the property as a gift, — but the
difference between the value of the property at the time of
its purchase by the corporation, and the price which the
corporation paid. The question may arise in two cases.
§ 61. When property is commodity in market. — First.
When the property sold to the corporation is a commodity
bought and sold in the market, and having a current market
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 65
price. Reasoning from analogy, we may take the rule ap-
plicable to one who accepts an agency to buy some article
in the market, and then sells to his principal his own goods,
without disclosing his interest. In such case the agent is
liable to account to the principal for his profit.
Thus, in Parker v. Nickerson,1 a bill was brought by the
receiver of the East Boston Ferry Company against the de-
fendant for an accounting. The defendant was the treas-
urer of the company, and had sold a quantity of coal to it
for $9.25 per ton. He did not originally buy the coal for the
purpose of selling it to the company, and did not buy it at
a time when it was his duty to buy coal for the company.
The coal had been used, so that it was not possible to restore
it. The Court held that the amount .due to the company
was not the difference between the price charged the com-
pany and the price at which the defendant purchased, on
the plaintiff's theory that the company was entitled to the
benefit of the defendant's purchase, but the difference
between the price charged and the fair market price at the
time of the sale. The authority and duty of the defendant
as treasurer of the company, it was held, was to buy coal
for it in the market at the market price. He was there-
fore not entitled to the larger price which he had charged.2
By analogy to this rule, is a promoter who sells his own
goods to the corporation while occupying a fiduciary posi-
tion toward it, liable to account to the corporation for his
profit ? Take, for illustration, a case where a promoter of
a railroad corporation sells to it steel rails. The promoter,
it is true, is not in the position of an agent to buy ; that
duty rests with the directors. But the promoter is in a
fiduciary relation to the corporation, and one of the conse-
1 137 Mass. 487.
2 See also Kimber v. Barker, 8 Ch. 56; In re Cape Breton Co., 29
Ch. D. at p. 811 ; Bentinck v. Fenn, 12 App. Gas. 652.
6
66 PROMOTERS AND PROMOTION OF CORPORATIONS.
quences of that is, that he is not as a rule permitted to
retain a secret profit arising out of or received by him in
connection with the promotion of the corporation. If when
he sells his goods to the corporation, he is not dealing with
it at arm's-length, he is in no better position with respect to
the right to make a secret profit than is the director. For
example, although he is not an agent to buy, he cannot re-
tain a secret commission, paid to him by the vendor of
property to the corporation from the purchase money.
Being, in the eye of the law, under the same disability in
this respect as a director, it would seem that if the director
must account for a secret profit realized on a sale of his
goods to the corporation, the promoter on a similar sale
must, on the same principle, be liable to account for his
profit. But to support the analogy between the director
and the promoter, facts must appear, it seems reasonable
to say, to show that the promoter has by virtue of his posi-
tion as such some advantage over the corporation in mak-
ing the sale. If competent and disinterested directors, not
nominated by the promoter, and not subject to his influ-
ence or control, have fairly passed upon the purchase of
the property, there would appear to be no ground for hold-
ing the promoter accountable for his profit.
§ 62. When property is not commodity in market. — Sec-
ond. When the property sold to the corporation is a spe-
cific property, sui generis, such as a mill, or a patent, or a
particular tract of land, for the purchase of which the cor-
poration is brought into existence. Here it would seem
that the director who owns the property and sells it to the
corporation without disclosing his interest is not bound to
sell at the market price, or if there is no market price, at
the fair price, and the corporation is not entitled to insist
on having the property at the market or fair price. If a
director, selling under such conditions to the corporation,
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 67
is not accountable to the corporation for his profit, as
profit, a promoter, by analogy, would not be liable. There
has been some judicial difference of opinion as to the
liability of a director to account for his profit under the
circumstances stated, but the decisions, and, it would seem,
the weight of argument, are in favor of the theory of non-
liability.1 In the case In re Cape Breton Co.,2 the ques-
tion arose, and it was held by a majority of the Court,
Bowen, L. J., dissenting, that a director was not so
liable. On appeal, in the House of Lords, the decision
went off on another point, and the question, although
considered, was not decided.3 The view that the direc-
tor must account for his profit was thus stated, in part,
by Bowen, L. J. : " It seems to me, upon every prin-
ciple of justice and equity, to be clear, that in all cases
where a person is directly or constructively an agent or
trustee for other persons, all profits made by him on behalf
of the business in which he is so employed, without the
knowledge of his cestuis que trust, belong in equity to his
employers, and not to himself. If there was a clandes-
tine profit he must hand it over. . . . The cestui que trust
who seeks to keep the thing purchased, and nevertheless
demands the profit improperly made, does not claim to be
recouped part of the price, as price, nor attempt in any way
to vary the contract. The fraudulent agent or trustee who
made the contract knew from the first, or ought to have
known, that it was an incident of equity and fair play at-
taching to such a contract, that an agent or trustee was
liable, upon demand, to hand back any profit clandestinely
1 In an action to recover damages for a breach of the duty to dis-
close interest, the profit might or might not afford a measure of the
damage ; but this presents another question, which will be discussed
later on.
2 23 Ch. D. 795. « Bentinck v. Perm, 12 App. Cas. 652.
68 PROMOTERS AND PROMOTION OF CORPORATIONS.
made by him. Making a vendor return something which
he ought not to have, is not altering the contract, it is
only insisting upon an incident which equity attaches to it.
A contract is not set aside merely because an incident which
is attached to it by equity is enforced, and in the same way,
it seems to me that it cannot be said that, by affirming a
contract, the person who affirms it releases any right which
is not inconsistent with the contract itself." 1
1 29 Ch. D. at p. 808. See Goodin v. Cincinnati Sf Whitewater Canal
Co., 18 Ohio St. 170, as supporting the view taken by Bowen, L, J.
The Cincinnati and Whitewater Canal Company owned and main-
tained a certain canal. Two railroad companies desiring to obtain
control of the canal, and convert it into a railroad track, bought more
than half the stock of the canal company, and with the power thus
acquired, reorganized its board of directors, putting in place of the old
directory, members who were in the interest of the railroad com-
panies, and at their head, as president, a Mr. Lord who was president
of the two railroad companies. Proceedings were then begun against
the canal company by one of the railroad companies for the condemna-
tion of the canal for use as a track. By an agreement between the
boards of directors of the two companies, parties to the proceedings, a
jury was dispensed with, the amount of compensation and damages fixed
at $55,000, and the canal condemned to the use of the railroad com-
pany. The amount named was less than the fair value of the canal.
At this time certain mortgages given by the canal company were in
suit. The railroad companies bought a controlling interest in these
mortgages, and thereupon procured a stay of proceedings and an order
placing the sum of $55,000 in the hands of Mr. Lord, as receiver in the
case, in lieu of the canal property. Mr. Lord then, as president of the
condemning railroad company, paid to himself, as receiver, the $55,000,
thus paying to the canal company the amount of the condemnation
money. The canal was converted into a road-bed by the railroad com-
pany Jast mentioned, and then leased to the other railroad company.
The plaintiffs, as stockholders and creditors of the canal company,
brought their bill in equity making the three corporations parties defend-
ant. The prayer was, that the pretended sale, or condemnation of
the canal property, might be set aside as a fraud upon the minority of
the stockholders and creditors, who did not participate therein ; and
that the railroad companies might be enjoined from using the line and
fixtures of the canal for railroad purposes, and that if neither of these
remedies could be granted, then that the railroad companies might be
ACCOUNTABILITY OF PROMOTEES TO CORPORATION. 69
The opposing view was stated by Fry, L. J., in part as
follows : " That in such a case the principal would have a
right to rescind, there can be no doubt. The option which
the principal had, has, in this case, been exercised by con-
firming the contract with knowledge of the facts, and the
question is whether, after that affirmation, the agent is
liable in any sum to his principal. ... It appears to me
that to allow the principal to affirm the contract, and after
the affirmation to claim, not only to retain the property,
but to get the difference between the price at which it was
bought and some other price, is, however you may state it,
and however you may turn the proposition about, to enable
the principal, against the will of his agent, to enter into a
adjudged to hold the property as trustees, and compelled to account
for the full value of the same to the canal company or to its stock-
holders and creditors.
The Court held that the plaintiffs had, by reason of their laches, lost
the right to the remedy of rescission, the railroad company having
expended large sums of money in constructing works and ways.
" The question of compensation, however," the Court said, " stands
upon a very different basis. The railroad company, having acquired
this property, ought to pay for it a fair value, unless by an agreement
between the parties, such as a Court of Equity will uphold, a less price
has been fixed. Was $55,000, then, a fair value for the property?
And, if not, did the parties by a valid agreement fix upon a less
sum? These, it seems to us, are the only questions remaining in the
case, and we are constrained to answer them in the negative. We
think the price was grossly inadequate, and that the agreement can-
not be sustained in a Court of Equity."
It was accordingly held, that the railroad company was liable to
account to the canal company for the full value of the property taken,
less the sum of $55,000 already paid.
The decision was put on two grounds.
1. The sale was, in effect, a sale by the railroad company to itself.
There was no adverse interest or adversary parties, and the sale was a
mere form. Such a transaction on the part of a trustee does not bind
the cestui que trust.
2. The property of a corporation is a trust fund in the hands of its
directors, for the benefit of its creditors and stockholders.
70 PKOMOTERS AND PROMOTION OF CORPORATIONS.
new contract with the agent, a thing which is plainly
impossible, or else it is an attempt on the part of the
principal to confiscate the property of his agent on some
ground which, I confess, I do not understand. It is said
that, notwithstanding the ratification of the contract,
the principal may claim some profits from the agent be-
cause these profits were made surreptitiously or clandes-
tinely. It appears to me that the answer to that is this,
that whatever the profits are, and however they are to be
measured, these profits result, not from the original con-
tract, but from the affirmance of the contract by the prin-
cipal, and that, therefore, the profits which are made by
the agent are neither clandestine nor surreptitious. . . .
Where the principal had no right to claim the property
as having been purchased on his behalf at the smaller
price, the voluntary ratification of the purchase by the
principal is equivalent, for this purpose, to a new sale by
the agent to the principal after the relation between them
had ceased, and it is only in consequence of the ratification
or adoption that any profits remain in the hands of the
agent. ... It is not a case of profits made clandestinely
or surreptitiously, because those profits have not arisen
from the original transaction alone, but from the adoption
of it by the principal." l The rule laid down by the ma-
jority of the judges in this case was adopted and applied
to promoters in Ladywell Mining Co. v. Brooks.'2
In a recent case in the Supreme Court of Illinois,3 it
appeared that a corporation had purchased from one of its
1 29 Ch. D. at p. 811.
2 35 Ch. D. 400. See also Great Luxembourg Co. v. Magnay, 25 Beav.
586 ; and the opinions of Lord Cairns and Lord Hatherly in Erlanger
v. New Sombrero Phosphate Co., 3 App. Gas. 1218.
3 Higcjins v. Lansingh, 154 111. 301, 378. See also Ely v. Hanford,
65 111. 267.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 71
directors lands which such director had bought before he
became a director. It was held that the corporation could
not recover the profit made by the director on the sale ;
that there could be no rescission without restoring the
land. " It might well be," said the Court, " that he would
not have sold to the company for what the land would
have brought in the market at the time the company
purchased it. He had a right to keep the land until he
could get his price for it, and we know of no power in
a Court of Equity to compel him to sell the land for its
market value." 1
ARTICLE II. — ACCOUNTABILITY OF PROMOTERS FOR GIFTS AND
COMMISSIONS.
§ 63. Explanation of term " promo-
tion money."
64. Accountability of promoters
for promotion money.
65. Hichens v. Congreve, 4 Russ.
562 ; 1 Russ. & Myl. 150, n.
66. Beck v. Kantorowicz, 3 Kay
& J. 230.
67. Lydney & Wigpool Iron Ore
Co. v. Bird, 33 Ch. D. 85.
68. Bagnall v. Carlton, 6 Ch. D.
371.
69. Emma Silver Mining Co. v.
Grant, 11 Ch. D. 918.
70. Emma Silver Mining Co. v.
Lewis, 4 C. P. D. 396.
71. McElheney's Appeal, 61 Penn.
188.
72. Chandler v. Bacon, 30 Fed.
Rep. 538.
§ 73. In re Westmoreland Green &
Blue Slate Co., 2 Ch. (1893)
612.
74. Yale Gas Stove Co. v. Foley,
64 Conn. 105.
75. Right of corporation to re-
cover from vendor promo-
tion money which he has
secretly agreed to pay to
promoter.
76. Accountability to corporation
of persons confederating
with promoters.
77. Right of corporation to re-
cover from promoters gifts
and commissions not ob-
tained at its expense.
78. In re North Australian Terri-
tory Co., 1 Ch. (1892) 322.
1 In Densmore Oil Co. v. Densmore, 64 Penn. 43, it was held that
the promoters of the plaintiff corporation were not liable to account to
it for their profit on a sale to it of property which they had purchased
before they became promoters ; but the case is not of weight on the
question discussed in the text, inasmuch as it appeared that the
72 PKOMOTEKS AND PROMOTION OF CORPORATIONS.
§ 63. Explanation of term " promotion money." — The pay-
ment of promotion money is a common expedient adopted
to secure compensation to promoters. Promotion money
consists of money or shares obtained by a vendor of the
corporation, nominally as a portion of the purchase price
of the property which he sells to the corporation, but in
reality as a sum in excess of the price at which he was
satisfied to sell, to be handed over to the promoters. It is
obtained by intentionally swelling the price for the purpose
of making the corporation itself pay the sum it has been
arranged that the promoters shall receive as their reward
for the part they are to take in the scheme.1
§ 64. Accountability of promoters for promotion money. —
Promoters are in all cases liable to account to the corpora-
tion for promotion money received by them, without the
knowledge and consent of the corporation. It will not
avail them to say that in promoting the corporation they
acted as agents for the vendor, that the money has been
paid to them by the vendor for services rendered to him,
and that it is but reasonable compensation for such
services.
" It was urged," said Cotton, L. J., in Bagnall v. Carlton?
" why should not the vendor pay his agent ? And there
was a sum paid to these gentlemen for services to be ren-
dered to the vendor. I said during the argument, and I
repeat it, that a vendor may pay his agent — nobody doubts
it ; but supposing that agent occupies another position,
that of agent or trustee for the purchaser, can he, as agent
for the purchaser, looking to his position of trustee or agent
promoters disclosed their ownership ; that the price at which they
sold was fair and reasonable, and that all the original shareholders
representing the entire capital stock acquiesced in the transaction at
the time.
1 Arkwright v. Newlold, 17 Ch. D. 301.
2 6 Ch. D. at p. 408.
ACCOUNTABILITY OF PKOMOTEKS TO CORPORATION. 73
for him, retain that which, if he had not occupied that posi-
tion, he might have received, and properly received, from the
vendor ? " And in Pearson's Case,1 Sir George Jessel, speak-
ing of a promoter who sought to retain promotion money
secretly received by him, said : " Can he be allowed to say
in a Court of Equity that he, having received a present
of part of the purchase money, and being knowingly in the
position of agent and trustee for the purchaser, can retain
that present as against the actual purchaser ? " It is im-
material that the purchase was advantageous, or that the
property was worth the price paid. On the theory of
trusteeship, the corporation is entitled to recover the
amount paid to the promoter.2 The cases stated in the
succeeding sections will serve to illustrate the rule as to
promotion money.
§ 65. Hichens v. Congreve.3 — The promoters of the com-
pany, with the connivance of the vendor, obtained, in the
sale of certain mines to the company, a large secret profit
or commission which they divided among themselves, their
agents, and the directors of the company. A bill was
brought against the recipients of the moneys thus divided,
to compel restitution to the company. " Upon the face of
the bill," said the Lord Chancellor, " I cannot help con-
sidering the transactions stated in it to be fraudulent. Sir
William Congreve entered into a negotiation with Flattery
for the purchase of the property in question at the price of
£10,000, for a joint-stock company of which he was to be
a member and a director. After the treaty was begun, the
two Clarkes associated themselves with Sir William Con-
greve in the scheme ; and the negotiations with Flattery
1 5 Ch. D. 336.
8 Pearson's Case, 5 Ch. D. 336 ; Phosphate Sewage Co. v. Hart-
mont, 5 Ch. D. 394.
s 4 Russ. 562 ; 1 Russ. & Myl. 150, n.
74 PROMOTERS AND PEOMOTION OF CORPORATIONS.
went on. The object was the purchase of the Arigna mines,
in order that they might be conveyed to a company by whom
they were to be worked ; and the company was to consist,
not of Congreve and the Clarkes alone, but of a considerable
body of shareholders. It appears that, in the course of the
negotiations, Congreve and the Clarkes became desirous of
making a profit out of the original transaction for the pur-
chase of Flattery's interest in the mines. The first plan
which occurred to them was that a conveyance for the
sum of £10,000 should be made to persons nominated by
them, who were afterward to convey to the company for
£25,000. If such a transaction had taken place, and the
particulars had been concealed from the company, it could
not have been sustained ; for, considering the situation in
which Congreve and the Clarkes stood with reference to
the company, it would have been incumbent upon them to
have communicated the real price at which the mine had
been purchased of Flattery. This objection appears to have
occurred to them ; and, accordingly, another shape was
given to the proceedings. The plan now adopted was this —
that a conveyance should be executed directly from Flattery
to trustees for the company, and although Flattery had
agreed to convey the property for <£ 10,000, that in this
conveyance it should be stated that the purchase money
was £ 25,000, in order that the difference might be put into
the pockets of Sir William Congreve and the two Clarkes,
and some other individuals whom they might choose to
nominate. Such a transaction is so incorrect, that it is
quite impossible that any Court of justice could permit it
to stand ; and if, after the conveyance had been made, re-
citing that the price paid to Flattery was £25,000, a com-
pany of shareholders was formed, who acted upon that
representation, they could in justice be chargeable only
with the money actually paid to Flattery ; and if a larger
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 75
sum was taken out of their funds, they would be entitled
to call on the individuals into whose hands it came to re-
fund it. In substance, therefore, the plaintiffs are entitled
to relief."
§ 66. In Beck v. Kantorowicz,1 — four out of five persons
who entered into a provisional contract to purchase a
mine, which they agreed to sell for their joint benefit to
a company to be formed, were deceived by the fifth, the
defendant, who, assuring them that the vendors would
not take less than £85,000, obtained secretly from the
latter an agreement that, if the contract were perfected
and money paid, he should receive thereout a bonus of
£20,000 for his pains in effecting the sale. Two of the
four, having absolute powers from the rest to sell to
the intended company, then formed themselves with others
into a committee of management, and, still ignorant of
the surreptitious agreement between the defendant and
the vendors, issued a prospectus stating that a contract
had been entered into for the purchase by the company
of the entire property for £125,000, " including all pre-
liminary expenses and a premium to the parties who
incurred the risk and responsibility of the original pur-
chase." After the company had been established, the
required capital paid in, and the provisional contract per-
fected, the agreement for the payment of the bonus of
£20,000 to the defendant was discovered, and a bill
was brought against him to compel an accounting for
it to the company. It was held that the transaction in
relation to the bonus was fraudulent and void, not only
as against the defendant's co-promoters who were asso-
ciated with him in the original purchase, but also as
against the company. It was not enough that the com-
pany got the whole of its bargain ; it had the right, it
1 3 Kay & J. 230.
76 PEOMOTEKS AND PROMOTION OF CORPORATIONS.
was held, to the best bargain which the two members
of the committee of management, had they known the
facts, would have been in a position, acting fairly and
rightly, to give it. The premium alluded to in the pro-
spectus was a premium of £30,000 to be paid from the dif-
ference between the £ 85,000 and the £125,000. Another
premium, payable out of the .£85,000 to one of the pro-
moters alone, in addition to his share of the £30,000,
was never contemplated in drawing up the prospectus.
The defendant, having concealed the arrangement by which
he was to receive an extra premium of £20,000, left it
to his co-promoters to fix the amount to be allowed by
the company as a premium, and permitted them to con-
tract with the company that the premium should be
X 30,000, and no more ; and he was deemed thereby to
have joined with his co-promoters in making such con-
tract, which it was held ought to be enforced in favor of
the company. The defendant was accordingly compelled
to account to the company for his bonus of ,£20,000.
§ 67. Lydney & Wigpool Iron Ore Co. v. Bird.1 — The
facts and the law are thus stated in the opinion of Lindley,
L. J. : —
" James Bird procured the company to be formed and
to be managed in such way as to transfer from the moneys
of the company to himself the sum of £10,800, without
informing the company of that fact. The company were
told that they had to pay £100,000 for the property ;
but they did not know that of that sum £10,800 was
to go into the pockets of the man who got the company
up, and who had in fact increased the purchase price in
order to get that £10,800. . . . That Bird was acting for
the vendors does not free him from liability to account
for the £10,800. In procuring that money he was not
1 33 Ch. D. 85.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 77
acting in their interest, but in his own, for though in
form it was part of the price paid to them, the .£10,800
was in truth to be paid out of the price to him. His
liability to account for this rests on his own conduct,
not on theirs, and as an agent is personally responsible
for his own torts and frauds, though committed by him
for other people, so a person acting as Mr. James Bird
did in getting £10,800 from the company, without dis-
closing the fact, is personally liable to account for it,
although in getting up the company he may have been
acting for the vendors."
§ 68. Bagnail v. Cariton.1 — The owners of property em-
ployed certain persons as their agents to form a corpo-
ration and procure subscriptions for shares to pay for
the property, which they agreed 'to transfer to the cor-
poration for X 290,370. From the proceeds of the sale,
the owners agreed to pay the agents X 85,000. The
corporation was formed, its capital stock was taken by
subscribers, the property was transferred to it, and the
purchase price was paid to the vendors, who, in accord-
ance with their agreement, paid therefrom to their agents
for their services the sum of £85,000. The prospectus
which was sent out referred to the agreement for the
purchase of the property, but made no mention of the
agreement between the vendors and their agents in re-
lation to the payment which the latter were to receive.
Upon discovering the facts, the corporation brought and
maintained an action against the agents to recover their
secret profits. The employment of the agents, as the
Vice-Chancellor observed, was for the purpose of forming
a corporation, and of inducing other persons to subscribe,
in reliance upon a representation which was untrue ; for
it was not true that the purchase money payable to the
1 6 Ch. D. 371.
78 PROMOTERS AND PROMOTION OF CORPORATIONS.
vendors was the sum mentioned in the prospectus, but
it was the purchase money stated, minus the amount to
be paid by the vendors to their agents as a reward for
procuring the subscriptions, and the nominal purchase
money, so diminished, was the true sum which was to
go into the pocket of the vendors. The agents were in
a fiduciary relation to the company ; they combined to
induce the belief that the company was purchasing from
the vendors at the price referred to in the prospectus
which they sent out, when, in fact, by reason of the sum
which they secretly received, the price was less ; and they
were accordingly holden to account for the secret profit,
on the ground that the corporation was entitled to the
benefit of the real price, as negotiated by the defendants
in their fiduciary capacity, which bound them to bargain
for the corporation and not for themselves.
§ 69. Emma Silver Mining Co. v. Grant.1 — The Emma
Mine was an American corporation in which Park and
Stewart were interested. Acting in its behalf, they went
to England to negotiate a sale of its mine, and to promote
a corporation to purchase it. They entered into an agree-
ment with Albert Grant to sell the mine for £1,000,000
to a corporation to be organized for the purpose of buying
it. It was agreed that Grant should be paid by the
vendors for his services twenty per cent, of the amount of
the capital of the corporation. Park, Stewart, and Grant
then organized the corporation as the " Emma Silver
Mining Company, Limited," the mine was transferred to
it at the stipulated price, and the vendors paid Grant the
commission agreed upon, the agreement under which it
was paid not having been divulged. As a promoter, Grant
was compelled to account to the corporation for his secret
profit. He was not the owner of the mine ; he was in a
1 11 Ch. D. 918.
ACCOUNTABILITY OF PKOMOTEES TO CORPORATION. 79
fiduciary relation to the corporation, and bound to act in
its interest in bringing about the purchase of the mine;
yet, while in this position, he contracted to obtain a
secret commission from the vendors of the mine, and
through the prospectus, which was issued by him, made
representations calculated to induce the belief that the
owners of the mine were selling it to the company for
XI, 000,000, when in fact, by reason of the amount to
be secretly paid by them to him, the price was much less
than that. The corporation was entitled to the benefit of
the real price, and accordingly recovered the secret profit
as money received by Grant as a trustee for it.
§ 70. Emma Silver Mining Co. v. Lewis.1 — Defendants
entered into a secret agreement with the owners of a
mine, by which they were to assist in its sale to a pro-
jected corporation, and were to be given therefor by
such owners 250 of the paid-up shares of the corpo-
ration, which were to be issued in part payment of the
purchase price. The defendants allowed themselves to
be referred to in a prospectus for information concern-
ing the mine ; but although they were acquainted with
facts detrimental to the reputation of the mine, they did
not disclose them. It was held that the acceptance by the
defendants of the reference to them in the company's
prospectus imposed upon them a duty to the corporation
to answer candidly such inquiries as might be made by
intending applicants for shares, and that by this accept-
ance they undertook the duty of assisting to float the
corporation by answering the inquiries of persons pro-
posing to take shares in it, and that therefore they were
promoters. Being promoters and in a fiduciary rela-
tion to the company at the time they acquired their
right to receive from the vendors a profit of 250
1 4 C. P. D. 396.
80 PROMOTERS AND PROMOTION OF CORPORATIONS.
shares, that profit belonged to the corporation, and judg-
ment was rendered in favor of the corporation for the
value of such shares, under its claim "for profits re-
ceived by the defendants for the use of and as trustees
for the plaintiff."
§ 71. McEiheney's Appeal.1 — McElheney, the owner of
land, sold it for $12,000 to certain persons who proposed
to form a corporation to which to dispose of it at an
. advance. He then associated himself with these persons
to form a corporation, with the agreement that he was to
share in the secret profit to be derived by them from the
sale to the corporation. The corporation was formed and
the property transferred to it for $40,000, the interest of
the promoters being concealed. Of this sum, McElheney
received over $2,000 as his share of the profit. In the
original sale he was not in a fiduciary position, and so that
transaction stood ; but as to the subsequent sale, he became
a promoter of the corporation, and was not allowed to
retain the secret profit. The receipt of this money, by
means of the fraud practised in his fiduciary relation, was
a wrong to the corporation, and he was compelled to ac-
count for the money. At the time of the sale to the
corporation he did not own the land, but accepted a secret
profit from the vendors of the corporation.
§ 72. in Chandler v. Bacon,2 — the defendants were
promoters and officers of the National Color Printing
Company, which was formed with a view to the pur-
chase of certain patents owned by the United States
Label, Card, and Tag Company. As such promoters,
they entered into an agreement with the latter company
for the sale of the patents by it to the former com-
pany when organized. Under this agreement they were
to receive as a bonus, and did receive from the old
1 61 Penn. 188. 3 30 Fed. Rep. 538.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 81
company, 3,125 shares of the stock of the new com-
pany transferred to it in part payment of the pur-
chase price of the patents. This fact they concealed.
Subscribers for stock in the new company paid $7.00
a share to the company. The defendants, as promo-
ters, obtained their stock without consideration. The
case was that of a secret gift to the promoters of the
company from the vendors of the patents. By reason of
their fiduciary relation towards the new company at the
time of the purchase of the patents by it, they could not
secretly participate in the profit of the transaction, and
were accountable to the company for the profits received
by them.
§ 73. In re Westmoreland Green and Blue Slate Co. 1 —
Poole and Binns were interested in certain quarries which
they were desirous of making over to a company to be
formed for the purpose. They employed Ashworth and
Bland to assist them in getting up the company. By an
agreement of the 16th of February, 1886, Poole, Binns,
Ashworth, and Bland entered into an agreement to hand
over the quarries, among which was that known as Stone
Dykes, to the proposed company in consideration of £2,600
in cash and £4,000 in fully paid-up shares, of which Bland
and Ashworth were each to receive 120. On the same day
a lease of Stone Dykes quarry, a lease of which Poole was
entitled to call for, was granted to the four promoters.
The company was formed. The agreement was made by
the promoters, as vendors, with a trustee for the intended
company, the quarries were transferred to it, and Binns
and Ashworth received their shares. The company was
subsequently wound up. In the course of the winding up,
Bland was examined. He admitted that up to the 16th of
February, 1886, he had no interest in Stone Dykes, and
1 2 Ch. (1893) 612.
6
82 PROMOTERS AND PROMOTION OF CORPORATIONS.
that he had nothing to do with fixing the purchase money.
An order was made that Bland should contribute to the
assets of the company the par value of the 120 shares
received by him. It was contended for Bland that he ren-
dered services to Poole, for which Poole gave him an
interest in the property sold, and he was therefore a real
vendor. The Court, however, regarded the transaction as
"a novel and ingenious attempt to evade the law as to
secret profits." If Ash worth and Bland had been lona fide
owners of shares in Stone Dykes, and had been agreeing to
sell their interests for shares in the new company, the
transaction could not have been impeached. But, as the
Court observed, " This was nothing but a scheme to enable
Bland and Ashworth to get from the company 120 paid-up
shares each for their services in getting up the company."
§ 74. In Yale Gas Stove Co. v. Foley,1 — Foley, the
owner of a patent, entered into an agreement with Wilcox,
by which the latter was to organize a corporation to purchase
and work it, and Foley was to transfer the patent to it for
a certain consideration, one-half of which he was to turn
over to Wilcox for his services. Wilcox proceeded to form
the corporation, and obtained subscriptions for its stock.
He became a director, the purchase of the patent was con-
summated, and one-half of the purchase price was turned
over to him by Foley. He was compelled to account to
the corporation for it. His agreement with Foley was con-
cealed. This agreement contained a provision that upon
the organization of the corporation Foley would assign one-
half of his interest in the patent to Wilcox. In view of
this, it was contended, on the authority of Ladywell Mining
Go. v. Brooks? that Wilcox had acquired an interest in the
patent before he became a promoter of the corporation, and
therefore was not accountable for his profit ; but it was
1 64 Conn. 105. 2 35 Ch. D. 400.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 83
found, as matter of fact, that the patent was transferred by
Foley to the corporation, and that the agreement did not
contemplate the acquisition by Wilcox of any title to the
patent, but simply the organization of a corporation by him,
the sale to it of the patent, and then a division between Foley
and himself of the avails of the sale. The case, therefore,
was that of a promoter of a corporation who has received a
secret commission from a vendor of the corporation.
§ 75. Right of corporation to recover from vendor promo-
tion money which he has secretly agreed to pay to promoter.
— The corporation may recover from the vendor any pro-
motion money which may be in his hands under a secret
agreement that it is to be turned over to a promoter. Thus
in Whaley Bridge Calico Printing Co. v. Grreen? it appeared
that Green had purchased certain calico printing works for
£ 15,000. Green and Smith associated themselves together
as promoters of a company formed for the purchase of the
works from Green, and for the purposes of the negotiations
for such purchase, a contract, which the jury found to be a
sham contract, was entered into between them for the pre-
tended sale of the works by Green to Smith for £20,000.
The company was ultimately formed, its directors being
nominees of Green and Smith and the works were con-
veyed by Green and Smith to the company for £20,000.
It was agreed between Green and Smith that the former
should pay the latter £3,000 out of the purchase money,
but this agreement was not communicated to the directors
of the company when the sale to the company was effected.
It was held that the company was entitled to treat the agree-
ment stated as made by Smith in its behalf, and to enforce
it against Green, and that it could recover from Green so
much of the £3,000 which he had agreed to pay to Smith
as he had not turned over to him. Mr. Justice Bowen said :
1 5 Q. B. D. 109.
84 PROMOTERS AND PROMOTION OF CORPORATIONS.
" In many unexecuted contracts the principal could not
substitute himself in the agent's place, as the person for
whose benefit the contract was to be performed, without
altering substantially the character of the contract. But
when nothing has to be done under the contract but payment
of money to the agent, I think that the principal, under cir-
cumstances such as these, is entitled to stand in the agent's
shoes and compel a payment of money directly to himself."
The promoter himself cannot in such a case enforce a
secret agreement by a vendor to pay him for his services
as a promoter.1 Such an agreement is not in itself illegal,
provided it is not to be kept secret from the company,
when the company is induced to negotiate with the vendor ;
but the element of secrecy makes it corrupt as between the
parties to it.2
§ 76. Accountability to corporation of persons confederating
with promoters. — Persons who are not promoters, but who
knowingly aid and abet promoters in securing secret com-
missions, and share in such commissions, become wrong-
doers, and the corporation may compel them to pay over
to it moneys which they have thus received.8 The corpora-
tion may also, it would seem, recover from such persons
and the promoters, jointly or severally, damages for the
injury caused by the wrong-doing. The abuse of trust of
which the promoters are guilty, with the knowledge and
co-operation of such persons, is a wrong for which they are
all liable, as the injury to the corporation is the result of
their combined action.4
1 Yale Gas Stove Co. v. Wilcox, 64 Conn. 105 ; Harrington v. The
Victoria Graving Dock Co., 3 Q. B. D. 549.
2 Whaley Bridge Calico Printing Co. v. Green, 5 Q. B. D. 109.
8 Emery v. Parrott, 107 Mass. 95 ; Fountain Spring Park Co. v.
Roberts, 92 Wise. 345.
4 Boston v. Simmons, 150 Mass. 461 ; Mayor, frc. of Salford v.
Lever, 25 Q. B. D. 363 ; affirmed 1 Q. B. (1891) 168.
ACCOUNTABILITY OF PROMOTERS TO CORPORATION. 85
§ 77. Right of corporation to recover from promoters gifts
and commissions not obtained at its expense. — The rules in
relation to secret profits obtained by trustees or agents out
of the matter of their trusteeship or agency, having been
quite generally extended to promoters, it would seem that
secret commissions or profits received by promoters from
vendors of property to the corporation, in connection with
the promotion of the corporation, or in consideration of
services rendered by them in the course of such promotion,
ought, speaking generally,1 to be recoverable by the cor-
poration from the promoters, although the purchase price
was not swollen for the purpose of making the corporation
pay such commissions or profits. A trustee is not, without
the knowledge or consent of his cestui que trust, permitted
to make any profit out of the matter of his trusteeship,
beyond his proper remuneration as trustee. A commission
paid him by persons with whom he is dealing, in behalf of
his cestui que trust, may not originally come from the funds
of the cestui que trust ; but, because the trustee is account-
able for it, it does in effect come from and is obtained at
the expense of the cestui que trust, who may accordingly
claim it. " Commission," said James, L. J.,2 " received by
an agent or trustee of a purchaser from a vendor, without
the knowledge of his principal, is, in this Court, a bribe —
it is the profit which the principal has a right to extract
from an agent whenever it comes to his knowledge." It
is not permissible for the vendor secretly to have the agent
of the purchaser in his pay. The promoter is constructively
an agent or trustee for the corporation, and it would seem
that ordinarily the same prohibition ought to be made in
his case.8
1 See remarks of Lindley, L. J., quoted in Sect. 23.
2 Phosphate Sewage Co. v. Hartmont, 5 Ch. D. at p. 457.
8 But see Bagnall v. Carlton, 6 Ch. D. 371, where one of the pro-
moters of a corporation received from a cestui que trust of certain prop-
86 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 78. In re North Australian Territory Co. — In a recent
case,1 the Court passed upon a secret arrangement between
a promoter and a director of a corporation by which the
latter obtained an advantage, at the expense of the corpora-
tion, in the sense mentioned in the preceding section. The
facts in the case were these : Archer was requested by the
promoter of a projected corporation to become a director.
He agreed to do so upon the terms that if he should at any
time desire to part with the shares necessary for him to
take to qualify him as a director, the promoter should
take them off his hands at the price he paid for them.
The corporation was subsequently formed, and Archer
became a director, taking the qualification shares and pay-
ing for them at par out of his own money. His agreement
with the promoter was not disclosed. He afterwards re-
signed his office of director, and, subsequently to his resig-
nation, the promoter, at his request, paid to him the sum
which he had paid for the shares, and accepted a transfer
of them. At that time the shares were valueless in the
market. In the winding up of the corporation, the liquida-
tors asked that Archer be ordered to pay to them the sum
received by him from the promoter, with interest. It was
held that whatever benefit accrued to him under the in-
demnity constituted by his secret agreements with the pro-
moter belonged to the corporation, and that the retention
by him of the proceeds of the indemnity occasioned a loss
to the corporation for which he was accountable, with
interest, upon the principle of Hay's Case and Pearson's
erty sold to the corporation £1500 as a commission agreed to be paid
to him in case he found a purchaser for the property. It was held
that he was not accountable to the corporation for this sum, on the
ground that it was not paid out of the purchase money, but by one of
the parties beneficially interested in the property, in respect of a per-
sonal liability, and out of his own pocket.
1 In re North Australian Territory Co., 1 Ch. (1892) 322.
ACCOUNTABILITY OF PROMOTEES TO CORPORATION. 87
Case.1 The following colloquy between the Court and
counsel for Archer, which occurred during the argument,
is instructive : Fry, L. J. : " Why should not Archer be
accountable for the £500, as property of the company re-
tained by him ? " Counsel : " The real question is, Did the
company suffer loss by what was done ? They never had
the <£500, and therefore cannot be said to have lost it. In
the majority of cases in which a director has been held
accountable to the company he has, in effect, received
money which originally came from the coffers of the com-
pany, as in Hay's Case, and the cases already mentioned."
Bowen, L. J. : " Smith, being in a fiduciary relation to the
company, had no right to give a director a benefit without
the company knowing it. An indemnity against loss is a
valuable consideration." Counsel: "At the time the letter
was written Archer had not taken the shares, and had not
then agreed to become a director." Fry, L. J. : " Would
an honorable man assent, as Archer did, to accepting this
indemnity, on the terms that he was to keep it secret ? If
it was not actually dishonest, it seems to me to be a very
improper course of proceeding." Bowen, L. J. : " Is it
right that the wolf should give a sop to the watch-dog,
without his master's leave?"2
1 Supra, Sect. 64.
2 The case of a solicitor who is a trustee under a will or deed which
contains no power to charge for professional services, furnishes an ex-
ample of the severity of the rule applied to trustees. Such a so-
licitor trustee is not entitled to fees for legal services rendered by him
in the administration of the trust. In Broughton v. Broughton, 5 De
G. M. & G. 160, in which this question was presented, Lord Cran-
worth said: "The rule applicable to the subject has been treated
at the bar as if it were sufficiently enunciated by saying that a
trustee shall not be able to make a profit out of his trust; but that is
not stating it so widely as it ought to be stated. The rule really is
that no one who has a duty to perform shall place himself in a situa-
tion to have his interests conflicting with that duty. . . . No person
88 PROMOTERS AND PROMOTION OF CORPORATIONS.
in whom fiduciary duties are vested shall make a profit of them by
employing himself, because in doing this he cannot perform one part
of his trust, namely, that of seeing that no improper charges are
made." See Sherman v. White (Illinois), 28 Chicago Legal News, 199,
holding that a trustee cannot be allowed to retain commissions, re-
ceived by him as a member of a board of underwriters, for placing in-
surance on the trust estate, although it appears that he could not have
obtained insurance at any less rate. In a recent valuable little work
on trustees, the author, speaking of the rule referred to, says: "It
has been applied by the Courts of Equity fearlessly — not only to
trustees of the kind we are now speaking of, but to all persons who
stand in a fiduciary relationship to others. Nor is the present time
one when either Parliament or judges are likely to relax the pressure
of the rule in any single respect. The habit of secret commissions
given and taken every day (so at least it is confidently asserted) by
persons in good positions, who account themselves, and are accounted,
honest men, is one to be scorned by Courts of law. It is the plain
duty of legislators and judges to hand down from one generation to
another (so far as they can) untarnished, and of full authority, those
principles of absolute integrity to those who employ you, or on whose
behalf you profess to act, which are not only compatible with pros-
perity, but are essential to commercial greatness and well established
success." Bissell on the Duties and Liabilities of Trustees, 66.
PKOFITS RECOVERABLE BY CORPORATION.
89
CHAPTER IV.
MEASURE OP PROFITS RECOVERABLE BY CORPORATION. —
STATUTE OF LIMITATIONS AS A BAR TO SUIT FOR THEIR
RECOVERY. — SURVIVAL OF CAUSE OF ACTION.
i 79. View that net profit only re-
coverable.
80. Modification of this view. —
No allowance for expendi-
tures ultra vires the corpo-
ration.
81. English decisions based on
provisions of the Compa-
nies Acts.
82. Interest recoverable.
83. Rule when gift, commission,
or profit is in form of shares
of corporation's stock.
84. Statute of Limitations as a bar
to suit to recover profits.
§ 85. Metropolitan Bank v. Heiron,
5 Ex. D. 319.
86. Statute runs from time of dis-
closure to or knowledge by
corporation .
87. In re Fitzroy Bessemer Steel
Co. v. Smith, 60 L. T. Rep.
N. s. 144.
88. Right of action not divested
short of period of statute
without accord and satisfac-
tion or release under seal.
89. Right of action survives
against personal represen-
tatives of promoters.
§ 79. View that net profit only recoverable. — When a
promoter is called upon to account to the corporation for
promotion money, or, in case he is a vendor of the corpo-
ration, for the profit made by him in the sale, he cannot,
according to the English decisions, claim as of right any
commission or payment for his services in promoting the
corporation, but may retain the amount of his proper dis-
bursements for costs and expenses in such promotion. In
Emma Silver Mining Co. v. Grant} it was said by Sir
George Jessel, Master of the Rolls, that the broad view of
the case is to take the whole transaction, and see how much
more money the promoter has got than he would have had,
if he had never entered into it at all. Adopting this view,
the Master of the Rolls held that, if a promoter has ex-
pended money in good faith to promote the corporation,
1 11 Ch. D. at p. 938.
90 PROMOTERS AND PROMOTION OF CORPORATIONS.
the Court will not inquire into the propriety or morality
of his expenditures ; and he allowed Grant for money paid
by him to persons who procured directors for the corpora-
tion, for shares furnished to qualify the directors, for money
paid to brokers to sustain the price of the shares in the mar-
ket, to persons connected with the press for puffing or lau-
datory statements respecting the corporation and its mine,
and to certain brokers as a consideration for their waiver of
an option to purchase shares.1
§ 80. Modification of this view. — No allowance for expendi-
tures ultra vires the corporation. — The view thus laid down
has not, however, been accepted without qualification. It
has been modified to this extent, that the expenditures to
be allowed must be such as do not involve a misapplication
of the corporation's funds, or amount to acts ultra vires the
corporation.2 In Lydney $ Wigpool Iron Ore Co. v. Bird?
the Court of Appeal, while allowing the defendant Bird for
expenses incurred by him in the promotion of the company,
such as advertisements, printing, solicitors' and brokers'
charges, refused to allow him the sum of £5,000 which he
had paid for a guarantee of the subscription of the capital
of the company. In a later case,* the same Court held that
it was not ultra vires the corporation, nor an improper ex-
penditure of its funds, to pay brokers a reasonable and usual
commission for placing the corporation's shares. The case
was distinguished from Lydney $ Wigpool Iron Ore Co. v.
Bird, Lindley, L. J., saying of that case : " The money
there sought to be recovered was not money which was paid
1 See also Bagnall v. Carlton, 6 Ch. D. 371.
a In re Faure Electric Accumulator Co., 40 Ch. D. 141; Capel v.
Sims Ships Compositions Co., 57 L. J. Ch. 713; Lydney &f Wigpool
Iron Ore Co. v. Bird, 33 Ch. D. 85.
8 33 Ch. D. 85.
* Metropolitan Coal Consumers' Association v. Scrimgeour, 2 Q. B.
(1895) 604.
PROFITS RECOVERABLE BY CORPORATION. 91
by the company for placing shares. There was a person
named James Bird, who was a promoter of the company,
and he secretly made a profit, at the expense of the com-
pany, of £10,800. He was made liable for it. He said,
4 Well, I have spent £5,000 as a consideration, which I
gave to William Bird for guaranteeing me that shares
should be taken up in this company,' and we disallowed
James Bird that bill. The whole thing was a juggle from
beginning to end ; and we disallowed it on the ground that
it was an improper transaction, — and so it was. It has
nothing whatever to do with, and is far away and remote
from, such a case as this where there is no juggle and no
impropriety at all."
§ 81. English decisions based on provisions of the Companies
Acts. — In reading the English cases on this subject, it
should perhaps be noted that under the English Companies
Act,1 the directors of a company may pay all expenses in-
curred in getting up and registering the company. Yet,
while the Act confers the power, it does not impose an obli-
gation to pay such expenses when incurred by promoters ;
and it would seem that, in the absence of legislation of the
nature stated, payment from the funds of the corporation of
the fair and reasonable expenses incident to its formation
is not improper or beyond the powers of the corporation.
Assuming this to be so, it would appear to be equitable, in
an accounting between the promoter and the corporation,
to allow the promoter all legitimate expenses incurred by
him in the work of organization and securing the capital.2
1 Table A. paragraph 55.
2 In Sherman v. White (Illinois), 28 Chicago Legal News, 199, a
trustee who had, as a member of a board of underwriters, received com-
missions for placing insurance on the trust estate, was compelled to ac-
count for them, but was allowed in the accounting six hundred dollars
paid by him for membership dues in the underwriters' association dur-
ing the period in which he received the commissions.
92 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 82. Interest recoverable. — When one has in his hands
money of another, which he has obtained by fraud, or
wrongfully retains money which he ought to pay over to
another, interest may be recovered thereon, by way of dam-
ages, for the breach of an implied promise to pay it over.
Promoters who are accountable to the corporation for
profits or commissions are accordingly chargeable with
interest on that which is withheld by them from the time
it is withheld.1
§ 83.- Rule when gift, commission, or profit is in form of
shares of corporation's stock. — When the profit or commis-
sion is in the form of shares of the capital stock of the cor-
poration, the corporation may, at its option, pursue one of
three courses. It may compel the promoter, if he has not
parted with the shares, to transfer them to it, and to account
for any dividends he may have received thereon.2 Al-
though he has not transferred the shares, or sold them at a
profit, the corporation may compel him to pay the highest
market value attained by the shares between the time of
their delivery to him and the time when knowledge of the
fact of such delivery came to the corporation, with interest.
The right to such recovery rests upon the theory that the
corporation has been deprived of the right of placing the
shares with other persons, and that for the loss occasioned
thereby the promoter is accountable.8
1 Mason v. Waite, 17 Mass. 560 ; Manufacturers' National Bank v.
Perry, 144 Mass. 313 ; Greenly v. Hopkins, 10 Wend. 96.
2 Chandler v. Bacon, 30 Fed. Rep. 538.
8 McKay's Case, 2 Ch. D. 1 ; Pearson's Case, 5 Ch. D. 336 ; De
Ruvigne's Case, 5 Ch. D. 306 ; In re Fitzroy Bessemer Steel Co., 50
L. T. Rep. N. s. 144 ; Eden v. Ridsdale's Ry. Lamp & Lighting Co.,
23 Q. B. D. 371 ; Huntington if Broad Top. Ry. fr Coal Co. v. English,
86 Penn. 247 ; North v. Phillips, 89 Penn. 250 ; Galigher v. Jones, 129
U. S. 193; Wright v. Bank of the Metropolis, 110 N. Y. 237. The rule
of highest intermediate value has been in many jurisdictions adopted in
PROFITS RECOVERABLE BY CORPORATION. 93
Thus, in Chandler v. Bacon,1 the promoters of a corpora-
tion received as a secret gift from the vendor of the corpo-
ration certain of the shares issued to such vendor in payment
for a patent transferred by him to the corporation. It ap-
peared in evidence that a large amount of the stock of the
company had been taken by the public at a uniform price
of $7.00 per share. It was held that the promoters must
account to the corporation for their stock at this price.
In Nant-y-Cilo $ Blaina Iron Works Co. v. Grave,2 a
promoter improperly obtained shares of the corporation
in 1871, and held them when suit was brought against him
by the corporation in 1877. They were then worth £1 per
share. The highest market price which they had attained
in the interval was <£80. It was held that the promoter
must account for the shares at the price of X80, with inter-
est from the time that he received them. If the promoter
has sold the shares, the corporation may require him to pay
the amount he has realized therefrom, and the amount of
dividends he has received with interest.3
When the promoters have combined or confederated in
a scheme to secure secret profits improperly at the expense
of the corporation, they may be held jointly liable in a suit
by the corporation to recover such profits.4
§ 84. Statute of limitations as a bar to suit to recover
profits. — It is true that no time will bar a suit by a cestui
the ordinary action for conversion of shares of stock. In some States
it has been repudiated. The objection urged is that ordinarily it is
mere conjecture that the owner would have obtained the highest in-
termediate value ; the presumption that the owner would have dis-
posed of his shares when they reached the highest price, would rarely,
it is said, accord with fact. The subject is well treated, and the cases
are collected and classified in Hale on Damages, 186, et seq.
1 30 Fed. Rep. 538.
2 12 Ch. D. 738.
8 In re Fitzroy Bessemer Steel Co., 50 L. T. Rep. N. s. 144.
4 Chandler v. Bacon, 30 Fed. Rep. 538.
94 PROMOTERS AND PROMOTION OF CORPORATIONS.
que trust against his trustee when the trustee has a fund in
his possession and wrongfully wastes it. Express trusts
are not within the Statute of Limitations, because the pos-
session of the trustee is presumed to be the possession of
the cestui que trust until the trustee duly discharges him-
self.1 But the statute is available as a bar in cases of con-
structive trusts, as where one has received money in his
own right, and is afterwards by construction held to have
received it as a trustee for another whose right to it is thus
established.2 Money or property improperly obtained by a
promoter as a profit, gift, or commission, is not the money
or property of the corporation unless it is made so by a
decree founded on the act by which the promoter obtained
the money or property. The case of the promoter is there-
fore that of a constructive trust. His liability is a debt
differing from ordinary debts only in the fact that it is
equitable ; and in dealing with equitable debts of such a
nature, Courts of Equity follow by analogy the provisions
of the Statute of Limitations.3
§ 85. In Metropolitan Bank v. Heir on,4 — an action was
brought by a company in 1879 against a former director to
recover £250, on the ground that the defendant had re-
ceived that sum from a debtor to the company as a bribe to
induce him to use his influence to obtain favorable terms of
compromise for the debtor. The allegation that the bribe
had been given, had, in 1872, been brought before the di-
rectors at a board meeting ; they had investigated it and
came to the conclusion that the charge was unfounded ;
and it did not appear that they had acted in the matter
1 Speidel v. Henrici, 120 U. S. 377 ; Hovenden v. Lord Annesley, 2
Sch. & Lef. Ch. 621.
2 Price v. Mulford, 107 N. Y. 303 ; Baxter v. Moses, 77 Me. 465 ;
AshursCs Appeal, 60 Penn. 290.
8 Metropolitan Rank v. Heiron, 5 Ex. D. 319.
4 5 Ex. D. 310.
PROFITS RECOVERABLE BY CORPORATION. 95
otherwise than in good faith. It was held that the action
was barred by the Statute of Limitations.1
§ 86. When statute begins to run. — The statute rims
from the time the facts are made known to or discovered
by the corporation. In cases of fraud the statute ordinarily
runs from the time of the commission of the fraud, unless
there has been some affirmative act of concealment; but
when a fiduciary relation exists between the parties, it is
the duty of the party complained of to make disclosure, and
silence amounts to concealment.2 It is the duty of a pro-
moter who has wrongfully received a profit, gift, or com-
mission to disclose the fact. His omission to do so will
prevent the Statute of Limitations from running in his
favor against the corporation, until the facts are discovered
by it. The facts must be made known to the directors, or,
if they are implicated, to the shareholders.
§ 87. In In re Fitzroy Bessemer Steel Co. v. Smith,3 — a
promoter of the company made an agreement with the
syndicate of vendors, by which he was to receive 1,000 B
shares in the company, in consideration of his taking or
placing 500 A shares. The agreement was subsequently car-
ried out. Notice of this transaction was, after the formation
of the company, given to the directors ; but the board which
received the notice consisted of persons more or less impli-
cated in the transaction, and no action was taken in the
matter. The company was afterwards wound up, and the
liquidators sought to recover from Smith the value of
the 1,000 B shares, on the ground that his having received
them under the circumstances was a misfeasance against
the company. It was contended that the claim was barred
1 See also De Bussche v. Ah, 8 Ch. D. 286.
2 Atlantic Bank v. Harris, 118 Mass. 147 ; Wickersham v. Lee, 83
Penn. 416.
8 50 L. T. Rep. N. s. 144.
96 PROMOTERS AND PROMOTION OF CORPORATIONS.
by the Statute of Limitations, the company having through
its directors received notice of the transaction more than
six years previously. It was held that, though notice to
the directors is prima facie notice to the company, yet it
was not notice in this case, it being certain that the direc-
tors would not communicate the information to the stock-
holders, and that accordingly the claim was not barred by
the statute.
§ 88. What -will divest right of action within period of
statute. — While the Statute of Limitations may be a bar
to a suit by the corporation to recover secret profits, when
the corporation is entitled to claim such profits, the right of
action vested in it, cannot, for a period short of the statute,
be divested without accord and satisfaction or a release
under seal. An express promise not to sue could not in
itself constitute a bar to proceedings, for the promise would
be without consideration and therefore not binding. But
there might be estoppel by conduct.1
§ 89. Right of action survives against personal representa-
tives of promoters. — A claim for secret profits against a
promoter, being founded on breach of a fiduciary duty, will
survive against the personal representatives of the pro-
moter.2 And this holds good as against a promoter who
has not himself participated in such profits, but has been
a party to the scheme by which they were obtained, and
were appropriated by his co-promoters. The principle on
which this rests is illustrated in Walsham v. Stainton?
Here A. and R, who were in a fiduciary relation to a
1 De Bussche v. Alt, 8 Ch. D. 286.
2 New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73 ; Ramskill
v. Edwards, 31 Ch. D. 100 ; Phillips v. Horn/ray, 24 Ch. D. 439, 11
App. Cas. 466 ; Batthyany v. Walford, 36 Ch. D. 269 ; Concha v.
Murietta, 40 Ch. D. 543 ; Warren v. Para Rubber Shoe Co., 166 Mass.
97.
8 1 De G. J. & S. 678.
PKOFITS RECOVERABLE BY CORPORATION. 97
partnership, combined together fraudulently to obtain the
shares of the partners at an undervaluation. A. was a party
to the fraud, but the whole benefit of it accrued to B. It
was held that A.'s estate was liable, though not benefited.1
1 An action for damages for false and fraudulent representations
(e. g., in a prospectus issued by the directors of a corporation inviting
subscriptions for shares) will not, in the absence of a fiduciary rela-
tion, survive against the personal representatives of the person com-
mitting the fraud, unless they have received an estate benefited by the
fraud. HamUy v. Trott, 1 Cowp. 371 ; Peek v. Gurney, L. R. 6 H. L.
377, 392-395; Houghton v. Butler, 166 Mass. 547. See the valuable
English and American Notes in 2 English Ruling Cases, at p. 14.
The right of action of a person who has been deceived by fraudulent
misrepresentations survives, if an injury has accrued to his personal es-
tate. Twycross v. Grant, 4 C. P. D. 40 ; 48 L. J. (Q. B.) 1 ; Hatchard
v. Mege, 18 Q. B. D. 771. In most of the States there is legislation
as to the survival of actions, which affects the common-law rule.
98
PROMOTERS AND PROMOTION OF CORPORATIONS.
CHAPTER Y.
BREACH OP DUTY OR FRAUD BY PROMOTERS AS GROUND
FOR RECOVERY OF DAMAGES FROM THEM BY CORPORATION,
AND FOR PROCURING THE SETTING ASIDE OF EXECUTED
CONTRACTS ENTERED INTO BY IT.
ARTICLE I. — Liability of Promoters in Damages to the
Corporation.
ARTICLE II. — Rescission by Corporation of Contracts
entered into by it with or through Promoters.
ARTICLE I. — LIABILITIES OP PROMOTERS IN DAMAGES TO THE
CORPORATION.
§ 90. Rule laid down in Taylor on
Corporations.
91. Damages recoverable for
breach of duty damnifying
corporation.
§ 92. Instances where promoters
liable to corporation in
damages.
§ 90. Rule laid down in Taylor on Corporations. — The
author of a work of authority on corporations,1 observing
that " the relationship existing between the promoters and
the corporation as subsequently organized is a fiduciary
relationship regulated by legal and equitable principles
in many respects similar to those applicable to the re-
lationship of agency," adds, "but not in every respect,
for the corporation, in the nature of things, not having
entrusted its property to the promoter, never having em-
ployed the promoter to act for it, and not being bound
by his contracts unless it ratifies or voluntarily accepts
the benefit of them after its incorporation, could ordinarily
bring no such action against a promoter for misfeasance
1 Taylor on Corporations, 2d ed., Sect. 82, n. 1.
BREACH OF DUTY OR FRAUD BY PROMOTERS. 99
as a corporation could bring against one of its officers.
A promoter, to be sure, would be liable to the corporation
in damages for any fraud committed by him, in contract-
ing with it, of a nature that would render one individual
liable under ordinary circumstances to another. But
usually the only action maintainable by a corporation
against its promoters is an action to make them disgorge
secret profits."
§ 91. Damages recoverable for breach of duty damni-
fying corporation. — It would seem, however, that mis-
feasance by a promoter, when in the nature of a breach
of duty and an act resulting in pecuniary loss to the
corporation, will ground an action by the corporation
for damages. When a trustee commits a breach of duty,
as, for example, by accepting a secret bribe, he cannot
acquit himself of all obligation by giving up that which
he has received. He must pay the damages occasioned
by his wrongful conduct.1 Special duties similar to some
of those imposed upon trustees rest upon promoters. It
is a familiar principle that when the law imposes upon
one a duty, any person to whom that duty is owing, and
who suffers special injury from its breach, may maintain
an action to recover his damages. If the promoter of
a corporation violates his duty to it to its injury, there
would seem to be no reason why it should not be per-
mitted to recover damages from him. It is true that
the corporation is not bound by the promoter's contracts
made for it prior to its formation unless it adopts them
after it comes into existence ; but the corporation may be
led to adopt such contracts by the promoter's non-disclosure
of facts which it was his duty to the corporation to dis-
close. Again, the corporation may not have entrusted its
property to the promoter, nor have employed him to act
1 Nant-y-Glo £ Blaina Iron Works Co. v. Grave, 12 Ch. D. 738, 747.
100 PROMOTERS AND PROMOTION OF CORPORATIONS.
for it ; but the promoter, in fact, takes charge of its inter-
ests, and, in so doing, the law imposes upon him certain
duties; if he violates these duties, to the injury of the
corporation, it would seem that he should be liable to
it in damages.1
§ 92. Instances where promoters liable to corporation in
damages. — Promoters are of course liable in damages to
the corporation for their frauds under the same circum-
stances that individuals not promoters would be liable.
If a sham contract of sale is made to a promoter for
a fictitious price, whereby the corporation is induced
to pay more than it would otherwise have done, an action
for deceit may be maintained by the corporation against
the promoter.2 The promoters may corrupt the govern-
ing body of the corporation, so as to get the corporation
to enter into a contract or to purchase property, or they
may aid and abet the corporate officers in defrauding
the corporation. In such cases, the principle applied in
Mayor, $c. of Salford v. Lever,3 a case of agency, may
1 Bentinck v. Fenn, 12 App. Cas. 652 ; Buckley on the Companies
Acts, 5th ed., 545; Boston v. Simmons, 150 Mass. 461. In England,
on the winding up of a company, the Court may, under the procedure
provided by the Companies Act, 1890, assess damages against pro-
moters for misfeasance, and in the course of the proceedings, a public
examination of the promoters by the official receiver may be had, in
which creditors or shareholders may take part for the purpose of
eliciting information to be utilized in pending or future litigation
against the promoters. While this act gives no new rights, and sim-
ply provides a summary mode of enforcing rights, which must other-
wise have been enforced by action (Buckley on the Companies Acts,
5th ed., 378), it removes a great obstacle to successful attacks upon
promoters by shareholders, namely, the difficulty in getting at the
facts before beginning legal proceedings. For an explanation of the
word " misfeasance" as employed in the Act, see Re Kingston Cotton
Mill Co., 2 Ch. (1896) 279.
2 Whaley Bridge Calico Printing Co. v. Green, 5 Q. B. D. 109.
8 25 Q. B. D. 363, affirmed 1 Q. B. (1891) 168.
BREACH OF DUTY OR FRAUD BY PROMOTERS. 101
be invoked. There the defendant offered to sell coals to
the plaintiff corporation, through its agent, at a certain
price ; but the agent refused to buy at the price at which
the defendant was willing to sell, unless the defendant
would add to the price a shilling- a ton, which, when
the bills were paid by the corporation, was to go to the
agent. The fraud on the part of the defendant was this,
— that " he allowed and assisted the agent of the corpo-
ration to put down a false figure as the price of the coals,
in order to cheat the corporation out of a shilling a ton,
which was to be paid to their own agent ; and the way
it was done was this, — the defendant sent in a bill to the
corporation for the whole price thus increased. He got
the advanced price into his hands, and then turned it
over to the agent." 1 It was held that the corporation
had two distinct and cumulative remedies, — to recover
from the agent the bribe which he had received, and
to recover from him and the vendor, jointly or severally,
damages for the injury caused by the fraud,2 — and that
in a suit for damages against the vendor no deduction
was allowable in respect4 of what the company might
recover from the agent.3 It must appear, however, in order
to render a person who has contracted with a corporation,
but who is in no fiduciary relation to it, liable to the corpo-
ration for giving a share of his profit to its promoters,
that there was fraud on his part. If he did not know,
or have reason to know, that the promoters would not make
proper disclosure to the corporation, he cannot be held.4
1 Per Lord Esher.
2 See also Grand Rapids Safety Deposit Co. v. Cincinnati Safe 8f
Lock Co., 45 Fed. Rep. 671.
8 Lands Allotment Co. v. Broad, 13 Reports, 699.
4 Cheney v. Gleason, 125 Mass. 166.
102 PROMOTERS AND PROMOTION OF CORPORATIONS.
ARTICLE II. — RESCISSION BY CORPORATION OF CONTRACTS EN-
TERED INTO BY IT WITH OR THROUGH PROMOTERS.
1 93. Rescission an elective rem-
edy.
94. Rescission of contracts on
ground of breach of duty
by promoters.
95. Erlanger v. New Sombrero
Phosphate Co., 3 App. Gas.
1218.
96. Atwool v, Merryweather, 5
Eq. 464, n.
97. Phosphate Sewage Co. v.
Hartmont, 5 Ch. D. 394.
98. Caveat emptor not applicable
to dealings by promoters
with corporation.
§ 99. Rescission by corporation of
transactions with third per-
sons on ground of partici-
pation by such persons in
frauds of promoters.
100. Election by corporation to con-
firm or rescind contract.
101. Right to rescind barred by
laches.
102. Return of consideration re-
ceived ordinarily condition
precedent to right to re-
scind. Exceptions.
103. Partial rescission not allowed.
104. Burden of proof in suit for
rescission.
§ 93. Rescission an elective remedy. — When a sale of
property to or a contract with a corporation has been
made by or through its promoters, and in the making of
such sale or contract the promoters have obtained secret
bribes or profits, or have abused their power or influence,
the corporation may, under certain circumstances, as we
have seen, without repudiating the sale or contract, recover
from the promoters the money received by them as bribes
or profits, or hold them responsible in damages. But the
corporation is not confined to these remedies. In a proper
case, it may, in place of pursuing such remedies, if it so
elects, and if it acts seasonably, procure the transaction to
be set aside altogether, and get back that with which it has
parted.
§ 94. Rescission of contracts on ground of breach of duty of
promoters. — When the corporation is formed for the pur-
pose of purchasing property from or entering into a con-
tract with the promoters, the interests of the promoters
and of the corporation necessarily conflict. Nevertheless,
BREACH OF DUTY OR FRAUD BY PROMOTERS. 103
in such case, the promoters are not absolutely disquali-
fied from dealing with the corporation ; but being in a
position of trust and confidence in relation to it, they must
show, when their dealings are called in question, that they
have not used their position for their own benefit only, but
have acted with that degree of fairness and with that re-
gard for the protection of the interests of the corporation
which a Court of Equity exacts from persons in the rela-
tion which they occupy. They must fully disclose their
position and interest and all material facts within their
knowledge ; and, as a rule, they must see that the directors
who are to pass upon the transaction in question are com-
petent and disinterested persons, who can and do exercise
an intelligent and impartial judgment in the matter.1 If
they fail in these duties, the corporation is entitled to have
transactions with them rescinded.
§ 95. Erlanger v. New Sombrero Phosphate Co.2 — is the
leading case on this point. A sale of property to the
company named in this case was rescinded on the follow-
ing facts. A syndicate, of which Baron Erlanger, a Paris
banker, was at the head, purchased for £55,000, from the
official liquidator of an insolvent company, an island said
to contain valuable mines of phosphate. Erlanger, who
managed the business of this purchase, then proceeded to
get up a company to take over the island and to work the
mines. He named five persons as directors. Two were
abroad ; of the three others, two were persons entirely
under his control, and were furnished by him with the
shares necessary to qualify them as directors. One . of
these two persons had acted as a business agent for
Erlanger, and the other was a personal friend. The sale
of the island was made, nominally, by a person who had
really no interest in the island, and was made to the
1 See Sect. 26, et seq. 2 3 App. Cas. 1218.
104 PROMOTERS AND PROMOTION OF CORPORATIONS.
director who was the business agent of Erlanger, and who
appeared as the purchaser for the company. The price
•was £80,000 in cash and £30,000 in paid-up shares of
the company. The two directors, with whom, through
Erlanger's arrangement, a third person (one entirely un-
informed on the subject of the original purchase and the
subsequent sale) was associated, assuming to act as direc-
tors of the company, accepted, on its behalf, the purchase.
The price paid by the syndicate for the island was not
disclosed. Subsequently, these facts coming to light, the
company filed a bill to rescind the purchase ; and a decree
for rescission was made on the ground that the promoters
had made an unfair and unreasonable use of the position
of advantage in which they stood in relation to the com-
pany, and had withheld from the company the needful
protection to which it was entitled at their hands in the
transaction in question. " I cannot," said Lord Cairns,
" but regard a meeting at which two of the principal direc-
tors did not and could not attend, at which one who did
attend and take part in the deliberations was at once a
person buying and selling, where the legal adviser present
and assisting was virtually another vendor, and where the
two remaining directors are not shown to have had the
means of exercising, or to have exercised, any intelligent
judgment on the subject, as little else than a mockery and
a delusion."
§ 96. In Atwool v. Merry weather,1 — the facts were these :
Merryweather was the owner of mining property, which he
proposed to sell for £4,000. He applied to Whitworth to
assist him in his project. The scheme concocted between
them was that a company should be formed for the pur-
pose of purchasing and working the mines, which were to
be sold to such company for £7,000. Of this money,- it
1 5 Eq. 464, n.
BEEACH OF DUTY OR FRAUD BY PROMOTERS. 105
was agreed that Meriyweather should get .£4,000, while
the remaining £ 3,000 was to be paid to Whitworth for his
assistance in getting up the company. This agreement
was concealed. The company was formed under the
promotion of Merryweather and Whitworth, who sent out
a prospectus stating that the company had been formed to
purchase and work the mines in question, and that the
purchase price had been fixed at £7,000, of which £4,000
was to be paid in cash and £3,000 in shares of the com-
pany. Whitworth became a director. The company hav-
ing received £3,940 for subscriptions for shares, paid the
same to Merryweather, and transferred to him six hundred
shares of its capital stock in part payment of the alleged
price of the mines. Upon the discovery of the agreement
between Merryweather and Whitworth, certain stockholders
of the company brought a bill to rescind the contract of
sale and purchase. A decree was made, setting aside the
contract of sale and purchase, and directing that the pur-
chase money should be repaid with interest and the share
certificates given to Merryweather delivered up. Vice-
Chancellor Wood said : " Upon such a transaction the
Court will hold that the whole contract is a complete
fraud. I do not in the least say that where persons with
their eyes open know that the agent who secures them the
bargain is going to take money for it, that would not be all
right enough. If the company knew this gentleman was
to have this amount as promotion money, well and good.
. . . But here it is a simple fraud, and nothing else.
Merryweather, knowing Whitworth's position with regard
to the company, and that as an honest man Whitworth
was bound to tell the company what price he bought the
mines for, agreed that the mines should be sold to the com-
pany for £7,000, and that the real price, £4,000, should
not be disclosed to the company."
106 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 97. In Phosphate Sewage Co. v. Hartmont,1 — the
owners of a concession from a foreign government entered
into a scheme to organize a company to buy the concession,
which, as they knew, was, on account of their default, sub-
ject to forfeiture. They and others who were promoters of
the company, and knew of the defect in the title, brought
about a sale to trustees for the projected company. The
trustees transferred the concession to the company when
formed, arid secretly received to their own use a portion of
the purchase money as a reward for their share in the
transaction. The solicitors of the company were also
solicitors for the vendors, and although they knew of the
infirmity in the title, they concealed it, and the trustees
neglected to secure proof as to whether the title was good.
It was held that the company was entitled to a rescission
of the purchase, and to a recovery of the money paid to the
trustees, as money received by them as a bribe for not per-
forming their duty.
§ 98. Caveat emptor not applicable to dealings by promoters
with corporation. — Promoters are in a fiduciary relation to
the corporation which they promote. When a fiduciary
relation exists between parties, and there is any misrepre-
sentation or concealment of a material fact, or any just
suspicion of artifice, in a transaction between them or in
dealings by one in behalf of the other, Courts of Equity
will interpose, if the rights of innocent third parties have
not intervened, and set the transaction aside. The maxim
caveat emptor does not apply here, and the rules pertaining
to representations as to value, cost, opinion, etc., in cases
where the parties deal at arm's-length, are not applicable.2
§ 99. Rescission of transactions with third persons on ground
of participation by such persons in frauds of promoters. —
1 5 Ch. D. 394.
2 Cheney v. Gleason, 125 Mass. 166 ; Cortes v. Thanhauser, 45 Fed.
Rep. 731.
BREACH OF DUTY OR FRAUD BY PROMOTERS. 107
When a sale of property by a non-promoter owner to a
corporation has been brought about by or through the in-
tervention of its promoters, and the promoters have, with
the participation or connivance of the owner, obtained
secret profits or bribes, or abused their power or influence
in the transaction, the corporation is entitled to have the
sale rescinded. Thus, in Lindsay Petroleum Company v.
HurdJ- A. having two parcels and B. one parcel of land
supposed to contain petroleum, it was agreed between them
and C. that C. should pay them $10,000 for the land, if he
succeeded in forming a company for the purpose of work-
ing the oil springs, and in inducing such company to pay
him $13,750, as the price of the land, out of which he was
to keep $8,750. B., accordingly, assuming the character of
owner, gave to C. a conditional promise to sell the land to
him for $13,750, provided the offer was accepted within a
certain time. A. wrote a letter, meant to be shown, and
which was shown, to persons intending to become members
of the proposed company, in which letter he recommended
the purchase, not disclosing that he had any interest therein.
A. and B. actively co-operated with C. throughout the whole
transaction. The company, in ignorance of the agreement
with C., accepted the proposal, but, having discovered the
fraud, sued for a rescission of the contract. It was held
that the contract must be wholly rescinded, the price re-
paid, and the land reconveyed. " It is difficult," said Sir
Barnes Peacock, " to conceive anything more clearly
fraudulent than for the owners of property to arm a person
whom they know to be about to endeavor to find others to
take up a purchase, whether as a company or otherwise,
with a document purporting to be an offer made by them-
selves, as owners, to sell at a fictitious price, at which price
he is to propose to other people to take up and to accept
1 L. R. 5 P. C. 221.
108 PROMOTERS AND PROMOTION OF CORPORATIONS.
that offer as if it were the real one. If that be not the
real price which the owners of the property expect to get,
and if they are parties to an arrangement that the inter-
mediate agent, who is to induce others to accept the offer,
is himself to put a considerable part of the nominal price
into his own pocket, without any communication of the
facts, the document is a dishonest and false document upon
the face of it, representing no real transaction, but evi-
dently representing a false transaction, only in order to
deceive somebody. It was used to deceive, and so used
with the knowledge " of the parties.1
S 100. Election by corporation to confirm or rescind con-
tract.— A corporation wronged by its promoters in a
transaction, in the manner stated, may elect whether to
affirm the transaction or to rescind it. The election once
made, if made with full knowledge of the facts, is irre-
vocable.2 It may be express, or implied from unequivocal
acts showing a determination, after discovering the facts, to
retain the property or rights which have passed to it in the
transaction.3 An action against the promoters to recover
damages or secret profits, for example, would amount to an
affirmance of the transaction, and a waiver of the right to
1 The consequences of surreptitious dealing with promoters by a
third person who is endeavoring to caTry out a transaction with
the corporation, through its promoters, must in the ordinary case be
the same as the consequences of such dealings with an agent. The
principles applicable in a case of agency are illustrated in Panama §•
South Pacific Telegraph Co. v. India Rubber, Gulta Percha §• Telegraph
Works Co., 10 Ch. 515. See also Smith v. Sorby, 3 Q. B. D. 552;
Henninger v. Heald, 52 N. J. Eq. 431 ; Briggs v. Withey, 24 Mich.
136.
2 1 Bigelow on Fraud, 436 ; Kennedy v. Thorp, 51 N. Y. 174 ; Great
Luxembourg Ry. Co. v. Magnay, 25 Beav. 586. As to the right of a
majority of the stockholders to bind the minority by such election,
see infra.
* See Chief Justice Shaw's definition of waiver, in Farlow v. Ellis,
15 Gray, 229 ; Tarkinson v. Purvis, 128 Ind. 182.
BREACH OF DUTY OR FRAUD BY PROMOTERS. 109
rescind.1 Continuing to deal with the property, as, for
instance, when the property is a mine, continuing to work
it, after knowledge of the facts, may constitute affirmance.2
Lapse of time, after the facts are known, may be such as to
furnish evidence that the corporation has determined upon
affirmance ; and it may be so great that it would perhaps
be treated in practice as conclusive evidence of such deter-
mination.3 In Vigers v. Pike,4 Lord Cottenham said : " A
man who, with full knowledge of his case, does not com-
plain, but deals with his opponent as if he had no case
against him, builds up from day to day a wall of protection
for such opponent, which will probably defeat any future
attack upon him."
§ 101. Right to rescind barred by laches. — Although the
corporation has not affirmed the transaction, still, in order
to obtain rescission, on any of the grounds stated, it must be
free from laches ; in other words, it must bring its suit for
relief seasonably. The right to rescind remains only for a
reasonable time after the discovery of the facts,6 and " the
law is well settled that when the question of laches is at
issue, the plaintiff is chargeable with such knowledge as he
might have attained upon inquiry, provided the facts already
shown by him were such as to put a man of ordinary intel-
ligence on inquiry."6 From the nature of the subject, it is
1 Sanger v. Wood, 3 Johns Ch. (N. Y.) 416.
2 Vigers v. Pike, 8 Cl. & F. 562; Morgan v. Thetford, 3 111. App. 323 ;
Barr v. New York, Lake Erie Sf Western R. R. Co., 125 N. Y. 263.
Compare the judgments of Lord Cairns and Lord Blackburn in Er-
langer v. New Sombrero Phosphate Co., 3 App. Cas. 1218.
8 Clough v. London Sf Northwestern Ry. Co., 1 Ex. at p. 35; Schif-
fer v. Dietz, 83 N. Y. 300 ; Williamson v. New Jersey Southern R. R.
Co., 29 N. J. Eq. 311 ; Davis v. Stuard, 99 Penn. 295.
* 8 Cl. & F. 562.
6 Royal Bank of Liverpool v. Grand Junction Railroad, 125 Mass.
490 ; In re Pinto Silver Mining Co., 8 Ch. D. 273.
6 Foster v. Mansfield R. R. Co., 146 U. S. 88.
110 PROMOTERS AND PROMOTION OF CORPORATIONS.
not practicable to state a precise rule as to what is or is not
unreasonable delay. This must be decided according to the
circumstances of each case, with a view to doing practical
justice between the parties. But it may be laid down
that no delay for the purpose of enabling a party to spec-
ulate upon the chances which the future may give him
of deciding profitably to himself whether he will abide by
his bargain or rescind it, is allowed in a Court of Equity.1
This is especially applicable where the subject-matter of
the controversy is property of a speculative character or
of fluctuating value. In Twin Lick Oil Company v. Mar-
bury,2 relief was refused, the suit having been brought four
years after the sale of the property in question, which con-
sisted of oil lands subject to marked fluctuations in value.3
The death of parties or witnesses, or the loss of evidence
that might have been obtained, if suit had been seasonably
brought, is of great moment in the question of laches.4 Of
course, if, prior to the suit for rescission, an innocent third
party has acquired an interest which would be affected by
the decree, rescission cannot be had.6
§ 102. Return of consideration received, ordinarily condition
precedent to right to rescind. — Exceptions. — Restoration of
the thing received by the injured party is, as a rule, a con-
dition precedent to rescission. In some cases the return
may be of an equivalent in place of the identical thing re-
1 Miller, J., in Twin Lick Oil Co. v. Marbury, 91 U. S. 592. Com-
pare the opinions in Erlanger v. New Sombrero Phosphate Co., 3 App.
Cas. 1218.
2 91 U. S. 587.
8 See also Neblett v. Macfarland, 92 U. S. 101, 104 ; Gartner v.
Walrod, 83 111. 171 ; Cox v. Montgomery, 36 111. 396 ; Jones T. Smith,
33 Miss. 215; Lindsay Petroleum Co. v. Hurd, L. R. 5 P. C. 221.
4 Jenkins v. Pye, 12 Peters, 241 ; Canpau v. Van Dyke, 15 Mich.
371 ; Hatcher v. Hall, 77 Va. 573.
5 Stevenson v. Newnham, 13 C. B. 285 ; Pease v. Gloaheck, L. R.
1 P. C. 219.
BREACH OF DUTY OR FRAUD BY PROMOTERS. Ill
ceived. Thus, on rescission of a sale of merchandise, either
the original articles, or their number, quantity, and value,
in kind, should be restored.1 If the property is entirely
worthless, it need not be restored.2 In Phosphate Sewage
Company v. Hartmont? the promoters of a company sold to
it a concession from a foreign government which was sub-
ject to forfeiture. On a bill to rescind the sale on account
of fraud on the part of the promoters, the objection that the
company had not re-conveyed, or tendered a re-conveyance
of the concession, was overruled on the ground that the
concession was worthless, the forfeiture to which it was
subject having taken place. But the rule requires that the
other party shall be substantially restored to his status quo ;
therefore if the property has the slightest value, or its loss
may be a disadvantage in any way, even if it have no intrinsic
or market value, it must be returned.4 The question as to
the worthlessness of the property may be a question of law,
as in the case of forged bank-notes or other counterfeit se-
curities, or of a title judicially determined to be invalid.
Ordinarily, however, it is a question of fact, as in a case
of shares of stock in a company alleged to be insolvent.5
The mere fact that the property has fallen in value since
the transaction in question will not prevent rescission.6
§103. Partial rescission not allowed. — The rescission
must be in toto ; a transaction cannot be rescinded in part
1 Smith v. Brittenham, 109 111. 540; Bodley v. Me Chord, 4 J. J.
Marsh. (Ky.) 475.
8 Perley v. Balch, 23 Pick. 283 ; Snow v. Alley, 144 Mass. 551 ;
Babcock v. Case, 61 Penn. 427 ; Haase v. Mitchell, 58 Ind. 213.
« 5 Ch. D. 394.
4 Snow v. Alley, 144 Mass. 551 ; Gay v. Alter, 102 U. S. 79 ;
Gushing v. Wyman, 38 Me. 589; Manahan v. Noyes, 52 N. H. 232;
Moriarty v. Stofferan, 89 111. 523 ; Hunt v. Silk, 5 East, 449 ; Clarke
v. Dicteon, 1 E. B. & E. 148.
6 Beetenn v. Burkholder, 69 Penn. 249.
6 Neblett v. Macfarland, 92 U. S. 101.
112 PROMOTERS AND PROMOTION OF CORPORATIONS.
and stand good for the residue.1 To permit the value of
property to be handed over in money, in place of the prop-
erty itself, would in most cases amount to a partial rescis-
sion. In Higgins v. Lansmgli? it was found that Higgins,
one of the managers of a company, had improperly sold land
to it for a price largely in excess of the market value. The
trial court decreed that the excess over the market value
should be refunded to the company, the company retaining
the land. This was reversed on appeal. " It is not ques-
tioned," said the Appellate Court, " that if the price charged
to the company by Higgins were exorbitant, or so much in
excess of the market value as to make the transaction unfair
or oppressive to the company, a Court of Equity would,
upon application made in apt time, set' it aside, he being at
the time of the sale one of the managers of the company ;
but it cannot be said that because he paid only $24,000 for
the land, he was under any obligations to sell it to the com-
pany for anything like that amount. He was not a manager
or other officer of the company when he bought it. ... He
had the right to purchase the land, and to keep it or sell it
to the company, as he saw fit. But if it be conceded that
the price was so excessive as to make the sale unfair and
oppressive, can appellees or the company now have the sale
rescinded without restoring the land to Higgins ? We
think not. ... It might well be that Higgins would not
have sold to the company for what the land would have
brought in 1873 in the market. He doubtless bought it for
a speculation, and he had a right to keep it until he could
get his price for it, and we know of no power in a Court of
Equity to compel him to sell the land for its market value ;
and to undertake now to fix that value as the measure of
1 Sheffield Nickel Co. v. Unwin, 2 Q. B. D. 214, 223 ; Grant v. Lato,
29 Wise. 99 ; 'Rand v. Webber, 64 Me. 191.
2 154 111. 301, 378.
BREACH OF DUTY OR FRAUD BY PROMOTERS. 113
pay for this land would seem to place in jeopardy the rights
of all the parties, while to rescind the sale in toto would
probably be of no benefit to either. . . . We are of the
opinion that neither the complainant nor the company is
entitled to rescission."
§ 104. Burden of proof in suit for rescission. — The rule as
to the burden of proof was thus laid down by Lord Watson
in Bentinck v. Fenn : l " In a case where rescission is asked,
and it is not denied that at the time when the sale was
made the seller failed in breach of his duty to disclose his
interest, the onus rests upon him to prove, if he desires to
maintain the transaction, that his interest became known
to the purchaser at a subsequent period, and that the pur-
chaser, either expressly or by plain implication, elected to
uphold the transaction. But the case is very different
when a defendant is charged with making undue profits in
the dark, at the expense of the purchaser, or with fraudu-
lent concealment of facts which has led to loss on the part
of the purchaser. The onus probandi then is upon the
plaintiff, — the usual rule of law must apply. I know of
no case where by implication of law the duty of clearing
himself from an imputed fraud rests on the defendant."
1 12 App. Cas. at p. 666.
114 PROMOTERS AND PROMOTION OF CORPORATIONS.
CHAPTER VI.
SUITS BY SHAREHOLDERS TO COMPEL REDRESS FOR WRONGS
BY PROMOTERS TO THE CORPORATION.
§ 105. As general rule suit can be
brought only by corpora-
tion.
106. Exceptions to this rule.
107. Proof necessary to establish
disability of corporation
to sue.
108. Transactions on account of
which shareholders may
or may not bring suit.
109. Exposition of rule on this
subject by Lords Justices
James and Mellish.
110. Right of minority sharehold-
ers to sue to rescind trans-
action voidable for fraud,
when majority are the
wrong-doers.
111. Atwool v. Merryweather, 5
Eq. 464, n.
112. Mason v. Harris, 11 Ch. D.
97.
113. Eight of minority, where
majority are not the
wrong-doers, to sue to
rescind contracts voidable
for fraud.
§ 114. Foss v. Harbottle, 2 Hare,
461.
115. Eight of minority to sue to
rescind a voidable trans-
action where there is no
fraud.
116. Eight of minority to sue for
recovery of secret profits
obtained by promoters.
117. Majority not allowed to
retain profits wrongfully
obtained at expense of
minority.
118. Eight of minority to sue
for recovery of promoter's
profits on sale to corpora-
tion at fraudulently ex-
cessive price.
119. Shareholder whose shares
have been voted on in
favor of a transaction can-
not maintain suit based
upon it.
120. Eule in Federal Courts.
121. Shareholders' suit may be
barred by laches.
122. Form of shareholders' suit. —
Necessary parties.
§ 105. General rule that suit can be brought only by the
corporation. — As a general rule, suits to obtain redress
for wrongs to the corporation, or to enforce corporate
rights, must be brought by the corporation itself through
its regularly appointed agents, and it is not competent for
the shareholders to sue for such purpose in their own
names or in the corporate name. The management of the
SUITS BY SHAREHOLDER. 115
affairs of a corporation is by law and by the agreement of
the shareholders vested in its duly constituted agents, ordi-
narily in a board of directors, with whom accordingly must
rest the decision of the question of the expediency of bring-
ing corporate suits.1 "It would be a doctrine attended
with very serious consequences," said Mr. Justice Miller,
" if every individual shareholder, assuming the place of the
corporation, could decide for it when actions should be
brought to vindicate its supposed right. Each one of the
shareholders might elect to claim a remedy, and resort to
a tribunal different from those chosen by every other, and
use the Court of Equity to enforce his views, regardless of
the duly constituted officers and all other parties having
interests, rights, and powers equal to his own. In such a
struggle the real interests of the corporation might be
entirely sacrificed." 2
§ 106. Exceptions to the rule. — This general rule has,
however, its exceptions. When it is duly shown that the
corporation is disabled from asserting its rights in the
courts, shareholders are permitted to bring suit, provided
the suit is of such a nature that it clearly ought to be
brought in order to conserve the equitable rights of share-
holders, and to prevent a failure of justice.
§ 107. Proof necessary to establish disability of corpora-
tion to sue. — In order to establish the disability of the cor-
poration, the following facts must be alleged and proved :
First. That a demand has been made upon the directors
to bring suit and that they have refused so to do ; or, that
the directors are the wrong-doers in the transaction com-
1 Smith v. Hurd, 12 Met. 371; Abbott v. Merriam, 8 Gush. 588;
Lord v. Copper Miners Company, 2 Phill. 740 ; Foss v. Harbottle, 2 Hare,
461; Allen v. Curtis, 26 Conn. 456; Jones v. Johnson, 10 Bush (Ky.),
649; Robinson v. Smith, 3 Paige, 222.
3 Samuel v. Holladay, 1 Woolw. (U. S. C. Ct.) 400.
116 PROMOTERS AND PROMOTION OF CORPORATIONS.
plained of, or are in collusion with the wrong-doers, in
which case a demand is unnecessary, not only because
ordinarily it would be a futile formality, but because, under
such circumstances, it would be a perversion of justice to
allow the directors to conduct the litigation. A demand
and refusal, or the facts relied on to excuse a demand, must
be alleged and proved.1
Second. That due effort has been made, unsuccessfully,
to bring about the choice of new directors competent and
willing to institute and carry on the desired suit. " Annual
meetings," said Mr. Justice Wells in Brewer v. Boston
Theatre Co.? " even if special meetings are impracticable,
secure to the corporation ample means of correcting abuses
practised by their officers, so far as correction is desired
by the majority or by the corporation as a body. It is not
to be presumed that the body of the corporation will toler-
ate a wrong in their elective officers, by which they are
themselves defrauded." It should also be noted that a
corporation has an implied power incident to its existence
as a corporation, and independent of statutory or charter
provisions, to remove a director for just cause. The power
of removal is incident to the power of appointment, and it
may therefore be exercised by a majority of the share-
holders.3 But if the delay incident to the effort to procure
1 Robinson v. Smith, 3 Paige, 222; Peabody v. Flint, 6 Allen, 52;
Dunphy v. Traveller Newspaper Association, 146 Mass. 495; Hersey v.
Veazie, 24 Me. 9; March v. Eastern R. R. Co., 40 N. H. 548; Heath
v. Erie Ry. Co., 8 Blatch. 347; Wheeler v. Pullman Iron if Steel Co.,
143 111. 197; Farwell v. Great Western Telegraph Co., 161 111. 5225
Bjorngaard v. Goodhue County Bank, 49 Minn. 483; Koop v. Bohm-
ricTi, 49 N. J. Eq. 82 ; Boyd v. Sims, 87 Tenn. 771 ; Miller v.
Murray, 17 Col. 408 ; Allen v. Curtis, 26 Conn. 456 ; Alexander v.
Searcy, 81 Ga. 536. See also cases cited in note 1, page 117.
3 104 Mass, at p. 393.
8 Neallv. Hill, 16 Cal. 145; Ohio v. Bryce, 7 Ohio, 82; Bayless v.
Orne, Freem. Ch. (Miss.) 161; Adamantine Brick Co. v. Woodruff",
4 Me Arthur (D. C.), 318; Auburn Academy v. Strong, Hopk. (N. Y.)
SUITS BY SHAREHOLDEKS. 117
the election of new directors would be prejudicial to the
remedy sought, or, if the majority of the shareholders are
themselves concerned in the wrong-doing complained of,
or in collusion with the wrong-doers, or it may be inferred
with reasonable certainty on the facts shown that they
would disregard the wishes of the minority in the matter,
then an effort of the nature stated is not requisite. The
facts relied on to excuse such effort must be alleged and
proved.1
278; Burr v. McDonald, 3 Gratt. (Va.) 215; Fawcettv. Charles, 13
Weud. 473; People v. Higgins, 15 111. 110;. State v. Trustees of Vin-
cennes University, 5 Ind. 77 ; Lord Burns1 Case, 2 Strange, 820.
1 Brewer v. Boston Theatre Co., 104 Mass. 378 ; Landis v. Sea Isle
City Hotel Co. (N. J.), 31 At. Rep. 755; Dunphy v. Traveller News-
paper Association, 146 Mass. 495; Wallace v. Lincoln Savings Bank,
89 Term. 630; Eschweiler v. Stowell, 78 Wise. 316; Rathbone v. Parkers-
burg Gas Co. (Va.) 8 S. E. Rep. 570 ; Haioes v. Oakland, 104 U. S.
450; Tuscaloosa Mfg. Co. v. Cox, 68 Ala. 71; Mozley v. Alston, 1
Phill. 790; Russell v. Wakefield Waterworks Co., 20 Eq. 474; Gray
v. Lewis, 8 Ch. 1035; Mason v. Harris, 11 Ch. D. 97; Menier v.
Hooper's Telegraph Works, 9 Ch. 350 ; Moore v. Silver Valley Mining
Co., 104 N. C. 534; Miller v. Murray, 17 Col. 408; Hersey v. Veazie,
24 Me. 9 ; Merchants' §• Planters' Line v. Wagoner, 71 Ala. 581.
In Hawes v. Oakland, 104 U. S. 450, Mr. Justice Miller said:
" Before the shareholder is permitted in his own name to institute
and conduct a litigation which usually belongs to the corporation, he
should show to the satisfaction of the Court that he has exhausted
all the means within his reach to obtain, within the corporation itself,
the redress of his grievance, or action in conformity to his wishes.
He must make an earnest, not a simulated effort with the managing
body of the corporation to induce remedial action on their part, and
this must be made apparent to the Court. If time permits, or has per-
mitted, he must show, if he fails with the directors, that he has made
an honest effort to obtain action by the stockholders as a body, in the
matter of which he complains. And he must show a case, if this is not
done, where it could not be done, or it was not reasonable to require
it. The effort to induce such action as complainant desires on the part
of the directors, and of the shareholders when that is necessary, and
the cause of failure in these efforts, should be stated with particular-
ity." These requirements were subsequently embodied in the rule
118 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 108. Transactions on account of which shareholders may
or may not bring suit. — The disability of the corporation
to sue having been proved, it is essential, in order to estab-
lish the right of minority shareholders to begin proceed-
ings, to show that the transaction on account of which it is
desired to bring suit, is of such a nature, and that the cir-
cumstances are such, that it is not competent for the
majority of the shareholders as against the minority to
determine that no action shall be taken in the matter by
the corporation. " It would be contrary to the fundamental
principles of corporate organization," said Mr. Justice
Knowlton in Dunphy v. Traveller Newspaper Association, 1
" to hold that a single shareholder can at any time launch
the corporation into litigation to obtain from another what
he deems to be due to it, or to prevent methods of manage-
ment which he thinks unwise. Intelligent and honest men
differ upon questions of business policy. It is not always
best to insist upon all one's rights ; and a corporation act-
ing by its directors, or by vote of its members, may properly
refuse to bring a suit which one of its stockholders believes
should be prosecuted. In such a case the will of the
majority must control. It is only when the action of a
corporation in refusing to proceed at the request of a stock-
of practice in the United States Courts known as the Ninety-fourth
Equity Rule, which provides, among other things, that every bill
brought by one or more stockholders in a corporation, and other par-
ties, founded on rights which may properly be asserted by the cor-
poration, must " set forth with particularity the efforts of the plaintiff
to secure such action as he desires on the part of the managing
directors or trustees, and, if necessary, of the shareholders, and the
causes of his failure to obtain such action." When, however, the
directors are the wrong-doers, or in collusion with the wrong-doers,
no demand on them to bring suit is required. Young v. Alhambra
Mining Co., 71 Fed. Rep. 810; Excelsior Pebble Phosphate Co. v.
Brown, 74 Fed. Rep. 323.
1 146 Mass, at p. 497.
SUITS BY SHAREHOLDERS. 119
holder is fraudulent as against him, or in disregard of his
rights, that he can maintain a suit in his own name in the
corporate right. The Court cannot interfere in the manage-
ment of corporations, in matters which are properly within
their discretion, so long as their discretion is fairly exer-
cised, and it is always assumed, until the contrary appears,
that they and their officers obey the law, and act in good
faith towards all their members."
§ 109. Exposition of rule by Lords Justices James and
Meliish. — Perhaps the most useful exposition of the rule
on the point stated in the preceding section, to be found in
the- books, is that contained in the judgments of Lords
Justices James and Meliish, in MacDougall v. Gardiner.1
" I' think," said Lord Justice James, " it is of the utmost
importance in all these companies, that the rule, which is
well known in this Court as the rule in Mozley v. Alston?
and Lord v. Copper Miners Company? and Foss v. Harbot-
tlef should always be adhered to ; that is to say, that
nothing connected with internal disputes between the
shareholders is to be made the subject of a bill by some
shareholder in behalf of himself and others, unless there
be something illegal, oppressive, or fraudulent — unless
there is something ultra vires on the part of the company,
qua company, or on the part of the majority of the com-
pany, so that they are not fit persons to determine it ; but
that every litigation must be in the name of the company,
if the company really desire it. Because there may be a
great many wrongs committed in a company — there may
be claims against directors, there may be claims against
officers, there may be claims against debtors, there may
be a variety of things, which a company may be well en-
titled to complain of, but which, as a matter of good sense,
1 1 Ch. D. 13. « 2 Phill. 740.
3 1 Phill. 790. * 2 Hare, 461.
120 PROMOTERS AND PROMOTION OF CORPORATIONS.
they do not think it right to make a subject of litigation,
and it is the company, as a company, which has to deter-
mine whether it will make anything that is wrong to the
company a subject-matter of litigation, or whether it will
take steps itself to prevent the wrong being done."
Lord Justice Hellish, observing that in companies things
are often done which ought not to be done, goes on to say :
" Now, if that gives a right to every member of the com-
pany to file a bill to have the question decided, then, if there
happens to be one cantankerous member, or one member
who loves litigation, everything of this kind will be liti-
gated, whereas if the bill be filed in the name of the com-
pany, then, unless there is a majority who really wish for
litigation, the litigation will not go on. Therefore holding
that such suits must be brought in the name of the com-
pany does certainly greatly tend to stop litigation. In my
opinion, if the thing complained of is a thing which in sub-
stance the majority are entitled to do, or if something has
been done irregularly which the majority of the company
are entitled to do legally, there can be no use in having
a litigation about it, the ultimate end of which is only that
a meeting has to be called, and then, ultimately, the ma-
jority gets its wishes. Is it not better that the rule should
be adhered to that if it is a matter which the majority are
masters of, the majority in substance shall be entitled to
have their will fulfilled ? If it is a matter of that nature,
it only comes to this, that the majority are the only per-
sons who can complain that a thing which they are entitled
to do has been done irregularly, and that, as I understand
it, is what has been decided by the cases of Mozley v. Alston
and Foss v. Harbottle. In my opinion, that is the rule that
is to be maintained. Of course, if the majority are abusing
their powers, and are depriving the minority of their rights,
that is an entirely different thing, and there the minority
SUITS BY SHAREHOLDERS. 121
are entitled to come before this Court to maintain their
rights ; but if what is complained of is simply that some-
thing which the majority are entitled to do has been done
or undone irregularly, then I think it is quite right that
nobody should have a right to set that aside, or to insti-
tute a suit in chancery about it, except the company
itself."
§ 110. Right of minority shareholders to sue to rescind trans-
action voidable for fraud, when majority are the -wrong-doers.
— A shareholder's suit to obtain redress for wrongs done
the corporation by or through promoters would ordinarily
seek one of two remedies, namely, — rescission of the trans-
action brought in question, or a recovery of secret profits
obtained by the promoters. When rescission of a transac-
tion is sought on the ground of fraud, and the majority
of the directors and shareholders are the wrong-doers, or
in collusion with the wrong-doers, so that they are not fit
persons to determine as against the minority the election
of the corporation to affirm or set aside the transaction,
the right of the minority to bring suit seems clear.1
§ 111. In Atwool v. Merryweather,2 — where a fraudulent
sale of mines was made to a company through promoters,
the purchase of the mines being the only thing for which
the company was incorporated, and the whole inception of
the company being simply a scheme to confirm a purchase
as made for £7,000, which was made for £4,000, the ma-
jority of the shares being owned or controlled by the
1 Meeker v. Winthrop Iron Co., 17 Fed. Rep. 48; Meyer v. Stalen
Island Ry. Co., 7 N. Y. St. Rep. 245; Farmers1 Loan tf Trust Co. v.
New York Sf Northern Ry. Co., 150 N. Y. 410. The last cited case
establishes the right of minority shareholders to defend a suit against
the corporation on an executory contract when the corporation is,
through the fraud of the majority shareholders, disabled from making
a proper defence.
2 5 Eq. 464, n.
122 PROMOTERS AND PROMOTION OF CORPORATIONS.
wrong-doers, it was held that the minority shareholders
might sue to set the purchase aside. " If I were to hold,"
said the Vice-Chancellor, " that no bill could be filed by
shareholders to get rid of the transaction on the ground of
the doctrine of Foss v. Harbottle, it would be simply impos-
sible to set aside a fraud committed by a director under
such circumstances, as the director obtaining so many
shares by fraud would always be able to outvote everybody
else."
§ 112. in Mason v. Harris,1 — the defendant Harris was a
promoter of a company formed to purchase from him a cer-
tain business and property employed therein. It was
agreed that the company should pay a stated price for the
property, and that for the good-will of the business it should
pay a sum equal to the profits of the business for the pre-
ceding year. The purchase price was payable partly in
money and partly in paid-up shares of the company.
Harris represented that the profits of the business for the
two years in question had amounted to £ 3,511, and the
transaction was carried out on that basis. Subsequently, it
was discovered that Harris's representation was false and
fraudulent, and that the profits had been but a little over
,£300 a year. Two shareholders of the company then
brought suit to set aside the purchase, alleging that the
board of directors was controlled by Harris, and refused to
take any steps with reference to the matter complained of,
and that Harris possessed such a preponderance of votes
that no steps could successfully be taken within the company
to obtain a remedy for the wrong committed. A demurrer
to the bill was overruled. " As a general rule," said Jessel,
M. R., " the company must sue in respect of a claim of this
nature ; but general rules have their exceptions, and one
exception to the rule requiring the company to be plaintiff
1 11 Ch. D. 97.
SUITS BY SHAKEHOLDEES. 123
is, that where a fraud is committed by persons who can
command a majority of votes, the minority can sue. The
reason is plain, as unless such an exception were allowed, it
would be in the power of a majority to defraud the minority
with impunity. If the majority were to make a fraudulent
sale and put the money into their own pockets, would it be
reasonable to say that the majority could confirm the sale ? "
James, L. J., said: " I am of the same opinion. No judge
has ever laid down more strongly than I the rule that in
general in these cases the company must be the plaintiff.
But an exception to that rule was established by Atwool v.
Merry weather?- and this case is within it. It has been sug-
gested that the Court has some means of directing a meet-
ing to be called in which the corrupt shareholders shall not
be able to vote. If the Court had any such power, that
mode of proceeding might furnish the best remedy in cases
of this nature, but I cannot see how any directions for hold-
ing such a meeting could be given."
§ 113. Right of minority, where majority are not the wrong-
doers, to sue to rescind contracts voidable for fraud. — When
rescission of a transaction is sought on the ground of fraud,
and the majority shareholders are not the wrong-doers or
in collusion with the wrong-doers, minority shareholders
have no standing to sue for rescission, unless the ratifica-
tion of the transaction would be illegal, fraudulent, or
oppressive toward them. Rescission involves the surrender
of property, or the release of rights acquired by the corpo-
ration through the transaction sought to be rescinded.
The corporation, by the vote of the majority of its share-*
holders acting fairly, in good faith, and intra vires, is enti-
tled to determine for itself exclusively, whether it will
retain or release property or rights thus acquired, although
it thereby precludes, or renders ineffectual, all proceedings
1 5 Eq. 464, n.
124 PROMOTERS AND PROMOTION OF CORPORATIONS.
against parties who may have made illegal or fraudulent
gains out of the transaction.1
§ 114. Thus, in FOBS v. Harbottle,2 — a demurrer was sus-
tained to a bill filed by two shareholders in a company in
behalf of themselves and other shareholders, against the
directors of the company and others, charging the defend-
ants with concerting and effecting various fraudulent and
illegal transactions, whereby the property of the company
was misapplied and wasted, and praying that the defend-
ants might be decreed to make good to the company the
losses and expenses occasioned by the acts complained of.
One alleged ground of complaint was that the defendant
directors had, in their character of directors, purchased
their own lands of themselves for the use of the company,
and had paid for them, or, rather, taken to themselves, out
of the moneys of the company, a price exceeding the value
of such lands. This " ground of complaint," said the Vice-
Chancellor, " is one which though it might prima facie
entitle the corporation to rescind the transactions com-
plained of, does not absolutely and of necessity fall under
the description of a void transaction. The corporation
might elect to adopt those transactions and hold the direc-
tors bound by them. In other words, the transactions
admit of confirmation at the option of the corporation, . . .
whilst the Court may be declaring the acts complained of
to be void at the suit of the present plaintiffs, who in fact
may be the only proprietors who disapprove of them, the
governing body of proprietors may defeat the decree by law-
fully resolving upon the confirmation of the very acts which
are the subject of the suit. The very fact that the govern-
ing body of proprietors assembled at the special general
1 Brewer v. Boston Theatre Co., 104 Mass, at p. 394 ; Clinch v.
Financial Corporation, 5 Eq. at p. 482.
2 2 Hare, 461.
SUITS BY SHAREHOLDERS. 125
meeting may so bind even a reluctant minority, is decisive
to show that the frame of this suit cannot be sustained
whilst that body retains its functions." 1
§ 115. Right of minority to sue to rescind a voidable trans-
action where there is no fraud. — When a transaction with
promoters is voidable by the corporation, on account of the
personal interest of the promoters, but there is no actual
fraud or unfairness in it, it would seem that although they
own or control a majority of the stock, and thus are en-
abled to outvote the minority, the latter are not entitled
to sue to rescind the transaction.2 Thus in North West
Transportation Go. v. Beatty? the plaintiff, as a share-
holder in the North West Transportation Company, sued
in behalf of himself and all the other shareholders of the
company, except those who were defendants. The de-
fendants were the company, and five shareholders who,
at the commencement of the action, were the directors of
the company. The claim in the action was to set aside
a sale made to the company by the defendant Beatty, one
of the directors of a steamer called the " United Empire,"
of which, previously to such sale, he was the sole owner.
1 It did not appear by the bill that the company was entitled to
claim the profits made by the directors on the sale to the com-
pany.
2 Hill v. Nisbett, 100 Ind. 341 ; Havens v. Hoyt, 6 Jones Eq. (N. C.)
115 ; Shaw v. Davis, 78 Md. 308. In Gamble v. Queen's County Water
Co. 123 N. Y. 99, it was held that one who has entered into a voidable
contract with a company is entitled to exercise his voting power as a
shareholder in general meeting to ratify such contract. His doing so
cannot be deemed oppressive by reason of his individually possessing a
majority of the shares acquired in a manner authorized by the consti-
tution of the company. But if the action resulting from his vote is a
wanton or fraudulent destruction of the rights of the minority, it may
be subjected to the scrutiny of a Court of Equity at the suit of the
minority shareholders.
• 12 App. Cas. 589.
126 PROMOTERS AND PROMOTION OF CORPORATIONS.
It appeared that a by-law for the purchase of the " United
Empire " from Beatty was passed by the directors. Sub-
sequently this by-law was adopted at a meeting of the
shareholders by a majority of votes, and the steamer was
purchased by the company. Beatty held and voted a
majority of the shares of the company. The contract
was a fair one, within the powers of the company, and
free from imputation of fraud. It was held that the de-
fendant was entitled to exercise his voting power as a
shareholder in general meeting to ratify the contract, and
that accordingly the plaintiff's action was not maintainable.
§ 116. Right of minority to sue for recovery of secret profits
obtained by promoters. — When secret profits have been
obtained by promoters under circumstances entitling the
company to claim them, the right of the majority share-
holders to determine, as against the minority, that no
steps shall be taken for their recovery, must depend upon
whether or not that determination would be fraudulent or
oppressive towards the minority. If it would have been
competent for the majority of the shareholders, in the first
instance, in case the profits had been disclosed, instead of
concealed, to allow them, then, doubtless, it would be within
the power of a disinterested majority, on discovering the
facts, to confirm the transaction.
§ 117. Majority not allowed to retain profits -wrongfully
obtained at expense of minority. — The majority will not
be allowed to put into their own pockets profits wrongfully
obtained at the expense of the minority.1 This is illus-
trated in Menier v. Hooper's Telegraph Works.2 A bill
was filed in this case by the plaintiff, a minority share-
holder, in behalf of himself and all other shareholders of
1 Hazard v.Durant, 11 R. I. 195 ; First National Bank of Fort Scott
v. Drake, 29 Kan. 311.
2 9 Ch. 350.
SUITS BY SHAKEHOLDERS. 127
the European and South American Telegraph Company,
except such of them as were defendants, against the com-
pany and a company called Hooper's Telegraph Works
and others. The European Company was incorporated
with the object of carrying out an agreement between
the plaintiff and others for constructing a submarine tele-
graph under certain concessions from foreign governments.
Hooper's Company was to contract for laying down the
European Company's telegraph cable from Portugal to
Brazil. Hooper's Company owned a majority of the shares
of the European Company. One of the concessions for
making the telegraph had been granted to the Baron de
Maua, who was at one time chairman of the European
Company, and this concession was claimed by that com-
pany, and a bill was filed by it, praying a declaration that
he was a trustee of the concession for it. Hooper's Com-
pany procured an abandonment of this suit, and the
winding up of the European Company. As a part of
this transaction, an arrangement was made by Hooper's
Company, the Baron de Maua, and a company in which he
was interested, by reason of which it was to the advantage
of Hooper's Company and the Baron de Maua, that the
agreement with the European Company should be put an
end to, in order that Hooper's Company might sell to the
Baron de Maua's company the cable it was making for
the European Company. The bill prayed that Hooper's
Company might be declared not entitled to the benefit of
the profits derived by it from the abandonment of the suit
and other arrangements as above stated, and might be
declared a trustee of those profits for the plaintiff and the
other shareholders of the European Company. A demurrer
to the bill was overruled. " It so happens," said Hellish,
L. J., " that Hooper's Company are the majority in this
company, and a suit by this company was pending which
128 PROMOTERS AND PROMOTION OF CORPORATIONS.
might or might not turn out advantageous to this com-
pany. The plaintiff says that Hooper's Company, being
the majority, have procured that suit to be settled upon
terms favorable to themselves, they getting a consideration
for settling it in the shape of a profitable bargain for the
laying of a cable. I am of opinion that although it may
be quite true that the shareholders of a company may vote
as they please, and for the purpose of their own interests,
yet that the majority of shareholders cannot sell the assets
of the company, and keep the consideration, but must allow
the minority to have their share of any consideration which
may come to them. I also entirely agree that, under the
circumstances, the suit is properly brought in the name
of the plaintiff on behalf of himself and all the other
shareholders."
§ 118. Right of minority to sue for recovery of promoter's
profits on sale to corporation at fraudulently excessive price.
— If secret profits have been obtained by promoters by
fraudulently swelling the purchase price of property sold
to the company, an excessive price having been charged in
order that such profits might be secured at the expense of
the corporation, it would ordinarily not be competent for
the majority, as against dissenting shareholders, to prevent
a suit for their recovery. Especially would this be so when
the promoters themselves owned or controlled a majority
of the shares, for to hold otherwise would be to permit the
majority fraudulently to enrich themselves at the expense
of the minority. In Mason v. Harris,1 where a promoter,
by means of fraudulent misrepresentations, sold property
to a company at a great over-value, and a suit was brought
by minority shareholders to rescind the sale, it was said by
Jessel, M. R., that a recovery ought to be had by the com-
pany, even if the purchase were not rescinded, but affirmed.
1 11 Ch. D. 97.
SUITS BY SHAREHOLDERS. 129
S 119. Shareholder -whose shares have been voted on in
favor of a transaction cannot maintain suit based upon it. —
A shareholder has no standing to bring suit, if his shares
have been voted on by a previous holder in favor of the
transaction complained of, or if, at the time when the trans-
action was entered into, the then holder of such shares
participated or acquiesced in the transaction.1 "This,"
observes Mr. Cook, " is a very important principle of law,
and defeats many suits instituted by stockholders to
remedy past wrongs." 2
§ 120. Rule in Federal Courts. — In the Federal Courts, a
shareholder cannot maintain a suit to obtain redress for a
wrong to the corporation committed before he became a
shareholder, unless his share has devolved on him by
operation of law. By Equity Rule 94, " Every bill brought
by one or more stockholders in a corporation against the
corporation and other parties, founded on rights which
may properly be asserted by the corporation, must be veri-
fied by oath, and must contain an allegation that the plain-
tiff was a shareholder at -the time of the transaction of
which he complains, or that his share has devolved on
him since by operation of law." 3
§ 121. Shareholder's suit may be barred by laches. — The
right of shareholders by suit to complain of transactions
with the corporation, which are voidable on account of the
actual or constructive fraud of promoters, may be lost by
laches. If the delay has been unreasonable and so great
1 In re Syracuse, Chenango, fyNew York R.R. Co., 91 N. Y. 1 ; Barr
v. New York, Lake Erie, Sf Western R. R. Co., 125 N. Y. 263 ; Wood v.
Cory Waterworks Co., 44 Fed. Rep. 146; Brown v. ,Duluth, ifc. R. R.
Co., 53 Fed. Rep. 889 ; Clark v. American Coal Co., 86 Iowa, 451. It
is held in Georgia that a subsequent shareholder cannot in any event
complain, Alexander v. Searcy, 81 Ga. 536.
2 Cook on Stockholders, Sect. 735.
8 Dimpfel v. Ohio If Mississippi R. R. Co., 110 U. S. 209.
9
130 PROMOTERS AND PROMOTION OF CORPORATIONS.
as to constitute acquiescence, or if other rights have inter-
vened which it would be inequitable to destroy, a Court of
Equity will refuse to grant the relief sought. What will
constitute such laches as to preclude relief must depend
upon the circumstances of each case.1
§ 122. Form of shareholder's suit. — Necessary parties. —
When shareholders sue to assert corporate rights, or to
remedy corporate wrongs, they must bring suit in behalf of
themselves and all other shareholders not made parties de-
fendant who may come in and join in the suit. A share-
holder does not sue in his own right.2 The real complainant
is the corporation, which is represented in the prosecution
of the suit by the shareholder as the nominal complainant.
The corporation, therefore, is an indispensably necessary
party defendant, in order that it may be bound by the
decree, and that the relief prayed for, if obtained, may be
decreed to it.3
1 Catlin v. Green, 120 N. Y. 441 ; Watt's Appeal, 78 Perm. 370 ;
Davis v. Gemmell, 70 Md. 356 ; Peabody v. Flint, 6 Allen, 52 ; Dunphy
v. Traveller Newspaper Association, 146 Mass. 495 ; Snow v. Boston Blank
Book Mfg. Co., 153 Mass. 456, 158 Mass. 325; Gregory v. Patchett, 33
Beav. 595 ; Dimpfel v. Ohio ft Mississippi R. R. Co., 110 U. S. 209.
2 Bailey v. Birkenhead Railway Co., 12 Beav. 433 ; Winsor v.
Bailey, 55 N. H. 218 ; Cunningham v. Pell, 5 Paige, 607.
8 Willoughby v. Chicago Junction Railways, 50 N. J. Eq. 656 ; 3
Pomeroy's Eq. Juris. Sect. 1095.
LIABILITY OF PROMOTERS TO SHAREHOLDERS.
131
CHAPTER VII.
LIABILITY OF PROMOTERS TO ACCOUNT FOR PROFITS, COMMIS-
SIONS, AND GIFTS, OR IN DAMAGES TO SHAREHOLDERS OF
THE CORPORATION.
ARTICLE I. — Liability to account for Profits, Crifts, and
Commissions.
ARTICLE II. — Liability in Damages when in a Fiduciary
Position toward Shareholders.
ARTICLE III. — Liability in Damages when not in a
Fiduciary Position toward Shareholders.
ARTICLE I. — LIABILITY TO ACCOUNT FOR PROFITS, GIFTS, AND
COMMISSIONS.
123. Effect of invitation by pro-
moters to others to join
them in acquiring property,
and to become shareholders
in corporation to be formed
to purchase it.
§ 124. Emery v. Parrott, 107 Mass.
96.
125. Getty v. Devlin, 64 N. Y.
403; 70 N. Y. 504.
126. Kule as to joinder of plain-
tiffs in suit against pro-
moters for an accounting.
§ 123. Effect of invitation by promoters to others to join
them in acquiring property, and to become shareholders in
corporation to be formed to purchase it. — When pro-
moters are liable to account for secret profits, they are,
as a rule, accountable only to the corporation. They may,
however, under some circumstances, be accountable to
the shareholders of the corporation to their separate use.
It is a rule that when a person is concerned in a trans-
action in which he is acting for himself and his future
partners, as an agent for the intended partnership, he
is not permitted to take advantage of his situation, in
order to obtain a personal benefit for himself ; and that
132 PKOMOTEES AND PROMOTION OF COKPOEATIONS.
when he does obtain such a benefit it will be deemed
that he holds it in trust for the partnership.1 On the
principle of this rule, if promoters invite others to join
with them on terms of equality in acquiring property
with a view to the profit to be made from it by organiz-
ing to work it a corporation to be comprised of the asso-
ciates, and the invitation is accepted, from that moment
the associates are in a fiduciary relation, and one will
not be allowed, while acting for himself and his associates,
to make a profit in the common enterprise at the expense
of the others.2 All profits thus obtained he must share
with his associates. The cases in which shareholders
of a corporation have maintained suits to recover to their
individual use, profits from promoters, fall within this
principle. In these cases, the standing of the plaintiffs
was not that of mere shareholders of the corporation ;
it was that of associates with the promoters in a common
enterprise, prior to the formation of the corporation, the
incorporation being an incident of the enterprise.
§ 124. in Emery v. Parrott,8 — the facts were these :
Archbold, who owned a coal mine, communicated to the
defendants Head and Parrott his desire to sell the mine
to a corporation to be formed to buy and work it, and
he promised to give them a certain part of the price
which he might thus obtain, if they would procure the
formation of a corporation and the purchase of the mine
by it. Parrott then induced the plaintiffs to join with
him in acquiring the mine ; and in behalf of himself and
his associates he conducted various negotiations with
1 Fawcett v. Whilehouse, 1 Russ. & Myl. 132 ; Colt v. Clapp, 127
Mass. 476.
2 Short v. Stevenson, 63 Penn. 95; Dole v. Wooldredge, 135 Mass.
140. And if he has himself purchased the property, his associates will
be entitled to share in the benefit of his purchase.
8 107 Mass. 96.
LIABILITY OF PEOMOTEKS TO SHAREHOLDER. 133
Archbold, which resulted in a contract between Archbold
and the associates to this effect, that the parties should
form a corporation with a capital stock of $150,000, half
of which should be subscribed by Archbold, and half
by the associates, and that the corporation should buy
the mine for $75,000, spend $70,000 in improvements
and machinery, and reserve the other $5,000 for work-
ing capital. The provisions of this contract were sub-
stantially carried out ; the corporation was formed ; the
mine was conveyed to it; certificates of its stock to the
amount of $75,000 were issued to Archbold in payment
of the purchase price ; and the associates furnished the
required cash capital. Archbold then transferred 112
shares of his stock to Parrott, and 113 shares to Head,
as a commission for their services. The plaintiffs, sub-
sequently discovering the secret arrangement by which
Parrott and Head received these shares, brought a bill
in equity against them, which resulted in a decree to
the effect that the plaintiffs were entitled to share in
the stock received by the defendants from Archbold, and
also in the dividends which the defendants had received
on the stock.
§ 125. In Getty v. Devlin,1 — the following facts appeared :
Bryan was the owner of leasehold interests in certain
lands in the State of Ohio, which he had bought for
about $15,000 and paid for with his own moneys. Bryan
and Arkenburg held contracts for the purchase of other
lands in Ohio for $15,000. In this condition of things,
the following scheme was entered into by Bryan, Arken-
burg, Atwood, and Devlin, who were the defendants in
the case. Devlin was to pay Bryan $7,650 for one half
the interest the latter then had in the property in question.
An association was to be formed to which all the property
1 54 N. Y. 403 ; 70 N. Y. 504.
134 PROMOTERS AND PROMOTION OF CORPORATIONS.
should be sold for $125,000. Atwood was to receive one-
third of the profit arising from the sale, and out of the
residue of the proceeds the original cost of the property
was to be paid to Devlin, Arkenburg, and Bryan, and the
remainder divided equally between them. In pursuance
of this scheme the defendants then prepared the following
paper : —
" We the undersigned, do hereby subscribe and agree to pay forth-
with the amount set opposite our names for the purchase of property
in Washington, Monroe, and Athens Counties, Ohio, as per mem-
orandum annexed, being leasehold interest in 745 acres, and 207 acres
in fee, at the sum of $125,000, payments to be made to Daniel Devlin,
Esq., at Broadway Bank, trustee for the purchasers, in whose name
the title to property shall be taken, said property to be put into an
association for development upon such terms as these subscribers
may elect after this subscription is complete."
This paper was subscribed by the defendants for $5,000
each, and it was then left with Atwood to procure sub-
scriptions. The plaintiffs subscribed on the assurance
that the property cost $125,000. The interest of the
defendants was concealed ; they subscribed for shares to
the amount of $60,000 for the purpose of filling up the
subscription ; they gave away in decoy subscriptions about
half of the amount to be subscribed. Subscriptions to
the amount of $65,000 were paid to Devlin, but the de-
fendants paid nothing. After the subscriptions had been
made, a meeting of the subscribers was held, and a cor-
poration organized. Bryan, who then held the title to
the lands, conveyed them to the corporation, receiving
in payment certificates for all the shares of the capital
stock. These shares he transferred to Devlin in trust
for all the subscribers of the subscription paper here-
tofore mentioned, and with the exception of a certain
number reserved for working capital, they were distributed
pro rata among the subscribers. The result of the enter-
LIABILITY OP PROMOTEKS TO SHAREHOLDERS.
135
prise, shortly stated, was that the four defendants shared
secret profits to the amount of $30,000 in money, besides
having as much stock as had those who paid their sub-
scriptions in cash. On a bill in equity brought by the
plaintiffs, it appearing that rescission was impossible, the
real estate having been seized, and sold to satisfy a debt
due from the company, it was held that the defendants
must account for the profits which they had fraudulently
appropriated to the exclusion of their associates, and that
the plaintiffs were entitled to recover their pro rata share
thereof.
§ 126. Rule as to joinder of plaintiffs in suit against pro-
moters for an accounting. — When the misrepresentation
made by the promoters as to the cost of the property has
been made to the whole company, and not to the parties
separately and individually, if an action at law can be
maintained, it is not plain whether the plaintiffs should
join in the action, or whether each should bring an
action to recover the damages he has sustained. But
the injured parties may join in a bill in equity for an
accounting.1
ARTICLE IT. — LIABILITY IN DAMAGES WHEN IN A FIDUCIARY
POSITION TOWARD SHAREHOLDERS.
§ 127. When such relation exists
between promoters and
shareholders, former li-
able to latter in damages
for breach of fiduciary
duty to them.
§ 128. Brewster v. Hatch, 122 N.
Y. 349.
129. Teachout v. Van Hoesen, 76
Iowa, 113.
§ 127. When fiduciary relation exists, promoters liable in
damages to shareholders for breach of fiduciary duty to
them. — While promoters stand in a fiduciary position
Dole v. Wooldredge, 135 Mass. 140.
136 PROMOTERS AND PROMOTION OF CORPORATIONS.
toward the corporation, they do not, as a rule, occupy
that position toward the subscribers for shares. A breach
of fiduciary duty by the promoters is ordinarily a breach of
such duty to the corporation only ; the injury occasioned
thereby is to the corporation, — that is, to the shareholders
collectively, and not individually, and the remedy is there-
fore worked out through the corporation. But, as we have
already seen, the promoters may by their acts create a
fiduciary relation between themselves and the subscribers
for shares. In such event it is incumbent upon them to
fully disclose all material facts within their knowledge
touching the proposed enterprise. If they are to receive
profits or commissions, at the expense of the subscribers, it
is their duty to disclose that fact. A failure to make proper
disclosure which, if made, would have led the subscribers
to decline to take shares, will enable the subscribers to re-
cover their damages from the promoters. And this is also
true when the subscribers have been induced to become
such by misrepresentations as to cost or value, although
misrepresentations of this nature may not be actionable
when the parties are not in a fiduciary relation, but stand
merely as vendor and vendee.1
§ 128. in Brewater v. Hatch,2 — the defendants associated
themselves together to get up a corporation to acquire cer-
tain mining property wholly at the cost of such persons as
they might induce to take and pay for shares of stock.
Having procured an option for the purchase of the prop-
erty in the name of Brown, one of their number, they sent
out a prospectus and a subscription agreement. It was set
out in this agreement that a corporation with a capital stock
of $1,500,000 was about to be organized for the purpose of
acquiring title to the property referred to ; that all of the
1 Cheney v. Gleason, 125 Mass. 166.
2 122 N. Y. 349.
LIABILITY OF PKOMOTEES TO SHAKEHOLDERS. 137
stock was to be issued to Brown in payment for the property ;
and that Hatch, one of the defendants, would, as trustee
for the subscribers, receive moneys due on subscriptions,
and hold the same to pay over to Brown upon the delivery
of a deed of the property in question, from him to the cor-
poration, and the transfer by him to the subscribers of the
number of shares of stock respectively subscribed for by
them. By the terms of the agreement, the subscribers
thereto covenanted with Brown that they would accept the
shares to be transferred to them by Brown, and that they
would make payment for the same to Hatch, at the rate of
four dollars per share on the trust stated. Subscriptions
having been received from the plaintiffs and others for about
sixty-one thousand shares at the price agreed upon, the
defendants proceeded to organize the corporation, naming
themselves as trustees for the first year. Brown thereupon
completed the purchase of the property in his own name, and
immediately conveyed it to the corporation ; all the shares
of stock were issued to him, and he transferred to the sub-
scribers the number of shares for which they had respec-
tively subscribed. The money which the subscribers had
paid to Hatch was then applied in payment of a loan which
the defendants had obtained, in order to enable Brown to
pay the purchase price of the property, when it was con-
veyed to him. After paying the cost of the purchase and
other expenses, the defendants had remaining on hand
58,235 shares of stock for which they had paid nothing,
and which they appropriated to their own use. When the
plaintiffs received and paid for their stock, they had no
knowledge that the defendants were to have shares without
paying for them. In an action by the plaintiffs to recover
damages, it was held that they were entitled to recover, on
the ground that the relation between the parties was not
that of vendors and vendees simply, but was of a fiduciary
138 PROMOTERS AND PROMOTION OF CORPORATIONS.
nature, binding the defendants to the exercise of good faith
and imposing on them the duty of disclosure. The invitation
extended by the defendants to the plaintiffs, it will be ob-
served, was not in behalf of the projected corporation to
enter into a contract with the corporation, when formed,
to take from it shares of its capital stock, but was in effect
to become associated with the defendants on terms of
equality in a common enterprise, of which incorporation
was to be merely an incident.1
§ 129. In Teachout v. Van Hoesen,2 — it appeared that
Teachout and Branson had purchased certain property used
in carrying on the ice business for the sum of $14,000, of
which $5,000 was paid in cash, and the balance was to be
paid by notes secured by a mortgage. Shortly afterward,
Teachout invited Van Hoesen to join them in a partnership
to acquire the property and carry on the business ; he told
Van Hoesen that he could have an interest at cost, and
that the property had cost $20,000, of which $11,000 had
been paid in cash, the deferred payment of $9,000 to be
secured by a mortgage on the property. Van Hoesen agreed
to invest $1,500, on the terms stated, with the privilege of
increasing his interest to one-third, making the interest of
each of the three parties equal. Subsequently, Teachout
proposed to Van Hoesen that the parties in interest should
form a corporation instead of a partnership, the property to
be turned in to the corporation on the same basis that it was
to have been turned in to the partnership, that is, at cost.
The corporation was organized with a capital stock divided
into 300 shares of the par value of $100 each. One hun-
dred shares were issued to Branson and the same number
1 See also Getty v. Devlin, supra, where the defendants were com-
pelled to share secret profits with their associates, but the Court said
that an action for damages might have been maintained.
a 76 Iowa, 113.
LIABILITY OF PROMOTEKS TO SHAREHOLDERS. 139
to Teachout and the property was conveyed by them to
the corporation which bound itself to meet the deferred
payment of $9,000. Fifteen shares were issued to Van
Hoesen on payment by him of $1,500 in money. Van
Hoesen subsequently, in accordance with his option by
which he had the right to increase his subscription so
that he might have an equal interest with Branson and
Teachout, paid in the further sum of $4,000. He was
induced to pay in the sum of $5,500 in all, in the belief
that Branson and Teachout had each paid out that sum
in the original purchase of the property in question, when,
in truth and fact, they had paid but $5,000 in the aggre-
gate. The result was that Branson and Teachout each
obtained a one-third interest in the corporation by the pay-
merit of $2,500 each, and Van Hoesen paid for his one-third
interest $5,500, although the invitation extended to and ac-
cepted by him was to join his associates in the enterprise
on terms of equality. It was held that he was entitled to
recover damages from Teachout. The Court said : " It is
to be remembered that the fraud complained of had its
inception before the corporation was organized. It was a
personal transaction between individuals. In making the
representations complained of, the plaintiff was not acting
as the agent of the corporation, but for the promotion of
his own interest, and it seems that the reparation for the
wrong done should be made by the wrong-doer to the
person upon whom the injury was inflicted.1
1 See also Paddock v. Fletcher, 42 Vt. 389 ; Cheney v. Gleason, 125
Mass. 166.
140 PROMOTERS AND PROMOTION OF CORPORATIONS.
ARTICLE III. — PROMOTERS' LIABILITY IN DAMAGES WHEN NOT IN
A FIDUCIARY POSITION TOWARD SHAREHOLDERS.
130. Promoters ordinarily not in
fiduciary position toward
subscribers for shares.
131. When action will lie in favor of
subscribers against promo-
ters for misrepresentations.
132. Misrepresentation must be
assertion of fact.
133. Mere commendatory expres-
sions privileged.
134. Representation as to value in
exceptional circumstances
not privileged.
135. Representation as to price
paid by third persons for
shares or as to cost of
company's property not
privileged.
136. Commendatory expressions
in prospectuses.
137. Expressions of opinion, al-
though untrue, not action-
able.
138. Representations as to the law.
139. Representation must be of a
material fact.
140. Promoters as a rule not lia-
ble to purchasers of shares
for misrepresentation in
prospectus addressed by
them to prospective sub-
scribers for shares.
141. But connection between pro-
moters issuing prospectus
and persons purchasing
shares in reliance upon it
may be shown.
142. Andrews v. Mockford, 1 Q. B.
(1896), 372.
143. Representation must be
fraudulent as well as false.
Facts to be proved to es-
tablish fraud.
144. False representation made as
of one's own knowledge
deemed fraudulent.
145. Absence of reasonable
grounds for belief in repre-
sentation evidence that it
is fraudulent.
§ 146. Effect of subsequent discov-
ery by one who has made
representation that it is
untrue.
147. Fraud may be inferred from
concealment as distin-
guished from non-disclos-
ure of material facts.
148. Circumstances under which
non-disclosure of facts may
make facts stated false.
149. Omission of facts from pro-
spectus not ground for
action of deceit, unless it
makes facts stated false.
150. Peek v. Gurney, L. R., 6 H.
L. 377.
151. Statement of portion of truth
with suggestions and infer-
ences rendered credible
only by suppression of
other portions of truth.
152. Rules as to misrepresentation
and non-disclosure not the
same in actions ex-delicto
as in suits for equitable
relief.
153. No legislation in this country
requiring promoters' agree-
ments to be disclosed in
prospectuses.
154. English statute on subject.
155. Right of subscriber to rely on
representations addressed
to him.
156. Liability of promoters on sale
of shares issued to them at
discount or in payment for
property at overvaluation.
157. Liability of promoters for
misrepresentations made
by co-promoters.
158. Conflicting views as to meas-
ure of damages.
159. Rule in Massachusetts and
other jurisdictions.
160. Rule in New Jersey.
161. Rule laid down in England
and by Supreme Court of
United States.
LIABILITY OF PKOMOTERS TO SHAEEHOLDEKS. 141
§ 130. Promoters ordinarily not in fiduciary position toward
subscribers for shares. — Promoters do not put themselves
in a fiduciary position toward intending subscribers for
shares by the mere act of issuing prospectuses, or inviting
or negotiating for subscriptions, in behalf of the projected
corporation. Their position in this respect does not differ
from that of the parties in the ordinary case of an adver-
tisement of goods or chattels for sale. Exceptional facts
must appear to establish a fiduciary relation. Ordinarily,
then, this relation does not subsist between promoters and
subscribers for shares.1 This brings us to a consideration
of the subject of the liability of promoters, ex delicto, to
subscribers for shares, when there is no relation of trust
and confidence between the parties.
§ 131. When action •will lie in favor of subscribers against
promoters for misrepresentations. — An action for damages
will lie against promoters of a corporation in favor of
persons who have been induced by misrepresentations made
by the promoters to subscribe for shares of the capital stock
of the corporation, provided the misrepresentation com-
plained of is an assertion of a material fact, is fraudulent,
is actually or constructively addressed to the subscriber,
and the subscriber has been deceived and damnified thereby.
§ 132. Misrepresentation must be assertion of fact. — The
misrepresentation must be an assertion of a fact as dis-
tinguished from an expression of opinion. If it is stated
1 Derry v. Peek, 14 App. Cas. 337; Peek v. Gurney, L. R. 6 H. L.
377; Arkwrightv. Newbold, 17 Ch. D. 301; Dwight on Law of Per-
sons and Personal Property, 393; Coil v. Pittsburgh Female College,
40 Penn. 439. " It is not believed that the American adjudications
require in such contracts any greater degree of good faith than is
exacted of parties in regard to other contracts." Lawson on Contracts,
Sect. 220. " In all contracts of buying and selling, the maxim is,
Caveat emptor ; and contracts to take shares are apparently governed
rather by this principle than by any other." Lindley on Law of
Companies, 5th ed. 70.
142 PROMOTERS AND PROMOTION OF CORPORATIONS.
that a gold mine has produced so much gold, that is a
representation of a fact ; if it is stated that it will yield
such an amount of gold, that is an expression of an opinion.
A representation of one's existing intention is a statement
of a fact which may be material.1 Thus, in Edgington v.
Fitzmaurice? the directors of a corporation issued a pro-
spectus inviting subscriptions for shares, and stating that
their intention was to apply the moneys received in improv-
ing the property of the corporation, and in extending its
business. In fact, the moneys were wanted to meet press-
ing obligations. In an action for deceit brought against
the directors by a subscriber, it was held that the misstate-
ment of intention was a misstatement of an existing fact.
" The state of a man's mind," said Bowen, L. J., " is as
much a fact as the state of his digestion." Yet if an exist-
ing intention is truly stated, its character is not altered by
a subsequent departure from it. An intention may be
changed without responsibility, unless there has been a
contract not to change it.3 A promise is a statement as to
one's intention. If a person makes a promise, not intend-
ing at the time to fulfil it, it is a misrepresentation of an
existing fact.4
§ 133. Mere commendatory expressions privileged. — Praise
of what one has to sell, by false statements as to value,
quality, or characteristics, is not ordinarily ground for an
action for deceit.6 Statements of this nature afford to the
1 Bryant v. Ocean Ins. Co., 22 Pick, at p. 203. 2 29 Ch. D. 459.
8 Grayv. Suspension Car Truck Mfg. Co., 127 111. 187; Long v.
Woodman, 58 Me. 49 ; Jordan v. Money, 5 H. L. Cas. 185.
4 Goodwin v. Home, 60 N. H. 485; 1 Bigelow on Fraud, 484.
Contra: Dawev. Morris, 149 Mass. 188.
5 Dimmock v. Hallett, L. R. 2 Ch. 21; Gordon v. Parmelee, 2
Allen, 212 ; Veazey v. Doten, 3 Allen, 380 ; Deming v. Darling, 148
Mass. 504; Ellis v. Andrews, 56 N. Y. 83; Holbrook v. Connor, 60
Me. 578; Suessenguth v. Bingenheimer, 40 Wise. 370; Anderson v.
Hill, 12 Smedes & M. 679; Vawter v. Ohio, etc., R. R. Co., 14 Ind.
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 143
person to whom they are addressed no excuse for omitting
to examine, or to make an investigation as to the thing
commended, although it is at a distance, and is not seen by
him ; 1 for " it has always been understood the world over
that such statements are to be distrusted." 2 " They are
such as the law, in deference to the universal habit and
practice of mankind, permits men to make in commending
property offered for sale, and as to which the buyer (unless
there be peculiar relations of trust and confidence between
him and the seller) must rely upon his own judgment." 3
They are looked upon as expressions of opinion. Thus, it
has been said of a statement as to the value of land, that
the persons to whom the statement was addressed must
have known that it was " a mere matter of opinion upon a
subject upon which absolute knowledge could not be ex-
pected. In most cases it would be impossible to prove
that one was knowingly and wilfully false in giving such
an opinion, and that is one of the reasons for refusing to
enter upon inquiries of this kind. ... It would be unjust
to convict one of fraud on a mere expression of opinion,
upon any evidence which can ordinarily be introduced, and
for that reason, as well as because common prudence for-
bids implicit reliance upon such expressions, we have the
general rule that false statements of opinion are not
actionable." 4
§ 134. Representation as to value in exceptional circum-
stances not privileged. — Still, a representation of value may
174; Schramm v. O'Connor, 98 111. 539; Wise v. Fuller, 29 N. J. Eq.
262 ; Shanks v. Whitney, 66 Vt. 405 ; Union Nat. Bank v. Hunt, 76
Mo. 439; Doran v. Eaton, 40 Minn. 35.
1 Parker v. Moulton, 114 Mass. 99.
2 Metcalf, J., in Brown v. Castles, 11 Cush. at p. 350.
8 Gilfillan, Ch. J., in Doran v. Eaton, 40 Minn. 35.
4 Knowlton, J., in Nash v. Minnesota Title Ins. §• Trust Co., 159
Mass, at p. 441.
144 PKOMOTERS AND PROMOTION OF CORPORATIONS.
go beyond opinion into fact.1 Again, if a person making a
representation of the nature stated falsely and fraudulently
holds himself out and is relied upon as an expert,2 or
fraudulently induces the person with whom he is dealing
to forbear inquiries which he otherwise would have made,3
or if the representation relates to a matter peculiarly within
the knowledge of the person making it,4 then there is no
exemption from liability on the ground that the represen-
tation is in the nature of " dealers' talk," or an expression
of opinion. There is some conflict of authority on the
question whether a statement as to cost is to be treated as
« dealers' talk." 6
§ 135. Representation as to price paid by third persons for
shares, or as to cost of company's property, not privileged. —
But it is obvious that a representation to an intended sub-
scriber as to the price paid by other subscribers for shares
in a corporation,6 or as to the price paid by the corporation
for property, is not privileged. The one is a representation
in relation to the amount of the corporation's capital ; the
other a representation as to the application of its capital.7
§ 136. Commendatory expressions in prospectuses. — The
rule stated as to commendatory expressions applies to
1 Bishop on Non-Contract Law, Sect. 327 ; King v. Sioux City Loan
If Inv. Co., 76 Iowa, 11.
2 Kost v. Bender, 25 Mich. 515.
8 Parker v. Moulton, 114 Mass. 99.
4 Bloomer v. Gray, 10Ind.«App. 326 ; Stewart v. Stearns, 63 N. H. 99.
6 Treated as trade or dealers' talk, — Medbury v. Watson, 6 Met.
246; Manning v. Albee, 11 Allen, 520; Holbrook v. Connor, 60 Me.
578. Contra, — Van Epps v. Harrison, 5 Hill, 63; Ives v. Carter, 24
Conn. 392; McFadden v. Robinson, 35 Tnd. 24; Somers v. Richards,
46 Vt. 170; McAleer v. Horsey, 35 Md. 439; Fairchild v. McMahon,
139 N. Y. 290.
6 Coolidge v. Goddard, 77 Me. 578; Caswell v. Hunton, 87 Me.
277 ; Kilgore v. Bruce, 166 Mass. 136.
7 Lindsay Petroleum Co. v. Hurd, L. R. 5 P. C. 221 ; Clarke v.
Dickson, 6 C. B. (N. s.) 453.
LIABILITY OF PROMOTEKS TO SHAREHOLDEES. 145
statements which are but expressions of hope, expectation,
or confidence, and it is applicable to prospectuses issued
by promoters. " I consider that in such a document as
the prospectus of a company," said Turner, L. J., " allow-
ance must be made for some latitude of statement." l Lord
Romilly said : " Anybody who looks at a prospectus under-
stands that the thing is colored in this sense, that every-
thing is put forward in the most favorable view it can be." 2
And Lord Chelmsford said : " Some allowance must always
be made for the sanguine expectations of the promoters of
the adventure, and no prudent man will accept the pros-
pects which are always held out by the originators of
any new scheme, without considerable abatement. But al-
though on its introduction to the public, some high coloring
and even exaggeration in the description of the advantages
which are likely to be enjoyed by the subscribers to an
undertaking may be expected, yet no misstatement or con-
cealment ought to be permitted." 3 It must be borne in
mind, however, that " you may use language in such a way
as, although in the form of hope and expectation, it may
become a representation as to existing facts, and if it is so,
and it is brought to your knowledge that these facts are
false, it is a fraud." 4 If the language used in a prospectus
is ambiguous, the burden is on the complaining subscriber
to prove that he understood it in the sense in which it was
untrue. If the defendants, said Lord Blackburn in Smith
1 Central Ry. Co. of Venezuela v. Kisch, 34 L. J. Ch. at p. 552.
2 Denton v. MacNeil, 2 Eq. 355.
8 Central Ry. Company of Venezuela v. Kisch, L. R. 2 H. L. 113.
" ' We agreed, however,' Pen said, laughing, ' that because the
prospectus was rather declamatory and poetical, and the giant was
painted on the show-board rather larger than the original, who was
inside the caravan, we need not be too scrupulous about the trifling
inaccuracy.'" (Thackeray's Pendennis.)
4 Lord Halsbury in Aaron's Reefs v. Turin, A. C. (1896) 273. For
the facts in this case, see Sect. 151.
10
146 PROMOTERS AND PROMOTION OF CORPORATIONS.
v. ChadwicJc,1 with intent to lead the plaintiff to act upon
it, " put forth a statement which they know may have two
meanings, one of which is false to their knowledge, and
thereby the plaintiff putting that meaning upon it is mis-
led, I do not think they can escape by saying he ought to
have put the other. If they palter with him in a double
sense, it may be that they lie like truth, but I think they
lie, and it is a fraud. Indeed, as a question of casuistry,
I am inclined to think the fraud is aggravated by a shabby
attempt to get the benefit of the fraud, without incurring
the responsibility."
§ 137. Expressions of opinion although untrue, not action-
able. — A statement in the nature of an expression of opin-
ion, although untrue, will not, as a rule, ground an action for
deceit. The person to whom it is addressed is bound to exer-
cise his own judgment, and it is his own fault if he allows
himself to be misled by the opinion of another. The follow-
ing untrue representations, held to be of opinion and not of
fact, will serve to illustrate the rule : That the rents of cer-
tain real estate to be acquired by a corporation would pay
six per cent on the capital stock of the corporation the first
year.2 That the probable expense of certain improvements
would be a sum stated.3 That a specified tract of land con-
tained large deposits of oil, it being known to both parties
that the land had not been tested ; 4 it would have been
otherwise if the land had been tested to the knowledge of
the vendor.5 While statements as to value are, as has been
pointed out, ordinarily regarded as expressions of opinion,
1 Smith v. Chadwick, 9 App. Cas. 187. See Yeates v. Prior, 6 Eng.
(Ark.) 58.
2 Hughes v. Antietam Mfg. Co., 34 Md. 316.
z Grossman v. Penrose Ferry Bridge Co., 26 Penn. 69.
* Holbrook v. Connor, 60 Me. 578.
6 Fisher v. Worrall, 5 W. & S. 483; Higgins v. Grouse, 147
N. Y. 411.
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 147
it is otherwise in the case of statements of facts which go
to make up value, — as, for example, statements in relation
to the pecuniary condition of a corporation, made to induce
subscriptions to its stock.1
§ 138. Representations as to the law. — A representation
concerning the law is taken to be the expression of an opin-
ion, and not the statement of a fact. The nature of such
a representation has been explained with great clearness as
follows : —
" A representation in law is this : When you state the
facts, and state a conclusion of law, so as to distinguish
between facts and law, a man who knows the facts is taken
to know the law ; but when you state that as a fact which
no doubt involves, as most facts do, a conclusion of law,
that is still a statement of fact and not a statement of law.
Suppose a man is asked by a tradesman whether he can
give credit to a lady, and the answer is ' You may ; she is
a single woman of large fortune.' It turns out that the
man who gave the answer knew that the lady had gone
through a ceremony of marriage with a man who was
believed to be a married man, and that she had been
advised that that marriage ceremony was null and void,
though it had not been declared so by any court, and it
afterwards turned out that they were all mistaken, that
the first marriage of the man was void, so that the lady
was married. He does not tell the tradesman all these
facts, but states that she is single. That is a statement
of fact. If he had told him the whole story and all
the facts, and said, ' Now you see the lady is single,' that
would have been a misrepresentation of law."2
1 Bigelow's Elements of Law of Torts, .15 ; Campbell v. Fleming,
1 Adol. & El. 40; Bedford v. Bagshaw, 4 Hurl. & N. 538; Bradley v.
Poole, 98 Mass. 169.
2 Jessel, M. R., in Eaglesfield V.Londonderry, 4 Ch. D. 693;
Upton v. Tribilock, 91 U. S. 45; Jaggar v. Winslow, 30 Minn. 263;
148 PROMOTERS AND PROMOTION OF CORPORATIONS.
But a misrepresentation as to the law of a foreign country
is a misstatemeut of fact.1
§ 139. Representation must be of a material fact — The
representation must be of a material fact.2 It has been said
that no better rule can be given for deciding this question
than this : " If the fraud be such that, had it not been
practised, the contract could not have been made or the
transaction completed, then it is material to it ; but if it be
shown or made probable that the same thing would have
been done in the same way if the fraud had not been prac-
tised, it cannot be deemed material." 3 The materiality of
the representation is a question of law for the Court.4
Thompsons. Phoenix Insurance Co., 75 Me. 55; ^Etna Insurance Co.
v. Reed, 33 Ohio St. 293; People v. Central Pacific R. R. Co., 27 Cal.
655; Fish v. Cleland, 33 111. 238; Davis v. Betz, 66 Ala. 206. It is
said in Pollock on Contracts, 522, that the rule " probably does not
apply to a deliberately fraudulent misstatement of the law. The cir-
cumstances and the position of the parties may well be such as to
make it not imprudent or unreasonable for the person to whom the
statement was made to rely on the knowledge of the person making
it; and it would certainly work injustice if it were held necessary to
apply to such a case the maxim that every one is presumed to know
the law." On this point the author cites Hirschfield v. London,
Brighton fr South Coast Ry. Co., 2 Q. B. D. 1 ; Bowen, L. J., in West
London Commercial Bank v. Kitson, 13 Q. B. D. at p. 363. See also
Burns v. Lane, 138 Mass. 350; Moreland v. Atchison, 19 Tex. 303;
Stumpfv. Stumpf, 7 Mo. App. 272 ; Berry v.- Whitney, 40 Mich. 65.
1 Bethell v. Bethell, 92 Ind. 318; Haven v. Foster, 9 Pick. 112 ;
Windram v. French, 151 Mass. 547 ; Upton v. Englehart, 3 Dill. 496.
See Payson v. Withers, 5 Biss. (U. S.) 269, holding that a subscriber
for shares of stock of a corporation of a foreign State is bound to
know the law of that State.
2 Hedden v. Griffin, 136 Mass. 229 ; Hall v. Johnson, 41 Mich. 286 ;
Schwabocker v. Biddle, 99 111. 343 ; Coles v. • Kennedy, 81 Iowa, 360 ;
Karberg's Case, 1892, 3 Ch. 1.
8 McAleer v. Horsey, 35 Md. at p. 452.
4 Penn. Mut. Life Ins. Co. v. Crane, 134 Mass. 56 ; Caswell v.
Hunton, 87 Me. 277 ; 1 Bigelow on Fraud, 139. Contra, — McAleer
v. Horsey, 35 Md. 452. See Moore v. The Explosives Co., 56 L. J.
(Q. B.) 235.
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 149
A representation may be of such a nature as to be suscep-
tible of interpretation either as an expression of opinion or
as a statement of a fact. It is then for the jury to deter-
mine the actual intent.1
§ 140. Promoters, as a rule, not liable to purchasers of shares
for misrepresentation contained in a prospectus addressed by
them to prospective subscribers for shares. — The representa-
tion must be made with intent that it shall be acted on by
the injured party in the manner that occasions the injury,
and the injury must be the immediate and not the remote
consequence of the representation.2 When promoters issue
a prospectus in behalf of the corporation, inviting subscrip-
tions for shares, the prospectus ordinarily is addressed to
prospective subscribers and to induce subscriptions only.
It is not an invitation to the public ultimately to become
holders of shares. Accordingly, in such case those only who
have been induced by misrepresentations contained in the
prospectus to become subscribers can have a remedy against
the promoters. The purchaser of shares in the market, on
the faith of a fraudulent prospectus, which he has not re-
ceived from those answerable for it, and which is issued,
not for the purpose of inducing dealing in the stock, but
solely to procure subscriptions, cannot by action upon the
prospectus so connect himself with those responsible for it
as to render them liable to him, as if it had been addressed
personally to him.3
1 Morse v. Shaw, 124 Mass. 59; Teague v. Irwin, 127 Mass. 217;
Warner v. Benjamin, 89 Wise. 290. But compare 1 Bigelow on
Fraud, 141, 142; Edgington v. Fitzmaurice, 29 Ch. D. 459.
2 Lord Hatherly in Barry v. Croskey, 2 J. & H. 21 ; Denton v.
Great Northern Ry. Co., 5 E. & B. 860.
8 Peek v. Gurney, L. R. 6 H. L. 377 ; Nash v. Minnesota Title In-
surance §• Trust Co., 159 Mass, at p. 442.
Judge Thompson in his Commentaries on the Law of Corporations,
Sects. 1471, 1472, criticises the doctrine of Peek v. Gurney, and char-
150 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 141. But connection between promoters issuing prospec-
tus and persons purchasing shares in reliance upon it may
be shown. — Nevertheless, a prospectus may be issued by
promoters with such intent and in such manner as to estab-
lish a connection between them and purchasers of shares in
acterizes it as destitute of reason and opposed to justice and business
morality. " Under this rule," he says, " the directors might get the
fruits of their fraud, and escape all liability by the simple device of
colluding with certain persons to become the purchasers of the shares
in the first instance, and to unload them upon the innocent public be-
fore the discovery of the fraud." It is plain that in such a case the
prospectus would have been fraudulently issued to lead the public to
purchase shares from the original subscribers. There would be a
clear connection between the persons issuing it, and persons led by it
to purchase shares. The transaction would not be within the rule
laid down in Peek v. Gurney. The learned author cites four cases to
show that the rule in this country is contrary to that announced in
Peek v. Gurney, but they are all distinguishable. (1) Morgan v.
Skiddy, 62 N. Y. 319. This is not a case in which the prospectus
was issued to invite subscriptions. All the stock of the company had
been issued in payment for a mine in which the promoters were inter-
ested, and the prospectus was issued for the purpose of creating a
market for the stock, and luring the public to buy it. (2) Cross v.
Sackett, 2 Bosw. 617, presents facts of the same nature, and proceeds
on the same ground as Morgan v. Skiddy. The Court said : " We ad-
mit that it cannot be law that a person who deceives A. by some in-
strument, and by it intends to deceive only him, can be made liable
to every person who is injured from dealing with A., by being misled
by the instrument which deceived A., and was made to deceive him
alone." (3) Caseaux v. Mali, 25 Barb. 578. This is a decision on a
demurrer to a declaration which alleged that the plaintiff purchased
shares of stock of a company of which the defendants were directors ;
that certain false representations were made by the defendants "for
the purpose of inducing parties, particularly the plaintiff, to purchase said
stock; and that the plaintiff was thereby influenced in making said
purchase." (4) Bartholemew v. Bentley, 15 Ohio, 659. This is a de-
cision on a demurrer to a declaration which alleged that the defend-
ants, conspiring to cheat and defraud the public, and falsely pretending
to have authority as a banking corporation, and that such corporation
had a suitable capital, issued and put into circulation notes and bills
of the pretended bank to a large amount.
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 151
the market, claiming to have been deceived by misrepresen-
tations in the prospectus. Thus it may be delivered by the
promoters to a person for the express purpose of inducing
him to purchase shares, or it may be addressed to the pub-
lic with a view to create a market for the shares, and thus,
perhaps, to enable the promoters to unload their own shares,
as, for example, when it is circulated after all the shares
have been allotted. Under such conditions persons who
have been induced to purchase shares by false and fraudu-
lent statements in the prospectus, have their remedy against
the promoters.1
§ 142. In Andrews v. Mockford,2 — the jury found that the
defendants had conspired to defraud the public by promot-
ing a sham mining company ; that they had authorized the
issue of a fraudulent prospectus of the company, in order
to induce the public to buy shares in the market, as well as
to apply to the company for shares ; that they had subse-
quently, for the purpose of creating fictitious prices for
shares, and to induce the public to buy at such fictitious
prices, caused to be published in the newspapers a false
telegram as to the discovery of ore in the company's mine ;
and that on the strength of this telegram arid on the faith of
the prospectus, the plaintiff had bought shares in the mar-
ket, and had suffered loss thereby. On these findings, it
was held that the plaintiff was entitled to judgment. The
judgment was sustained in the Court of Appeal, the Court
saying, through Lord Esher, that there was evidence upon
which the jury might well come to the conclusion that the
defendants, when they sent out the prospectus, did not issue
it merely with the object of inviting people to subscribe to
the proposed company, but that they issued it having in
1 Scott v. Dixon, 29 L. J. Ex. 62 n. ; Gerhard v. Bates, 2 El. & Bl.
476; Morgan v. Skiddy, 62 N. Y. 319 ; Cross v. Sackett, 2 Bosw. 617.
2 1 Q. B. (1896), 372.
152 PROMOTERS AND PROMOTION OF CORPORATIONS.
their minds the intention of using it afterward to carry out
the fraud, and supporting the prospectus afterward by other
means ; that they did subsequently resort to other means to
carry out that original intention ; that there had been one
continuous fraud, beginning with the prospectus and cul-
minating in the publication of the telegram, practised by
the defendants upon the plaintiff to induce him to purchase
shares in the company in the market ; and that the plaintiff
was damaged in consequence of having so purchased shares
in the market.
§ 143. Representation must be fraudulent as well as false.
Facts to be proved to establish fraud. — The representation
must be not only false but fraudulent. Promoters who
issue a prospectus do not impliedly warrant the truth of
the statements contained in it.1 As a rule they are not
subject to a duty, such as the law recognizes, to be careful
in making representations to intending subscribers for
shares. The doctrine that negligent misrepresentation
affords a cause of action for damages is confined to cases
in which there is a duty imposed by law to be careful.2
In Derry v. Peek,8 a case of misrepresentation in a pro-
spectus, the House of Lords considered that the circum-
stances raised no such duty. If the misrepresentation
was made with intent honestly to tell the truth, and not
recklessly, even though there was negligence, ignorance,
or stupidity on the part of the person making it, an action
for damages cannot be sustained.4 In Derry v. Peek,5
1 Lindley, L. J., in Low v. Bouviere (1891), 3 Ch. at p. 101.
2 Bowen, L. J., in Low v. Bouviere, 3 Ch. (1891), at p. 105
Kountze v. Kennedy, 147 N. Y. 124.
8 14 App. Cas. 337.
4 But in Hubbard v. Weare, 79 Iowa, 678, it was held that the
officers of a corporation who invite the public to take shares on the
8 14 App. Cas. 337.
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 153
Lord Herschell said: "I think the authorities establish
the following propositions : First, in order to sustain your
action of deceit, there must be proof of fraud, and nothing
short of that will suffice. Secondly, fraud is proved when
it is shown that a false representation has been made, (1)
knowingly, or (2) without belief in its truth, or (3) reck-
lessly, careless whether it be true or false, Although I
have treated the second and third as distinct cases, I think
the third is but an instance of the second, for one who
makes a statement under such circumstances can have no
real belief in the truth of what he states. To prevent a
false statement being fraudulent, there must, I think,
always be an honest belief in its truth. And this prob-
ably covers the whole ground, for one who knowingly
alleges that which is false has obviously no such honest
belief. Thirdly, if fraud be proved, the motive of the
person guilty of it is immaterial. It matters not that
there was no intention to cheat or injure the person' to
whom the statement was made."1
faith of their representations, will be presumed to have known that
which it was their duty to know ; that it is their duty to use reason-
able diligence to ascertain the truth of the facts which they state ;
and that they will be presumed to possess the knowledge which the
exercise of such diligence would have brought them. " Outside inves-
tors," it was said, " can know but little of the affairs of the corpora-
tion, while its officers may and should know them fully."
1 See also Glassier v. Rolls, 42 Ch. D. 436; Angus v. Clifford,
(1891), 2 Ch. 449 ; Le Lievre v. Gould (1893), 1 Q. B. 491. Follow-
ing upon and in consequence of the decision in Derry v. Peek, the
Directors' Liability Act, 1890, was passed in England. It gives a
person who has been led by a false statement in a prospectus to sub-
scribe for shares in a company, a right to recover damages for his loss
from the promoters or directors, unless they can prove that they had
reasonable ground to believe the statement and continued to believe
it until the shares were allotted, or that the statement was a fair ac-
count of the report of an expert or a correct representation of an
official document.
154 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 144. False representations made as of one's own knowl-
edge deemed fraudulent. — The weight of authority in this
country supports the proposition thus stated by Lord
Herschell.1 But it may be added that fraud is proved
when it is shown that a false representation has been
made " as of the party's own knowledge, provided the thing
stated is not merely a matter of opinion, estimate, or
judgment, but is susceptible of actual knowledge. The
fraud consists in stating that the party knows the thing
to exist, when he does not know it to exist ; and if he
does not know it to exist, he must ordinarily be deemed
to know that he does not. Forgetfulness of its existence
after a former knowledge, or a mere belief of its exist-
ence, will not warrant or excuse a statement of actual
knowledge." 2
1 Nash v. Minnesota Title Insurance Sf Trust Co., 163 Mass. 578; Id.
159 Mass. 437 ; Page v. Parker, 40 N. H. 47; Hammett v. Emerson, 27
Me. 308 ; Marsh v. Falker, 40 N. Y. 562 ; Chester v. Comstock, 40 N.
Y. 575 ; Kountze v. Kennedy, 147 N. Y. 124 ; Cowley v. Smyth, 46 N.
J. L. 388; Holdom v. Ayer, 110 111. 448; Avery v. Chapman, 62 Iowa,
144 ; Sollund v. Johnson, 27 Minn. 455; Erie City Iron Works v.
Barber, 106 Penn. 125; Crown v. Brown, 30 Vt. 707 ; Bartholemew v.
Bushnell, 20 Conn. 271 ; Rawson v. Harzan, 48 Iowa, 269 ; Union
Pacific Ry. Co. v. Barnes, 64 Fed. Rep. 80; Farmers1 Stock Breeding
Association v. Scott, 53 Kan. 534; Williams v. McFadden, 23 Fla. 143;
Jackson v. Stockbridge, 29 Tex. 394 ; Robertson v. Parks, 76 Md. 118 ;
Taylor v. Leith, 26 Ohio St. 428 ; Bishop on Contracts, Sect. 662.
Contra. — Bird v. Kleiner, 41 Wise. 134 ; Totten v. Burhans, 91 Mich.
495 ; Montreal River Lumber Co. v. Milhils, 80 Wise. 540.
2 Allen, J., in Chatham Furnace Co. v. Moffat, 147 Mass. 404;
Kountze v. Kennedy, 147 N. Y. 124; Stone v. Denny, 4 Met. 151 ;
Cooper v. Schlesinger, 111 U. S. 148; Bower v. Fenn, 90 Penn. 359;
Graham v. Nowlin, 54 Ind. 389; Hammett v. Emerson, 27 Me. 308;
Ford v. McCombj 12 Bush (Ky.), 723 ; Mitchell v. Zimmerman, 4
Tex. 75 ; Cabot v. Chester, 42 Vt. 121 ; Indianapolis, Peru, fr Chicago
Ry. Co. v. Tyng, 63 N. Y. 653; Smith v. Newton, 59 Ga. 113; Cald-
well v. Henry, 76 Mo. 254; Kilpatrick v. Reeves, 121 Ind. 280;
Humphrey v. Merriam, 32 Minn. 197.
LIABILITY OF PKOMOTERS TO SHAREHOLDERS. 155
§ 145. Absence of reasonable grounds for belief in repre-
sentation evidence that it was fraudulently made. — While a
statement made with an honest belief in its truth cannot
furnish ground for an action of deceit, the absence of
reasonable grounds for belief is evidence of the non-
existence of such belief. And it has been observed that
" if a man neglects means of information which were at
hand, and which would have corrected his belief in the
matter, he lays himself open to the suggestion that he took
care not to acquaint himself with inconvenient facts." l
§ 146. Effect of subsequent discovery by one who has made
representation that it is untrue. — When a person who has
made a representation, honestly believing it to be true,
subsequently and before the other party has acted upon
it, discovers that it is not true, it seems that he will be
deemed to have made a fraudulent representation, if, hav-
ing the means of communicating the truth to the other
party, he omits to do so, and suffers him to continue in
error and to act on the belief that no mistake has been
made. The offer to contract being treated as a continuing
offer till revocation or acceptance, the representation must,
it is thought, likewise be taken to be continuously made
until it is acted upon or withdrawn.2
§ 147. Fraud may be inferred from concealment as distin-
guished from non-disclosure of material facts. — A fraudulent
misrepresentation may be implied from successful efforts
to conceal material facts, as, for example, by interposing
obstacles to their discovery, or by diverting attention from
them.3
1 Anson on Contracts, 169.
a Webb's Pollock on Torts, 366 ; Reynell v. Sprye, 1 D. M. G. 660,
709. See Arkwright v. Newbold, 17 Ch. D. at pp. 325, 329.
8 Matthews v. Bliss, 22 Pick. 48 ; Kenner v. Harding, 85 111. 265 ;
Croyle v. Moses, 90 Penn. 250 ; Roseman v. C'anoran, 43 Cal. 110 ;
Tyler v. Savage, 143 U. S. 79.
156 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 148. Circumstances under which non-disclosure of facts
may make facts stated false. — A fraudulent misrepresenta-
tion may under certain conditions arise from the intentional
non-disclosure of facts. In the language of Lord Cairns,
there may be " such a partial and fragmentary statement of
fact as the withholding of that which is not stated makes
that which is stated absolutely false." 1 Commenting on
this, Cotton, L. J., said: " Of course I adopt what has been
said by Lord Cairns, that the omission of something in a
prospectus or other document may make the statement con-
tained in it false, as, for instance, if it contained the state-
ment of a covenant, and omitted to state the fact that the
covenant had been released." In the same case, James,
L. J., said : " Suppose you state a thing partially, you may
make a false statement as much as if you had misstated it
altogether. Every word may be true, but if you leave out
something which qualifies it, you may make a false state-
ment. For instance, if pretending to set out the report of
a surveyor, you set out two passages in his report, and
leave out a third passage which qualifies them, that is an
actual misstatement." 2
§ 149. Omission of facts from prospectus not ground for
action of deceit, unless it makes facts stated false. — But in
the case of representations made by promoters through a
prospectus or otherwise, mere omission is not, if it does not
make the substantive statements false, a sufficient ground
for maintaining an action of deceit. This was expressly
adjudged by the Court of Appeal in Arkwright v. Newbold?
At the trial in this case, Fry, J., said : " It appears to me
1 Peek v. Gurney, L. R. 6 H. L. 377.
2 Arkwright v. Newbold, 17 Ch. D. 320 ; see Miller v. Barber, 66
N. Y. 558; Coles v. Kennedy, 81 Iowa, 360; Oakes v. Tourquand, L. R.
2 H. L. 344 ; Central Ry. Co. of Venezuela v. Kisch, L. R. 2 H. L. 113.
« 17 Ch. D. 320. See also Lawson on Contracts, Sect. 220 ;
Dwight's Commentaries on Law of Persons and Personal Property, 393.
LIABILITY OF PROMOTEKS TO SHAREHOLDERS. 157
to be well worthy of consideration whether a person putting
out a prospectus does not undertake to say, ' I am telling
you everything which it is really material for you to know ;
and I am putting before you the whole prospect of the en-
terprise on which you are entering.' " He did not pass on
this question, but on the appeal it was considered and de-
cided in the negative.
§ 150. In Peek v. Gurney,1 — a bill in equity was brought
by a shareholder of a company alleging misrepresentation
and concealment of facts in a prospectus issued by the
directors of the company, on the faith of which prospectus
the shareholder had purchased his shares. The object of
the bill was to obtain indemnity from the directors. The
prospectus stated, among other things, that the company
had been formed to purchase the business of the firm of
Overend, Gurney & Co., the consideration for the good-will
to be £500,000 payable one-half in cash, and the remainder
in shares of the company. As a fact, the firm was insol-
vent to the extent of ,£3,000,000, and the good-will of the
business was worthless, but this was not disclosed by the
directors. It was held on the evidence that " there was,
beyond the passive concealment of the state of affairs of
the old firm, an active misrepresentation of the truth by
the respondents for which they were answerable." But
the question of the effect of the passive concealment or non-
disclosure was also dealt with. Lord Chelmsford said :
" That there was a moral obligation upon the respond-
ents not to put forward a scheme which depended for its
success upon keeping the public in ignorance of what ought
in fairness to be made known to them, no one can doubt.
... As this was an experiment which was to be made with
the money of other persons as well as their own, they were
bound to give all those other persons such information as they
1 L. R. 6 H. L. 377.
158 PROMOTERS AND PROMOTION OF CORPORATIONS.
themselves possessed, to enable a competent judgment to be
formed as to the prudence of joining the proposed company.
The question, however, is not as to the moral obligation of
the respondents, but whether their intentional concealment,
from whatever motive, of a fact so material that if it had
been made known no company could have been formed.,
renders them liable to an action for damages, or to the
analogous proceeding in equity, by the appellant, who was
led by it to purchase shares in the company, by which
he has been subjected to a most serious loss. This case is
entirely different from suits instituted to be relieved from,
or for the enforcement of, contracts induced by the fraudu-
lent concealment of facts which ought to have been dis-
closed. ... It is a suit instituted to recover damages from
the respondents for the injury the appellant has sustained
by having been deceived and misled by their misrepresenta-
tions and suppression of facts to become a shareholder in
the proposed company of which they were the promoters.
It is precisely analogous to the common-law action for
deceit. There can be no doubt that equity exercises a con-
current jurisdiction in cases of this description, and the
same principles applicable to them must prevail both in
law and in equity. I am not aware of any case in which an
action at law has been maintained against a person for
an alleged deceit charging merely a concealment of a mate-
rial fact which he was morally but not legally bound to
disclose."
Lord Cairns said : " I entirely agree with what has been
stated by my noble and learned friends before me, that
mere silence could not, in my opinion, be a sufficient foun-
dation for this proceeding. Mere non-disclosure of material
facts, however morally censurable, however that non-dis-
closure might be a ground in a proper proceeding at a
proper time for setting aside an allotment or a purchase of
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 159
shares, would in my opinion form no ground for an action
in the nature of an action for misrepresentation. There
must, in my opinion, be some active misstatement of fact,
or at all events such a partial and fragmentary statement of
facts as that the withholding of that which is not stated
makes that which is stated absolutely false." 1
§ 151. Statement of portion of truth with suggestions and
inferences rendered credible only by suppression of other
portions of truth. — But the statement of a portion of the
truth, accompanied by suggestions and inferences which
would be plausible and credible if it contained the whole
truth, but becomes neither plausible nor credible whenever
the whole truth is divulged, is a false statement.2 If by a
number of statements you intentionally give a false impres-
sion and induce a person to act upon it, it is not the less
false, although if one takes each statement by itself there
may be difficulty in showing that every specific state-
ment is untrue.3 Thus the promoters of a company issued
a prospectus representing in substance that a mine ac-
quired by the company had already been proved to be rich
in gold, and only required the erection of machinery (ten-
ders for which were about to be invited), in order to be at
once in a position to make returns ; that it was proposed
to erect a forty-stamp mill in the first instance, and to
make additions from time to time ; that an average yield
of one and one-half ounces per ton would yield .a monthly
return of thirty-six hundred ounces of gold per month ;
1 The omission from the prospectus in this case of reference to an
agreement which would have made known the insolvency of the firm
of Overeud, Gurney, & Co., is said to have occasioned the enactment
of Sect. 38 of the Companies Act, 1867, which makes non-disclosure
in a prospectus in certain cases fraudulent. Bramwell, L. J., in Twy-
cross v. Grant, 2 C. P. D. at p. 499.
2 Per Lord Watson in Aaron's Reefs v. Twiss, A. C. (1896), 273.
8 Per Lord Halsbury, in Aaron's Reefs v. Twiss, supra ; 1 Story's
Equity, 201 ; Denny v. Oilman, 26 Me. 149.
160 PROMOTERS AND PROMOTION OF CORPORATIONS.
the greater part of which would be available for distri-
bution as dividends, and that it was not unreasonable to
anticipate that the mine would readily and speedily pay
dividends to the extent of one hundred per cent. The fol-
lowing facts were not disclosed : That three companies
had tried to work the mine and had failed ; that the mine
had been recently purchased from one of these companies
for £2000 and the assumption of liabilities of £8000 ; that
the present company had acquired it under an agreement by
which it was to pay as the purchase price £131,000 in stated
instalments; that of the £10,000 which the subscribers
were asked to pay on the shares during the first year, none
would be available for working the mine ; and that there
would be no money available for that purpose until £38,000
of calls had been paid. In truth, the scheme of the pro-
moters was to divide among themselves the money obtained
from the public on the false pretence that it was to be used
to develop the mine. In an action for calls on shares
brought by the company against a subscriber, the sub-
scriber claimed in his defence that he was induced to take
the shares by false and fraudulent representations in the
prospectus. " It is said," observed the Lord Chancellor,
" there is no specific allegation of fact which is proved to
be false. I protest against that being the true test. I
should say, taking the whole thing together, was there
false representation ? I do not care by what means it is
conveyed, by what trick or device or ambiguous language ;
all these are expedients by which fraudulent people seem
to think they can escape from the real substance of the
transaction. . . . When I look at the language in which
the prospectus is couched, and see that it speaks of a prop-
erty which requires only the erection of machinery to be
either at once or shortly in a condition to do work so as to
obtain all this valuable metal from the mine, it seems to
LIABILITY OF PKOMOTERS TO SHAEEHOLDEES. 161
me that although it is put in ambidextrous language, it
means, as plainly as can be, that such is now the condition
of the mine, that such and such additions to it will en-
able it shortly to produce all those great results, and that
that is a representation of an actually existing fact. .. . .
You may use language in such a way as although in the
form of hope and expectation, it may become a repre-
sentation as to existing facts, and if it is so, and it is
brought to your knowledge that these facts are false, it
is a fraud. . . ." l
§ 152. Rules as to misrepresentation and non-disclosure not
ths same in actions ex delicto as in suits for equitable relief.
— While misrepresentation or non-disclosure of facts may
be of such a nature as not to create a liability ex delicto, it
may affect the validity or operation of a contract of sub-
scription entered into on the supposition that the facts as
stated are true, and that facts not stated do not exist. In
equitable suits for rescission and specific performance, a
stricter rule prevails, as we shall hereafter see. It is im-
portant to bear this distinction in mind in considering the
decisions and dicta in relation to the duty of promoters as
to accurately stating and fully disclosing all material facts
in their knowledge touching the corporate enterprise.
§ 153. No legislation in this country requiring promoters'
agreements to be disclosed in prospectuses. — In this country
there is not, it is believed, any legislation requiring pro-
moters of corporations who issue prospectuses, to disclose
prior agreements material to intending subscribers to know.
In England, frauds perpetrated by promoters by means of
concealed agreements became common, and were found
difficult to deal with. In Twycross v. Grant? Lord
Coleridge said : " Their non-disclosure by no means neces-
1 Aaron's Reefs v. Tvoixs, A. C. (1896) 273.
2 2 C. P. D. at p. 484.
11
162 PROMOTERS AND PROMOTION OF CORPORATIONS.
sarily made a prospectus fraudulent ; and, unless the
prospectus was fraudulent, the deluded shareholders were
generally without redress. To defeat frauds of this kind
some law was required to compel the promoters of com-
panies to disclose all agreements entered into by them, and
affecting their own remuneration by the company directly or
indirectly, the price to be paid by the company directly or
indirectly for the property the company was formed to
take, the qualifications or independence of the directors,
the issue or control of the shares of the company. Experi-
ence showed that it was by means of secret agreements
relating to matters such as these that unscrupulous pro-
moters succeeded in enriching themselves at the expense of
their dupes. In this state of things the 38th section of
30 & 31 Viet. c. 131 was passed."
§ 154. English statute on subject. — By this section of an
act known as the Companies Act, 1867, it is provided that
every prospectus of a company, and every notice inviting
persons to subscribe for shares, shall specify the dates and
names of the parties to any contract entered into by the
company or by the promoters, directors, or trustees thereof,
before the issue of the prospectus, whether subject to adop-
tion by the directors of the company or not, and that every
prospectus or notice not specifying the same shall be deemed
fraudulent on the part of the promoters, directors, or
officers knowingly issuing the same, as regards any person
taking shares in the company on the faith of the prospec-
tus, unless he had notice of the contract. This enactment
does not affect the obligation of the promoters toward the
corporation, but it imposes a fresh duty on their part
toward subscribers for shares, and gives such subscribers a
new cause of action against the promoter.1 The question
1 Lord Blackburn in Erlanger v. New Sombrero Phosphate Co., 3
App. Cas. at p. 1269.
LIABILITY OF PEOMOTERS TO SHAREHOLDERS. 163
as to just what contracts are meant by this enactment has
given rise to considerable difference of judicial opinion.
There are two conflicting views : The one, that only those
contracts are meant which affect the company, which put
an obligation on it, whether with or without some benefit
attached.1 The other, that the section includes every con-
tract made before the issue of the prospectus, the knowl-
edge of which might have an effect upon a reasonable
subscriber for shares in determining him to give or with-
hold faith in the promoter, director, or trustee issuing the
prospectus, and whether or not such contract was made on
behalf of, or so as if adopted to impose a liability on the
company.2 The weight of authority is in favor of the
latter interpretation.3
§ 155. Right of subscriber to rely upon representations ad-
dressed to him. — The subscriber has usually a right to
rely upon a representation of a material existing fact, the
truth of which is not known to him. He is not bound to
investigate,4 unless he has had actual notice sufficient to
put him on his guard.5 And when the representation is
contained in a prospectus, he is not chargeable with con-
structive notice of the contents of documents referred to,
an examination of which would show the falsity of the
representation.6 If the subscriber does not believe the
1 Bramwell, L. J., in Twycross v. Grant, 2 C. P. D. at p. 499.
2 Brett, L. J., in Governs Case, 1 Ch. D. at p. 200.
8 See Cornell v. Hay, L. R. 8 C. P. 328 ; Gover's Case, 1 Ch. D.
182; Craig v. Phillips, 3 Ch. D. 722; Twycross v. Grant, 2 C. P. D.
469; Sullivan v. Mitcalfe, 5 C. P. D. 455.
4 Central Ry. Co. of Venezuela v. Kisch, L. R. 2 H. L. 99;
McClellan v. Scott, 24 Wise. 81; Mead v. Bunn, 32 N. Y. 275.
6 Warner v. Seymour, 89 Wise. 290; Salem Rubber Co. v. Adams,
23 Pick. 256.
9 Central Ry. Co. of Venezuela v. Kisch, supra ; Aaron's Reefs Co.
v. Twiss, A. C. (1896) 273.
164 PKOMOTEKS AND PROMOTION OF COEPORATIONS.
representation, or acts, not upon the representation, but
upon his own judgment after investigation, there is no
deceit.1 He must show that he relied upon or was mate-
rially influenced by the false statement, and that he was
misled by it to his injury ; 2 and it should be considered
whether he was likely through inexperience to be misled
by the prospectus.3 Of course, in order to recover he must
show that he has suffered damage.4
§ 156. Liability of promoters on sale of shares issued to
them at a discount or in payment for property at overvalua-
tion. — It has been a not uncommon practice for promoters
controlling the corporation in its inception to cause to be
issued to themselves and their co-adventurers shares of the
capital stock of the corporation at a discount or on a trans-
fer of property to the corporation at a fraudulent over-
valuation. The shares which they have thus obtained they
then unload on the public before the bubble bursts. If in
doing this, they knowingly falsely represent to purchasers
of the shares that the capital of the corporation has been
paid in, or that the shares are full paid shares, the pur-
chasers have a right to rely on the representation, and if
they are deceived to their injury, an action for deceit will
lie against those who have been guilty of such fraudulent
misrepresentation.6 Beyond this, in such case, probably
1 Brownlow v. Cauthers, 40 Ind. 90 ; Jennings v. Broughton, 22 L. J.
Ch. 585; Haight v. Hayt, 19 N. Y. 464.
2 Smith v. Chadwick, 9 App. Cas. 187; Walker v. Mobile fr Ohio
R. R. Co., 34 Miss. 245; Colton v. Stanford, 82 Cal. 351; Bennett v.
Gibbons, 55 Conn. 450.
8 Bellairs v. Tucker, 13 Q. B. D. 562.
* Pasley v. Freeman, 3 T. R. 51 ; Ming v. Woolfolk, 116 U. S. 599 ;
Danforth v. Gushing, 77 Me. 182 ; Windram v. French, 151 Mass. 547.
6 In re Ambrose Lake Tin #• Copper Mining Co., 14 Ch. D. at p. 397 ;
Re Gold Co., 11 Ch. D. at p. 713; Flagler Engraving Co. v. Flagler, 19
Fed. Rep. 468 ; Priest v. White, 1 S. W. Rep. 361.
LIABILITY OF PKOMOTKKS TO SHAEEHOLDEES. 165
the promoters might be convicted on an indictment for
conspiracy,1 and, under some circumstances, the corpora-
tion might be entitled to a remedy against them.2 But
suppose promoters, selling stock which they have obtained
in the manner stated, make no misrepresentations, what
remedy has the purchaser against them ? It has been held
that the usual statement contained in the certificate of
stock, to the effect that the shares are full paid, amounts
to a representation on which the purchaser has a right to
rely.3 But this would not often be available in view of the
fact that ordinarily the purchaser does not see the certifi-
cate until after the stock has been bought and the cer-
tificate issued or transferred to him.4 In order to recover
he must prove that he knew and relied upon the represen-
tation alleged to be false and fraudulent. This question,
however, is not perhaps of much practical importance, as
it is not easy to conceive of a case of the nature stated in
which the promoters could without some other fraudulent
misrepresentation work off their shares on the public.5
§ 157. Liability of promoters for misrepresentations made by
co-promoters. — One is of course liable for such misrepresen-
tations as he has expressly authorized another to make in
his behalf. It is also apparent that, if persons combine and
conspire fraudulently to effect a common object, as, for
example, to get up a bubble company and by means of
fraudulent prospectuses to sell shares to the public, any
1 Bramwell, L. J., in In re Gold Co., 11 Ch. D. 701. See opinion
of Best, Ch. J., in Duvergier v. Fellows, 5 Bing. 248.
2 See Chapter II.
8 Cross v. Sackett, 2 Bosw. (N. Y.) 617; Windramv. French, 151
Mass. 547.
4 McAleer v. McMurray, 58 Penn. 126.
5 " I suppose there was some public announcement of the company
as having a capital of £100,000 paid up, which was untrue. If any-
body could prove that he had been deceived by that, he might be
able to maintain an action against the fraudulent persons who had
166 PROMOTERS AND PROMOTION OF CORPORATIONS.
act done in furtherance of the common object, and in
accordance with the general plan, becomes the act of all ;
all are alike responsible, the acts and words of one becom-
ing the acts and words of all.1 But inasmuch as promoters
are not presumptively partners, one is not prima facie lia-
ble for misrepresentations made by another.2 Accordingly,
to hold a promoter responsible for the misrepresentations
of a co-promoter, when the misrepresentation itself was not
authorized, and there was no fraudulent combination, it
must be shown, as matter of fact, that the promoter author-
ized his co-promoter, either expressly or impliedly, to act
as his agent, and that the misrepresentation was made
within the apparent scope of the authority, and in reference
to the subject matter of the agency.3
§ 158. Conflicting views as to measure of damages. — There
appear to be three distinct theories as to the true measure
of damages in an action of deceit brought by a person who
has been induced by false and fraudulent representations to
take and pay for shares in a corporation. The respective
measures under these theories are as follows.
§ 159. Rule in Massachusetts and other jurisdictions. —
First. The difference between the value of the shares at the
time of their purchase and what the value would then have
been had the representations been true.4 The objection to
deluded him and caused damage to him." Bramwell, L. J., in In re
Gold Co., 11 Ch. D. 701.
1 Page v. Parker, 43 N. H. 363 ; HornUower v. Crandell, 7 Mo.
App. 220; Aff. 78 Mo. 581. Stiles v. White, 11 Met. 356; Morehouse
v. Yeager, 71 N. Y. 594. Although some obtain no benefit from the
fraud. Walsham v. Stainton, 1 De G., J. & S. 678.
2 See Sect. 233.
8 Meacham on Agency, Sect. 743, and cases there cited. See Weir
v. Barnett, 3 Ex. D. 32 ; Cargill v. Bower, 10 Ch. D. 502.
4 Hubbell v. Meigs, 50 N. Y. 480; Exchange Bank of Kentucky v.
Gailskill (Ky. 1896), 37 S. W. Rep. 160; Warner v. Benjamin, 89 Wise.
290 ; Morse v. Hutchins, 102 Mass. 440 ; 1 Bigelow on Fraud, 628.
LIABILITY OF PROMOTERS TO SHAREHOLDERS. 167
this is that it permits a recovery for " the expected fruits of
an unrealized speculation," instead of limiting the recovery
to the actual, tangible loss. The action being for a tort, and
not for the breach of a contract, the plaintiff's loss is not
the value of his bargain, for, as Mr. Sedgwick observes, " it
is necessary to the very maintenance of the action to show
that the bargain would not have been made if the defend-
ant had not made the false statements complained of. If
these had not been made, therefore, the plaintiff would
have the consideration he paid, but nothing more ; and the
difference between that consideration and the actual value
of the property represents all the loss that was caused by
the defendant's tort." 1
§ 160. Rule in New Jersey. — Second. In case the shares
have been purchased to hold as an investment, the differ-
ence between the price paid for the shares and their value
at the time when the fraud ceases to be operative.2 If this
is to be applied in all cases without qualification, it may put
the shareholder in a better position than if the false repre-
sentation had in fact been true, inasmuch as it eliminates
the risk of loss or depreciation from extrinsic causes, while
the shares are retained, until the fraud is discovered. The
recovery should be limited to loss caused by defects inhe-
rent in the original project, and should not extend to loss
occasioned by extrinsic causes, such as mismanagement or
business depression. This has been stated and explained
with great force and clearness by Ch-ief Justice Cockburn,
as follows : " If a man is induced by misrepresentation to
buy an article, and, while it is still in his possession, it be-
comes destroyed or damaged, he can only recover the differ-
ence between the value as represented and the real value at
the time he bought. He cannot add to it any further dete-
1 Sedgwick on Damages, 8th ed., Sect. 773.
2 Smith v. Duffy, 57 N. J. L. 679.
168 PROMOTERS AND PROMOTION OF CORPORATIONS.
rioration which has arisen from some other supervening
cause. If a man buys a horse, as a race-horse, on the false
representation that it has won some great race, while in
reality it is a horse of very inferior speed, and he pays
ten or twenty times as much as the horse is worth, and
after the buyer has got the animal home it dies of some
latent disease inherent in its system at the time he bought,
he may claim the entire price he gave ; the horse was, by
reason of the latent mischief, worthless when he bought ;
but if it catches some disease and dies, the buyer cannot
claim the entire value of the horse, which he is no longer in
a condition to restore, but only the difference between the
price he gave and the real value at the time he bought." J
§ 161. Rule laid down in England and by Supreme Court of
the United States. — Third. The difference between the
value of the shares at the time when they were purchased
and the price paid, with interest and any other outlay
legitimately attributable to the fraudulent representations.2
This is the rule adopted by the Supreme Court of the
United States. It is also the rule in England. And it
would seem to be the sounder and more reasonable rule.
While the value is to be ascertained as of the time when
the shares were taken, it is not conclusively fixed by what
might then have been obtained for the shares in the market,
because the purchaser, having invested, was not bound to
sell at that time. Moreover, the inquiry is as to the real
value, and the market price may have been factitious or a
mistaken estimate of the real value.3
1 Twycross v. Grant, 2 C. P. D. at p. 544.
2 Smith v. Bolles, 132 U. S. 125 ; Twycross v. Grant, 2 C. P. D.
514 ; Peek v. Derry, 37 Ch. D. 541 ; Redding v. Godwin, 44 Minn.
355. In Buschman v. Codd, 52 Md. 202, the same rule was applied
when the misrepresentation related to a business sold.
6 Peek v. Derry, supra ; Twycross v. Grant, supra ; Smith v. Bolles,
supra.
LIABILITY OF PKOMOTEKS TO SUBSCRIBERS.
169
CHAPTER VIII.
LIABILITY OP PROMOTERS TO SUBSCRIBERS FOR SHARES IN A
PROJECTED CORPORATION WHICH PROVES ABORTIVE.
§ 162. Promoters, in such case, may
be liable to refund moneys
paid in advance on shares
by subscribers.
163. No deduction allowed for ex-
penses, unless subscriber
has authorized deposit to
be applied thereto.
164. What subscriber must prove
in order to recover from
promoters.
§ 165. Burnside v. Dayrell, 3 Ex.
224.
166. Criticism of Burnside v. Day-
rell.
167. Subscriber has no lien on
moneys advanced as
against creditors of com-
pany.
168. Subscriber's remedy is at
law, unless fraud shown,
or accounting necessary.
169. Apperly v. Page, 1 Phill. 779.
§ 162. If corporation proves abortive, promoters may be lia-
ble to refund moneys paid in advance by subscribers. — When
a subscriber for shares in a projected corporation has paid
money thereon in advance to the promoters, and the
scheme proves abortive, he may recover back his money.
This right rests on the failure of the consideration on
which the money was paid.1 But the scheme is not to be
deemed abortive until the formation of the corporation has
been abandoned or has become impracticable, or a reason-
able time for the formation has elapsed.2 It is reasonable, in
the absence of agreement to the contrary, that the expense
1 Nockels v. Crosby, 3 B. & C. 814 ; Walstdb v. Spottiswoode, 15 M. &
W. 501 ; Ward v. Lord Lodensborough, 12 C. B. 254 ; Chaplin v. Clark,
4 Ex. 402 ; Grand Trunk Ry. Co. v. Brodie, 9 Hare, 822. If the sub-
scriber has given a note, instead of paying cash, he may plead as a de-
fence the fact that the company has proved abortive. Bradford v.
Harris, 77 Md. 153.
2 Johnson v. Goslett, 3 C. B. (N. s.) at p. 590 ; Liudley on Com-
pany's Law, 5th ed., 29.
170 PROMOTERS AND PROMOTION OF CORPORATIONS.
of exploiting the proposed undertaking should, in case
it collapses, fall upon the original projectors, and not
on those who advanced their money on the faith of the
ability of the projectors to do that which they undertook
to do.
§ 163. No deduction allowed for expenses, unless subscriber
has authorized his deposit to be so applied. — In Nockels V.
Crosby? Littledale, J., said : " If persons set a scheme
afoot, and assume to be the directors or managers, all the
expenses incurred before the scheme is in actual operation
must in the first instance be borne by them. When it is
in operation, the expenses and charges of management
should be borne by the concern, and then it may be fair
that the preliminary expenses should be paid in the same
way, for then the subscribers have the benefit of them.
Suppose there had been no subscribers, the projectors must
have paid all the expenses. If, then, one person only
subscribes, are all those expenses to be cast upon him ?
The hardship and injustice would be monstrous, yet that
would be the consequence in such a case were we now to
hold that the plaintiff was liable to a proportion of the ex-
penses incurred by these defendants."
Accordingly, on recovery of deposits paid in advance by
a subscriber, no deduction is allowed on account of ex-
penses which the promoters have incurred in attempting
to bring about the formation of the corporation,2 unless
the subscriber has expressly or impliedly authorized the
expenditures.3
1 3 B. & C. 814.
2 Nockels v. Crosby, 3 B. & C. 814; Ashpitel v. Sercombe, 5 Ex.
147.
* Baird v. Ross, 2 Macq. 61; Vanev. Cobhold, 1 Ex. 798; Willey
v. Parrott, 3 Ex. 211; Aldhom v. Brown, 7 E. & B. 164; 2 E. & E.
398; Garwood v. Ede, 1 Ex. 264; Jones v. Harrison, 2 Ex. 52; West
Point Foundry Association v. Brown, 3 Edw. Ch. (N. Y.) 284.
LIABILITY OF PROMOTERS TO SUBSCRIBERS. 171
§ 164. "What subscriber must prove in order to recover
from promoters. — The subscriber, in order to recover his
money, must prove that he paid it to the defendant or to the
defendant's agent. As promoters are not, as such, partners,
the payment of moneys by a subscriber to one of several
promoters is not necessarily a payment to the others, and
payment into a bank to the account of the company is not
a payment to the promoter sought to be held, unless it is
shown that he authorized the bank to receive the deposit on
the account to which it was paid. Thus in Watson v. Earl
of Charlemont* the plaintiff sued to recover deposits paid
by him on shares in an abortive company. The three de-
fendants were members of the committee of management.
The letter of allotment sent to the plaintiff was signed by
the secretary of the company, and contained a list of banks
into any of which deposits might be paid. The plaintiff
had paid his deposits into one of those banks, and had
received from the bankers a receipt on account of certain
persons as trustees for the company. Only one of the
defendants was amongst the persons on whose account
the receipt of the money was thus acknowledged. It was
held that this evidence was insufficient to show a receipt
by all the defendants, and the action therefore failed.
§ 165. In Burnside v. Dayrell,2 a subscriber for shares in
a projected company paid his deposit into the bank named
in the prospectus which had been circulated by the defend-
ant's sanction, the defendant's name appearing therein as
one of the provisional committee, and as chairman of the
committee of management; but the defendant had not
personally superintended the allotment of shares, and had
taken no active part in the concern, and had been present
once only at any meeting, when he acted in the capacity of
chairman, but dissented from the proceedings ; in an action
1 12 Q. B. 856. 2 3 Ex. 224.
172 PROMOTERS AND PROMOTION OF CORPORATIONS.
by the subscriber against the defendant for the recovery of
his deposit on the abandonment of the scheme, it was held
that the defendant was not liable. Pollock, C. B., said :
" The defendant can only be liable because he was the
person, or one of the persons, to whom the deposit was
paid. There was no evidence that such was the case in
the present instance. The defendant never acted at all,
except by once attending a meeting as chairman, and by
concurring in the circulation of the prospectus. . . . Al-
though the money was paid to the bankers named in the
prospectus, it was not paid to the use of the defendant, nor
was there any proof that the defendant ever received, or
could have received, any part of it." 1
§ 166. Criticism of Burnside v. Dayrell. — The correctness
of the decision in this case may well be doubted. In the
earlier cases of Nockels v. Crosly? and Walstab v. Spottis-
woode? the plaintiff proved that he had paid his deposits to
the bankers appointed by the defendants to receive them,
and this was regarded as sufficient.4 And in the later case
of Johnson v. Goslett? the defendants having issued a
prospectus in which certain bankers were designated to
whom deposits on shares might be paid, it was held that
the prospectus was evidence against the defendants that
money for shares might properly be paid to the bankers
named in the prospectus. It was likewise held that all
the defendants were responsible to the depositors for the
money so paid in, the scheme having proved abortive, not-
withstanding the fact that the bankers gave receipts as for
the company, and though they entered the moneys received
1 Drouet v. Taylor, 16 C. B. 671, is to the same effect.
2 3 B. & C. 814.
« 15 M. & W. 501.
4 See also Hayes v. Stanley, 14 Ir. Com. Law Rep. 277 ; Maitland's
Case, 4 De G., M. & G. 769.
6 3 C. B. (N. s.) 569.
LIABILITY OF PROMOTERS TO SUBSCRIBERS. 173
to an account in the name of some only of the defendants.
" That," it was said, " was an act between the bankers and
the defendants subsequent to the paying in, with which
those who had paid in had no concern." Burnside v.
Dayrell being cited in argument, Martin, B., remarked:
" That case was decided after the turning of the tide in the
provisional committee cases."
§ 167. No lien by subscribers as against creditors of com-
pany. — Subscribers who have paid money on their shares,
which has been deposited to the credit of the company,
have no lien on such money as against creditors of the
company. Thus, in Moseley v. Cressey's Co.? the promot-
ers of a company issued a prospectus stating that deposits
would be returned if no allotment of shares was made.
Several deposits were made, but no allotment ever took
place. The depositors filed a bill to restrain creditors
from attaching under a garnishee order the deposits which
stood in a bank to the credit of the company. " If the
object had been to create a lien of this kind," said Sir W.
Page Wood, Y. C., " the obvious way of doing so would
have been to have said in the prospectus that there would
be a lien on the deposits until the company was estab-
lished, or that it was to be set apart as a trust fund in the
name of trustees, to be returned in the event of the com-
pany not being established. Nothing of that kind was
done ; nor was that the contract. The contract was,
You are to pay so much per share when you apply for
shares, and your deposits will be returned if no allotment
is made, — not that the actual thing so deposited was to be
paid back ; for payment to the company's bankers to the
account of the company made the moneys ipso facto part
of the company's assets. There are persons to be consid-
ered besides the depositors, — namely, creditors who supply
1 1 Eq. 405.
174 PROMOTERS AND PROMOTION OF CORPORATIONS.
their labor and goods to the company when registered, in
the hope and expectation that they will be paid out of its
assets ; when they know there is a balance at the bankers,
they furnish goods ; but if they understand that the com-
pany has no credit at the bank, they do not trust it at all."
Demurrer to bill allowed.
§ 168. Subscriber's remedy is at law, unless fraud shown,
or accounting necessary. — The remedy to recover deposits
on shares in an abortive company is by an action at law,1
and not by a suit in equity, unless in a case of fraud, or
when an accounting is essential.2 Thus it has been held
that when promoters issue a prospectus, not with a fair in-
tention to establish a bona fide company, but as a snare to
obtain subscriptions, the proposed enterprise being a " bub-
ble," a mere scheme to cheat, subscribers may maintain a
bill in equity to recover the moneys which they have paid
on their shares.3 If the promoters have received money
on subscriptions and used it in purchasing property, mak-
ing a profit in the transaction, the profit may be secured
for the benefit of the subscribers on a bill by some in
behalf of all, although the corporation has never been
formed ; the subscribers are not limited to the remedy
of suing for a return of their deposits.4
§ 169. In Apperly v. Page,5 a bill was brought by sub-
scribers against promoters for an accounting, alleging that
the promoters had been expending the deposits for un-
authorized purposes, and praying that payments of legiti-
1 Denton v. MacNeil, 2 Eq. 352.
2 Colt v. Woollaslon, 2 P. Wms. 153; Green v. Barrett, 1 Sim. 45;
Williams v. Page, 24 Beav. 654 ; Grand Trunk Ry. Co. v. Brodie, 9
Hare, 822 ; Williams v. Salmond, 2 K. & J. 463.
8 Green v. Barrett, 1 Sim. 45 ; Blain v. Agar, 5 L. J. Ch. 1.
* Butt v. Monteaux, 1 Kay & J. 98 ; 24 L. J. Ch. 99.
• 1 Phill. 779.
LIABILITY OF PROMOTERS TO SUBSCRIBERS. 175
mate expenses only from the deposits should be allowed,
and the remainder returned to the subscribers. In return-
ing deposits, it is a breach of trust to prefer particular
shareholders.1
1 Williams v. Page, 24 Beav. 654 ; Clements v. Bowes, 1 Drew, 684 ;
21 L. J. Ch. 306.
176 PEOMOTERS AND PROMOTION OF CORPORATIONS.
CHAPTER IX.
REMEDIES OP SUBSCRIBERS FOR SHARES AGAINST CORPORA-
TION WHEN MISLED BY MISREPRESENTATIONS MADE BY
PROMOTERS OR BY THEIR NON-DISCLOSURE OF MATERIAL
FACTS.
ARTICLE I. — Liability of Corporation in Damages for
Fraudulent Misrepresentations made by Promoters.
ARTICLE II. — Misrepresentation or Non-disclosure of
Material Facts by Promoters as Ground for Rescission of
Subscriptions for Shares, or as a Defence to /Suits thereon
by the Corporation.
ARTICLE I. — LIABILITY OF CORPORATION IN DAMAGES FOR FRAUD-
ULENT MISREPRESENTATIONS MADE BY PROMOTERS.
§ 170.
Action of deceit will lie
against a corporation.
171. Corporation not liable in
damages for frauds com-
mitted by promoters prior
to its formation.
§ 172. Effect of insolvency of cor-
poration on right of suit
by subscriber against it to
recover damages.
§ 170. Action of deceit •will lie against a corporation. — It
is sometimes laid down that an action for deceit will not
lie against the corporation itself, because the gist of the
action is fraudulent intent, and a fraudulent intent is not
imputable to an artificial body.1 The modern doctrine,
however, is otherwise. In Bank of Scotland v. Addie? it
was said that an action for deceit could not be maintained
1 Thompson on Corporations, Sect. 1462; Cook on Stockholders,
Sect. 157 ; Houston v. R. R. Co., 55 Tex. 176.
2 L. R. 1 Sc. App. 145.
REMEDIES OF SUBSCRIBERS. 177
against a corporation ; but this was not necessary to the
decision, and in the later case of Mackay v. Bank of New
Brunswick,1 it was directly held that such an action would
lie. In, this country it has been generally held that the
action will lie against the corporation.2
§ 171. Corporation not liable in damages for frauds com-
mitted by promoters prior to its formation. — In order to
make the corporation liable in damages to subscribers who
have been led to take shares by false and fraudulent repre-
sentations, it must be shown that such representations were
made by agents of the corporation acting within the scope
of their authority. In an action for damages on the ground
of fraudulent misrepresentations, it is essential to prove
knowledge by the defendant or his agent of the falsity of
the statement alleged to have deceived the plaintiff. As a
corporation cannot have agents before it exists, it follows
that it is not liable in damages for misrepresentations made
by its promoters, through prospectuses, or otherwise, before
it comes into existence. Not having made the representa-
tions itself or by its agents, it is not responsible for them.3
But the promoters may, in fact, after its formation, act as
its agents in procuring subscriptions for shares.
§ 172. Effect of insolvency of corporation on right of suit
by subscriber against it to recover damages. — Subscribers
who have been induced to take shares by the fraud of the
1 5 P. C. 394. See also Houldsworth v. City of Glasgow Bank, 5
App. Cas. at p. 327.
2 Dorsey Match Co. v. McCaffery, 139 Ind. 545; Nash v. Minnesota
Title Ins. fr Trust Co., 163 Mass. 574; Bosley v. National Machine Co.,
123 N. Y. 550, 555; Cragie v. Hadley, 99 N. Y. 131; Erie City Iron
Works v. Barber, 106 Penn. 125; Fogg v. Griffin, 2 Allen, 1; Peebles
v. Patasco Guano Co., 77 N. C. 233 ; Cassidy v. Globe Rubber Co., 37
N. J. Eq. 175.
8 Miller v. Wild Cat Gravel Road Co., 57 Ind. 241; Karberg's Case
(1892), 3 Ch. at p. 13; Kennedy v. McKay, 43 N. J. L. 288 ; Presby v.
Parker, 56 N. H. 409.
12
178 PROMOTERS AND PROMOTION OF CORPORATIONS.
agents of the corporation may be precluded from recover-
ing damages from the corporation when it has become
insolvent. In Houldsworth v. City of Glasgow Bank,1 the
plaintiff, who had taken shares in the defendant company
on the faith of certain fraudulent misrepresentations made
by its directors, brought an action against it for damages.
The company was then insolvent and was being wound up.
It was held that the action could not be maintained, the
ground for the decision being that " a shareholder con-
tracts to contribute a certain amount to be applied in pay-
ment of the debts and liabilities of the company, and it is
inconsistent with his position as a shareholder, while he
remains such, to claim back any of that money."2 The
doctrine of this case, it has been said, is based on the
winding-up provisions of the Companies Act, 1862, and
upon the rights of creditors under winding-up proceedings,
and has no application to companies not being wound up.3
The question of its applicability in this country to a share-
holder's action against an insolvent corporation when pro-
ceedings have been instituted for a distribution of the
assets among the creditors, does not appear to have been
much considered.4
1 5 App. Gas. 317.
2 Per Lindley, L. J., in In re Addlestone Linoleum Co., 37 Ch. D.
191 ; Carling v. London tf Leeds Bank, 56 L. J. Ch. 321.
8 Lindley's Law of Companies, 5th ed., 777.
4 It has been held in Indiana that the shareholder may sue after
the insolvency of the corporation, and while it is being wound up
under a statutory assignment. Dorsey Match Co. v. McCaffrey, 139
Ind. 545. See Sects. 191, 192.
KEMEDIES OF SUBSCEIBEES.
179
ARTICLE II. — MISREPRESENTATION OR NON-DISCLOSURE OF MA-
TERIAL FACTS BY PROMOTERS AS GROUND FOR RESCISSION
OF SUBSCRIPTIONS FOR SHARES, OR AS A DEFENCE TO SUITS
THEREON BY THE CORPORATION.
§ 173. Responsibility of corpora-
tion for misrepresentation
or non-disclosure by pro-
moters before corporation
formed.
174. Subscriber s' remedies
against corporation for
fraudulent misrepresenta-
tion by promoters.
175. Remedy when misled by
non-disclosure of facts by
promoters.
176. Dicta of Vice Chancellor
Kindersley.
177. Dicta of Lord Chelmsford.
178. Standard of duty as to dis-
closure required by dicta
quoted. Whether legal or
moral duty.
179. Peek v. Gurney, L. R. 6
H. L. 377.
180. Duty to disclose material
facts not a legal duty,
when omission does not
make facts stated false.
181. Absence of direct decisions
on this point. Reasons
for and against require-
ment of disclosure.
182. Contracts to take shares
governed by maxim caveat
emptor.
183. Views of Brett, J., expressed
in Cover's Case, 1 Ch. D.
182.
§ 184. Relief obtainable in Equity,
and in some jurisdictions
at law, against innocent
misrepresen tation.
185. No relief at law where dis-
tinction in procedure be-
tween action at law and
suit in Equity adhered to.
186. Principle on which Equity
rescinds or refuses to en-
force contract induced by
innocent misrepresenta-
tion.
187. Proof necessary to obtain re-
scission of contract of sub-
scription on ground of in-
nocent misrepresentation.
188. Laches as a bar to rescis-
sion of contract of sub-
scription.
189. Waiver of right to avoid
subscription on ground of
misrepresentation.
190. Burden of proof on question
of laches or waiver.
191. Rule in England as to effect
of corporate insolvency
on right to rescind con-
tract of subscription.
192. Tendency of decisions in
this country.
193. Repudiation of contract of
subscription without suit
for rescission effective,
although corporate insol-
vency proceedings subse-
quently begun.
§ 173. Responsibility of corporation for misrepresentation
or non-disclosure by promoters prior to its formation. —
Although, as a general rule, a corporation is not responsible
in tort or otherwise for misrepresentations made by pro-
180 PROMOTERS AND PKOMOTION OF CORPORATIONS.
moters before the corporation comes into existence,1 still,
when the contract of subscription has been induced thereby,
a remedy may be had in certain cases against the corpora-
tion. When the corporation can be held, before the contract
is complete, with the knowledge that it is induced by such
misrepresentation, — as, for example, when the directors on
allotting the shares know the fact that the application for
them has been so induced, — the subscriber, if he conies
seasonably, is entitled to rescission.2 A subscriber who
acts seasonably may also procure rescission when he has
subscribed on the faith of a prospectus containing misrepre-
sentations, issued by promoters prior to the formation of
the corporation. The application to the corporation, when
formed, for shares, being based on the prospectus, cannot
be dissevered by the corporation from the prospectus.
"The offer to take shares," as Lindley, L. J., said, "is
an offer to take them on the terms of the prospectus, and
on no other terms ; and the acceptance of the application
by the allotment of shares is an acceptance of the offer on
those terms, and not on other terms." 3 With these prem-
ises, a consideration may now be had of the subscribers'
remedies against the corporation for misrepresentations by
promoters for which the corporation is responsible.
§ 174. Subscribers' remedies against corporation for fraud-
ulent misrepresentation by promoters. — A misrepresentation
may be innocent or fraudulent. When it is fraudulent,
and an action to recover damages for the deceit could be
maintained, several remedies against the corporation are
1 Burnes v. Pennell, 2 H. L. C. 497; Felgate's Case, 2 De G., J. &
S. 456; Ex parte Worth, 4 Drew, 529; Duranttfs Case, 26 Beav. 268;
St. John's Mfg. Co. \. Hunger (Mich. 1895), 64 N. W. Rep. 3 ; Belav
v. Bryan, 89 Iowa, 348.
2 Lynde v. Anglo-ftalian Hemp Spinning Co. 1 Ch. (1896), 178 ; Law
v. Grant, 37 Wise. 548.
• Karberg's Case (1892), 3 Ch. 1.
REMEDIES OF SUBSCRIBERS. 181
open to the subscriber, if he acts seasonably,1 in addition
to that afforded by an action of deceit. 1. If he has paid
for his shares, in full or in part, he may, upon tender of
his shares to the corporation, recover from it, in an action
at law for money had and received, what he has paid.2
2. He may, when sued by the corporation upon the sub-
scription, interpose the fraud as a defence.3 3. He may
begin a suit in equity to rescind the subscription and to
recover payments, if any, which he has made thereon.
" This," says Mr. Cook, " is the most fair, safe, and con-
venient remedy that the subscriber has. It is a decisive
notice to the corporation and all third parties not to rely
upon the subscription in question. It avoids the risk of
future corporate insolvency. It enables the subscriber to
set aside the contract, to enjoin actions at law for calls,
and to recover back payments made before discovery of the
fraud." 4 And when several persons have been induced to
subscribe for shares by the same fraudulent misrepresenta-
tions, as in the case of a fraudulent prospectus addressed to
all of them, and on which they all act, they may join in a
bill against the corporation and the promoters who issued
the prospectus, to procure rescission of their subscriptions
and to recover the moneys paid thereon.5 In decreeing re-
scission, the Court will allow interest on the money actually
paid by the subscriber on his shares. Interest is not allowed
by way of damages, but on the ground that the parties are
to be restored as far as possible to their original position.6
1 As to \vhat is seasonable action, see Sects. 188, 193.
2 Granger's Ins. Co. v. Turner, 61 Ga. 561 ; Hamilton v. Granger's
Ins. Co., 67 Ga. 145.
8 Deposit Life Ins. Co. v. Ayscough, 6 E. & B. 761 ; Bivleh-y-plom Lead
Mining Co. v. Baynes, 36 L J. (Ex.) 183; Sanford v. Handy, 23
Wend. 260; Crump v. U. S. Mining Co., 1 Gratt. (Va.) 353.
4 Cook on Stockholders, Sect. 155.
6 Bosher v. Richmond if Harrisonburg Land Co., 89 Va. 455.
6 Karberg's Case (1892), 3 Ch. 1.
182 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 175. Subscribers' remedy against corporation when mis-
led by non-disclosure of material facts by promoters. — All
action of deceit will not lie for non-disclosure of material
facts, when it is not such as to render the statement actu-
ally made a misrepresentation.1 The question then arises
whether for non-disclosure of this nature, by which a sub-
scriber has been misled, any remedy against the corporation
may be had. While the rule is that mere non-disclosure
does not create a liability ex delicto, it may affect the validity
or operation of the contract in a certain exceptional class of
contracts, such as contracts of insurance, in which the duty
of disclosure is imposed by law. It is said by Sir Frederick
Pollock, that contracts to take shares in corporations fall,
by analogy to contracts of partnership, within the class of
contracts thus exceptionally treated,2 "inasmuch as the
public to whom promoters address themselves are for the
most part not versed in the particular kind of business
proposed, but are simply persons in search of an invest-
ment for their money, and with slight means at hand, if
any, of verifying the statements made to them." 3 Another
eminent English writer also lays it down that in contracts
to take shares in corporations there is a special duty to
disclose material facts, a breach of which may invalidate
the contract.4 But no case can be found, it is believed, in
which it has been decided that promoters merely as such
or other persons soliciting subscriptions for shares of stock
of a corporation are subject to a legal duty to disclose the
1 See Sects. 149, 150.
2 But Sir William Anson asserts that contracts of partnership do
not require a full disclosure of all facts which might affect the judg-
ment of the intending partner, nor the same fulness of disclosure
which, in his opinion, is necessary to the contract to allot shares.
Anson on Contracts, 159.
8 Pollock on Contracts, 487, 508.
4 Anson on Contracts, 6th ed., 158.
REMEDIES OF SUBSCRIBERS. 183
material facts touching the proposed corporate enterprise, un-
less they have put themselves in a fiduciary position toward
the persons with whom they deal. Sir Frederick Pollock and
Sir William Anson support their propositions by reference
to certain dicta by Kindersley, Y. C., and Lord Chelmsford.
§ 176. Dicta in New Brunswick & Canada Ry. Co. v.
Muggeridge.1 — Vice-Chancellor Kindersley said: "Those
who issue a prospectus holding out to the public the advan-
tages which will accrue to persons who will take shares in
the proposed undertaking, and inviting them to take shares
. on the faith of the representations therein contained, are
bound to state everything with strict and scrupulous accu-
racy, and not only to abstain from stating as a fact that
which is not so, but to omit no one fact within their
knowledge, the existence of which might in any degree
affect the nature, extent, or quality of the privileges and
advantages which the prospectus holds out as inducements
to take shares."
§ 177. Dicta in Central Ry. Co. of Venezuela v. Kisch.2 —
Lord Chelmsford, referring to a prospectus, observed : " In
an advertisement of this description some allowance must
always be made for the sanguine expectations of the pro-
moters of the adventu-re, and no prudent man will accept
the prospects which are always held out by the originators
of every new scheme without considerable abatement. But
although on its introduction to the public some high color-
ing and even exaggeration in the description of the advan-
tages which are likely to be enjoyed by the subscribers to
an undertaking may be expected, yet no misstatement or
concealment ought to be permitted. In my opinion, the
1 1 Dr. & Sm. at p. 381 ; S. C. 30 L. J. Ch. 242. This was a
bill by the company for specific performance of a subscription for
shares.
2 L. R. 2 H. L. at p. 113. This was a bill to rescind a subscription
for shares.
184 PROMOTERS AND PROMOTION OF CORPORATIONS.
public who are invited by a prospectus to join any new
adventure ought to have the same opportunity of judging
of everything which has a material bearing on its true
character as the promoters themselves possess. It cannot
be too frequently or too strongly impressed upon those
who, having projected any undertaking, are desirous of
obtaining the co-operation of persons who have no other
information on the subject than that which they choose to
convey, that the utmost candor and honesty ought to
characterize their published statements."
§ 178. Standard of duty as to disclosure required by dicta
quoted. "Whether legal or moral duty. — The rule as to
strict accuracy of statement laid down in the dicta of Vice
Chancellor Kindersley is somewhat modified, it will be
observed, in the dicta of Lord Chelmsford ; but there is an
agreement in this, that it is the duty of promoters issuing
a prospectus to disclose all material facts within their
knowledge. This is not so high a standard as that main-
tained in marine insurance, where the assured must not
only communicate to the insurer information of all ma-
terial facts touching the risk of which the assured has
knowledge, but must disclose all material facts of which
in the ordinary course of business he ought to have
knowledge, and must use due diligence to obtain all due
information as to the subject matter of the insurance.
Whatever the duty of disclosure in a prospectus inviting
share subscriptions may be, " it is not the same," to use
the language of Lord Watson in a late case in the House
of Lords, " as in the case of a proposal for marine insur-
ance. In an honest prospectus many facts and circum-
stances may be lawfully omitted, although some subscribers
might be of the opinion that these would have been of
materiality as influencing the exercise of their judgment." 1
1 Aaron's Reef Co. v. Twiss (1896), A. C. 273.
EEMEDIES OF SUBSCRIBERS. 185
Assuming that it is the duty of promoters who issue a
prospectus to induce share subscriptions, to disclose all
material facts within their knowledge, the question arises
whether this is, as contended by Sir Frederick Pollock and
Sir William Anson, a legal duty.
§ 179. In Peek v. Gurney,1 the plaintiff having taken
shares in a company, on the faith of a prospectus, and
having sustained loss thereby, brought a suit for damages
against the persons by whom the prospectus was issued.
He set up the non-disclosure by those persons of material
facts within their knowledge, — facts so material that if
they had been disclosed no subscriptions could have been
obtained. In the argument, the dicta of Vice Chancellor
Kindersley and of Lord Chelmsford were quoted and
relied upon. In delivering judgment, Lord Chelmsford
said : " That there was a moral obligation upon the re-
spondents not to put forward a scheme which depended
for its success upon keeping the public in ignorance of
what ought in fairness to be made known to them, no one
can doubt. ... As this was an experiment which was to
be made with the money of other persons as well as their
own, they were bound to give all those other persons
such information as they themselves possessed to enable
a competent judgment to be formed as to the prudence
of joining the proposed company. The question, however,
is not as to the moral obligation of the respondents,
but whether their intentional concealment, from whatever
motive, of a fact so material that if it had been made
known no company could have been formed, renders them
liable to an action for damages, or to the analogous
proceeding in equity, by the appellant, who was led by it
to purchase shares in the company, by which he has been
subjected to a most serious loss. This case is entirely
i L. E. 6 H. L. 377.
186 PROMOTERS AND PROMOTION OF CORPORATIONS.
different from suits instituted to be relieved from, or for
the enforcement of, contracts induced by the fraudulent
concealment of facts which ought to have been disclosed.
... It is a suit instituted to recover damages from the
respondents for the injury the appellant has sustained by
having been deceived and misled by the misrepresentation
and suppression of facts to become a shareholder in the
proposed company of which they were promoters. It is
precisely analogous to the common law action for deceit.
There can be no doubt that equity exercises a concurrent
jurisdiction in cases of this description, and the same
principles applicable to them must prevail both in law
and in equity. I am not aware of any case in which an
action of law has been maintained against a person for an
alleged deceit charging merely a concealment of a ma-
terial fact which he was morally, but not legally, bound
to disclose."
Lord Cairns said : " Mere non-disclosure of material
facts, however morally censurable, however that non-dis-
closure might be a ground in a proceeding at a proper
time for setting aside an allotment on a purchase of
shares, would, in my opinion, form no ground for an
action in the nature of an action for misrepresentation.
There must in my opinion be some active misstatement
of fact, or, at all events, such a partial and fragmentary
statement of facts as that the withholding of that which
is not stated makes that which is stated absolutely false."
§ 180. Duty to disclose material facts not a legal duty, when
omission does not make facts stated false. — The natural
deduction from the decision in this case would seem to be
that, while there is a moral, there is not a legal duty incum-
bent upon promoters who invite subscriptions for shares to
disclose all material facts within their knowledge ; that the
legal duty of promoters in respect to disclosure, is simply not
REMEDIES OF SUBSCKIBEES. 187
to omit a statement of facts when such omission would make
the statement which has been made false. The question of
the right of a subscriber to be relieved from his subscrip-
tion, in equity, on the ground that he has been misled by
a breach of the moral duty of the promoters in failing to
disclose facts which were material, but the non-disclosure
of which did not have the effect of rendering the statement
actually made false, is suggested, but not decided.1
§ 181. Absence of direct decisions on question. Reasons
for and against requirement of disclosure. — The theory that a
subscriber may be relieved from his contract of subscrip-
tion, when he can show that he would not have entered
into the contract if the persons who induced him to do so
by means of representations had disclosed every material
fact within their knowledge which might have influenced
his judgment in determining the expediency of becoming a
subscriber, is not affirmed nor denied,2 it is believed, by
any direct decision. As conducive to fair dealing and
for the protection of the ignorant, the careless, and the
trusting, in such transactions, it may be deemed desirable
that the remedy stated should be afforded. " The general
public," said Lord Brain well, " is so at the mercy of pro-
moters, sometimes dishonest, sometimes over-sanguine, that
it requires all the protection that the law can give it." 3
" There are cases," said Chief Justice Cockburn, " in
which, in the absence of active fraud, passive misrepresen-
tation, that is to say, silence as to some fact which it
1 See also Arkwright v. Newbold, 17 Ch. D. 301.
2 In Pulsford v. Richards, 17 Beav. 87, Heymann \. European Cen-
tral Ry. Co., 7 Eq. 154, and Doris v. French, 4 Hun, 292, there was non-
disclosure, and relief was refused, but it appears to have been on the
ground that the facts withheld were not such as to warrant subscribers
in saying that if they had known of them they would not have taken
shares.
8 Derry v. Peek, 14 App. Cas. at p. 344.
188 PROMOTERS AND PROMOTION OF CORPORATIONS.
would be material to the one party to know, but which
the other is not legally bound to communicate, may in-
volve the one in loss, but in which the party suffering
what amounts to a moral, but not a legal wrong, has no
remedy at law. In the ordinary transactions of life, an
individual can make inquiries and require positive infor-
mation, or insist on a warranty, before entering into a
contract, or embarking in a common enterprise. But in
these vast undertakings, carried on by the united enter-
prise and capital of hundreds, perhaps thousands, of share-
holders, the individual shareholder is more or less at the
mercy of those who invite him to join the company, as
to the facts on which he may be led to invest his money." l
On the other hand, it may be thought better " to teach
people to look after themselves, and not have this sort of
paternal legislation taking care of them and giving them
information they will not take the trouble to ask for." 2
§ 182. Contracts to take shares apparently governed by
maxim caveat emptor. — But, however this may be, not
only is there an absence of adjudication in support of
the theory maintained by Sir Frederick Pollock and Sir
William An'son, that the mere non-disclosure of material
facts may affect the validity and operation of a contract
to take shares in a corporation, but the dicta relied on
by them indicate, it is submitted it has been shown, merely
a moral, and not a legal, duty of disclosure. Moreover,
in these dicta there is no expression of opinion on the
question, whether, under any circumstances, a breach of
this duty entitles a subscriber who has been misled thereby
to be relieved in equity. Opposed to the view that relief
1 Twycross v. Grant, 2 C. P. D. at p. 532.
2 Bramwell, L. J., construing the section of the Companies Acts
which relates to disclosure in prospectuses, in Twycross v. Grant, supra,
at p. 498.
REMEDIES OF SUBSCRIBERS. 189
may be had in such a case, is the view expressed by Lord
Justice Lindley in his work on the Law of Companies :
" In all contracts of buying and selling, the maxim is
caveat emptor ; and contracts to take shares are apparently
governed by this rather than by any other principle." 1
§ 183. In Gover's Case,3 Brett, J., stating the law as it
appeared to him to have been before the enactment of that
section of the Companies Act which makes non-disclosure
of certain contracts, when a prospectus is issued, fraud-
ulent, said : " For mere non-disclosure, fraudulent or
otherwise, which had not the effect of rendering that
which was disclosed or stated a misrepresentation, how-
ever otherwise important for the consideration of an in-
tended subscriber, there was no remedy, either in law
or equity, if he became a registered shareholder." In
a late ease in the Court of Appeal, Rigby, L. J., said:
"I think the law is this, — that if a person relies, as a
ground for the rescission of a contract, on the omission
of a statement, he must show that the omission of that
statement makes what is stated misleading. It is not
that omission of material facts is an independent ground
for rescission, but the omission must be of such a nature
as to make the statement actually made misleading." 3
In other words, relief is not obtainable in cases of pure
non-disclosure of or simple silence as to material facts.
§ 184. Relief obtainable in Equity, and in some jurisdictions
at law. — In an action to recover damages for misrepre-
sentation it is essential, as we have seen, to show that
the party who made the misrepresentation had knowledge
of its falsity at the time it was made. But a misrepresen-
1 Lindley's Law of Companies, 5th ed., p. 70.
2 1 Ch. D. 182.
« McKeon v. Boudard, Peveril Gear Co. (1896), 65 L. J. Rep. N. s.
735.
190 PROMOTERS AND PROMOTION OF CORPORATIONS.
tation may be an invalidating circumstance in a contract
induced by it, although knowledge of its falsity is not
shown. Equity will in a proper case relieve against an
innocent misrepresentation,1 and in several States relief
may be had at law.
§ 185. No relief at law -where distinction in procedure
bet-ween action at law and suit in Equity adhered to. — 111
those jurisdictions where the distinction in procedure
between actions at law and suits in equity has been pre-
served, an innocent misrepresentation, where there was
not a duty to be careful or to state the facts correctly,
will not ground an action or a defence to an action at
law. Consequently a subscriber who has been led into
taking his shares by an innocent, as distinguished from
a fraudulent misrepresentation, cannot in such jurisdic-
tions avail himself of that fact as a defence to an action
at law brought by the corporation on the contract of
subscription, nor can he, in case he has repudiated the
contract and tendered back his shares, on the ground
of the misrepresentation, maintain an action at law to
recover moneys paid by him on the shares.2 His remedy
1 Redgrave v. Hurd, 20 Ch. D. 1; NewUggin v. Adam, 34 Ch. D.
582; Rarberg's Case (1892), 3 Ch. 1; Peek v. Derry, 14 App. Cas.
at p. 359; Wilcoxv. Iowa Wesleyan University, 32 Iowa, 367; Mohlerv.
Carder, 73 Iowa, 582 ; Groppengiesser v. Lake, 103 Cal. 37 ; Yeater v.
Hines, 24 Mo. App. 619; Kountze v. Kennedy, 147 N. Y. 124; 1 Bige-
low on Fraud, 414. In Goodwin v. Mass. Loan Sf Trust Co., 152 Mass,
at p. 201, Field, Ch. J., said: "It does not seem to have been much
considered in this Commonwealth whether the misrepresentation on
account of which a contract can be rescinded must be in all respects
the same as that on which an action for deceit can be maintained ; al-
though, in England and in many of the States of this country a clear
distinction has been taken between the two, . . . and it may deserve
consideration hereafter whether a contract cannot be rescinded for a
misrepresentation or a concealment of facts, which would not support
an action of deceit."
2 Salem Mill Dam Co. v. Ropes, 9 Pick. 187; King v. Eagle Mills,
REMEDIES OF SUBSCRIBERS. 191
is to bring a bill in equity to rescind the contract, and
to enjoin the prosecution of an action upon it by the
corporation. But where equitable claims and defences
may be set up at law, it would seem that the rule is other-
wise, and that the principle upon which equity affords
relief to one who has been led into a contract by an in-
nocent misrepresentation may be invoked at law.1
§ 186. Principle on which Equity acts in matter of innocent
misrepresentation. — The principle on which equity acts in
setting aside or refusing to enforce a contract induced by
an innocent misrepresentation is that it is a constructive
fraud for one to insist on obtaining or retaining a benefit
under a contract procured by his own untruthful state-
ment, however innocent he may have been in the first in-
stance in making that statement.2
§ 187. Proof necessary to obtain rescission of contract of
subscription on ground of innocent misrepresentation. — To
entitle a subscriber for stock to rescind or to procure
the setting aside of the contract of subscription, on the
ground of simple misrepresentation, the same things must
be proved as in an action of deceit, excepting knowledge
by the defendant of the falsity of the representation, and,
when the contract is executory, damage to the defendant.3
When the contract is executed, it would seem that proof
must be furnished that injury has resulted to the party
seeking relief.4 When the misrepresentation which in-
duced the contract was made by promoters before the
10 Allen, 548 ; Goodrich v. Reynolds, 31 111. 490 ; Parmelee v. Arfolphe,
28 Ohio St. 10; Kennedy v. Panama Mail Co., L. R. 2 Q. B. 580.
1 1 Bigelow on Fraud, 414.
2 Redgrave v. Hurd, 20 Ch. D. 1 ; Homes' Appeal, 77 Penn. 50 ;
Swimm v. Bush, 23 Mich. 99.
8 1 Bigelow on Fraud, 541.
4 Ibid. ; Jewell v. Davis, 10 Allen, 68 ; Marriner v. Dennison, 78 Cal.
202; Henninger v. Heald, 52 N. J. Eq. 431.
192 PROMOTEES AND PROMOTION OF CORPORATIONS.
formation of the corporation, or afterwards by promoters
not acting as its agents, the subscriber cannot, with a
single exception, rescind the contract unless he can show
that, at the time of its acceptance by the corporation, the
corporation knew that it was induced by the misrepresenta-
tion. The exception is when the subscription was made on
the faith of a prospectus, containing a misrepresentation
issued by the promoters. In this case it is not necessary to
prove that the corporation had knowledge of the misrepre-
sentation at the time the shares were allotted, for the appli-
cation for shares cannot be dissevered from the prospectus.1
§ 188. Laches as a bar to rescission of contract of subscrip-
tion. — In discussing laches as a bar to a subscriber's rem-
edy against the corporation, a learned writer states that
" in the remedies by action at law the statute of limitations
governs." 2 Undoubtedly the statute would prevail as a bar
at law, and also in equity. But delay for a shorter period
than the statutory limitation may, as constituting waiver, at
law, as well as in equity, defeat the right to rescission.3 To
rescind the contract, or to have it set aside, the subscriber
must, within a reasonable time after learning, or after he
might and should have learned the truth, repudiate the
contract and tender back his shares, or bring a bill for re-
scission. He will not be permitted to wait and see how the
speculation turns out, in order that he may shape his action
accordingly. "A man must not play fast and loose; he
must not say, * I will abide by the company if successful,
and I will leave the company if it fails ; ' and therefore,
1 Tamplin's Case (1892), W. N. 146. See Section 173. The remedy
is limited to the subscriber. It does not extend to a vendee of a
shareholder, because the office of the prospectus is exhausted when the
shares are allotted. Peek v. Gurney, L. R. 6 H. L. 377.
2 Cook on Stockholders, Sect. 161.
8 Duffield v. E. T. Barnum Wire $ Iron Works, 64 Mich. 293 ;
Perley v. Balch, 23 Pick. 283.
KEMEDIES OF SUBSCRIBERS. 193
when a misrepresentation is made of which any one of the
shareholders has notice and can take advantage to avoid
his contract with the company, it is his duty to determine
at once whether he will depart from the company, or
whether he will remain a member."1 It is generally a
question of fact, but in some circumstances a question of
law, as to what is a reasonable time.2
§ 189. Waiver of right to avoid subscription on ground of
misrepresentation. — The subscriber may waive his right to
avoid the contract on account of misrepresentation. Acts,
after discovery of the truth, inconsistent with an inten-
tion to rescind the contract, may constitute such waiver.
Thus, by attending a stockholder's meeting, and voting for
a levy of an assessment on the capital stock, and subse-
quently paying the assessment without objection,3 or by
demanding or receiving a dividend,4 the subscriber may
1 Lord Romilly, in Ashley's Case, 9 Eq. 263 ; Taite's Case, 3 Eq,
795; Peek's Case, 2 Ch. 674; Wilkinson's Case, 2 Ch. 536; Heymann v.
European Central Ry. Co., 7 Eq. 154; Directors of Central By. Co.
v. Kisch, L. R. 2 H. L. 99; Oakes v. Turquand, L. R. 2 H. L. 325;
In re Scottish Petroleum Co., 23 Ch. D. 413; Farrar v. Walker, 3 Dill.
(U. S.) 506; Upton v. Tribilock, 91 U. S. 45; Leaving v. Wise, 73
Penn. 173 ; Dynes v. Schaffer, 16 Ind. 165 ; Parsons v. McKinley, 56
Minn. 464; Cedar Rapids Ins. Co. v. Butler, 83 Iowa, 124 ; State v.
Jefferson Turnpike Co., 3 Humph. (Tenn.) 305.
2 Hill v. Hobart, 16 Me. 164; Holbrook v. Burt, 22 Pick. 546;
Flemings. Weagley, 32 111. App. 183; Collins v. Townsend, 58 Cal.
608 ; Page v. McMillan, 41 Wise. 337 ; Morgan v. McKee, 77 Penn.
228; Boughton v. Standish, 48 Vt. 594.
But when a stockholder's shares have been forfeited for non-pay-
ment of an assessment thereon, it is not incumbent upon him to take
any active step to avoid the contract of subscription if it was induced
by misrepresentation ; he is justified in awaiting the company's
attack; and when the company brings suit against him he may plead
the misrepresentation as a defence. Aaron's Reef Co. v. Twiss (1896),
A. C. 273.
' Marten v. Paul 0. Burns Wine Co., 99 Cal. 355.
* Weiseger v. Richmond Ice Machine Co., 90 Va. 795.
13
194 PROMOTERS AND PROMOTION OF CORPORATIONS.
waive his right to relief. Such acts, however, are not con-
clusive on the question.1 When the stock has been ten-
dered in rescission and refused, the subscriber has a right to
do any acts in regard to the stock reasonably necessary to
protect his interests, and at the same time to maintain his
claim to rescind. The jury may infer from acts of owner-
ship prima facie inconsistent with the demand for rescission,
that the subscriber has waived his demand, but the apparent
inconsistency may be dissipated by evidence that such acts
were properly done in the way of protection only, the right
to rescind being at the same time insisted upon.2
§ 190. Burden of Proof. — The burden of proof to estab-
lish laches or waiver is on the corporation. Accordingly,
in an action for calls on shares, when the defendant pleads
that he was induced to take the shares by fraud, it is not
for him to show that he repudiated the contract as soon as
he became aware of the fraud, but it is for the plaintiff to
show that the defendant adhered to the contract notwith-
standing his discovery of the fraud.3 .
§ 191. English rule as to effect of corporate insolvency on
right to rescind subscription. — It is settled in England that
the right of a subscriber to avoid the contract of subscrip-
tion is lost, unless he rescinds the contract and brings suit
to procure the removal of his name from the list of share-
holders before proceedings are instituted by or against the
corporation for a distribution of its assets on account of in-
solvency. But the subscriber is in time if he brings his suit
prior to such proceedings, although the corporation is as a
1 Stewart's Case, I Ch. 574 ; Wontner v. Sharp, 4 C. B. 404 ; Phila-
delphia, Wilmington, fr Baltimore R. R. Co. v. Cowell, 28 Penn. 329;
McCully v. Pittsburg £ Connellsville R. R. Co., 32 Penn. 25.
2 Jessop v. Ivory, 158 Penn. 71.
8 Aaron's Reefy. Twiss (1896), A. C. 273; Lindsay Petroleum Co.
v. Hurd, L. R. 5 P. C. 221.
EEMEDIES OF SUBSCRIBERS. 195
fact insolvent when his suit is begun.1 The rule is based
on the provisions of the winding-up acts.2 Under these acts,
a public officer is appointed to keep a register of, amongst
other things, the name of the projected company, a state-
ment of the nature of the intended business, the amount
of its capital, the names and addresses of subscribers, with
the number of shares taken by them, and the amount paid
on each share. And it is provided that, in the event of a
company being wound up, every member shall be liable, if
the company is a limited liability company, to pay in the
amount unpaid on his shares, or, if the liability of the
shareholders is not limited, to pay in an amount sufficient
to satisfy the claims of creditors. The status of registered
shareholders as contributories is thus fixed by winding-up
proceedings.3
§ 192. Tendency of decisions in this country. — In this
country, the tendency of the decisions is toward the view that
creditors of the corporation who become such subsequent to
stock subscriptions, and without notice of equities between
1 Oakes v. Turquand, L. R. 2 H. L. 325 ; Reese River Silver Mining
Co. v. Smith, L. R. 4 H. L. 64 ; Tennent v. City of Glasgow Bank,
4 App. Cas. 615 ; Cat-ling v. Bank of London ff Leeds, 56 L. J. Ch.
321.
2 In re Scottish Petroleum Co., 23 Ch. D. 413.
8 Compare the United States National Banking Act, which pro-
vides that a certificate shall be filed with the Comptroller of the Cur-
rency, containing, among other things, a statement of the capital stock
of the proposed banking corporation, the number of shares into which
it is divided, the names and places of residence of the shareholders and
the number of shares held by each of them. The corporation is re-
quired to keep a list of the shareholders open to the inspection of
shareholders and creditors, and annually to transmit a copy of such
list to the Comptroller of the Currency. Shareholders are individually
responsible for the corporate debts to an amount equal to the par value
of their shares, in addition to the paid-up value. On a winding-up, a
receiver is authorized to enforce this individual liability. U. S. Re-
vised Statutes, Sect. 5133 et seq.
196 PROMOTERS AND PROMOTION OF CORPORATIONS.
the" subscribers and the corporation, stand, as to those sub-
scriptions, to the extent of their equitable lien, in the posi-
tion of innocent purchasers for value. As against such
creditors, the subscriber's right to rescind his contract of
subscription is lost if not exercised before corporate insol-
vency proceedings, voluntary or involuntary, have been in-
stituted, or some act done that is in law regarded as an act of
insolvency. It makes no difference in what aspect the ques-
tion is raised, — whether the subscriber who has paid for
his stock repudiates the contract on the ground of misrepre-
sentation, and sues to recover what he has paid, or whether
he is sued for the amount unpaid on his subscription,
and defends on the ground of misrepresentation. If, in
consequence of his apparent relations with the corporation
as a subscriber, innocent third parties have, upon the faith
of such relations, acquired rights which would be preju-
diced by a rescission of the contract of subscription, the
subscriber will not be allowed, in the one case, to with-
draw what he has paid in, or, in the other case, to escape
payment.1
§ 193. Effect of repudiation of subscription -without suit. —
Repudiation by any act or acts of the subscriber which in
law amount to a rescission, as, for example, when the sub-
scriber notifies the corporate authorities that he repudiates
1 Morawetz on Corporations, Sects. 839, 840 ; Duffield v. E. T.
Barnum Wire if Iron Works, 64 Mich. 293; Savage v. Bartlett, 78
Md. 561; Howard v. Turner, 155 Penn. 350; Ramsey v. Thompson
Mfg. Co., 116 Mo. 313; Michener v. Payson, 13 Nat. Bank Reg. 49;
Webster v. Upton, 91 U. S. 65 ; Upton v. Tribilock, 91 U. S. 45 ;
Sanger v. Upton, 91 U. S. 56; Chubb v. Upton, 95 U. S. 665; Ogilvie
v. Knox, 22 How. (U. S.) 380; Upton v. Englehart, 3 Dill. 496. Com-
pare Cunningham v. Edgefield if Kentucky R. R. Co., 2 Head (Term.),
23; Ashmeadv. Colby, 26 Conn. 287; Turner v. Grangers' Life Sf Health
Ins. Co., 65 Ga. 649; Hamilton v. Grangers' Life if Health Ins. Co.,
67 Ga. 145; Jewell v. Rock River Paper Co., 101 111. 57; Reederv.
Maranda, 66 Ind. 486.
EEMEDIES OF SUBSCEIBERS. 197
the contract, and tenders back his shares, is effective with-
out a suit against the corporation to set the contract aside,
although insolvency proceedings are subsequently begun ;
and in such case it is not necessary, at least in those juris-
dictions where a public registry of the shareholders is not
required by law to be kept, to begin suit before insolvency
proceedings to procure the removal of the shareholder's
name from the register of shareholders.1
i Savage v. Bartlett, 78 Md. 561; Fear v. Bartlett (Md. 1895), 32
At. Rep. 322; Upton v. Englehart, 3 Dill. 496; Newton Nat. Bank v.
Newbiggen, 74 Fed. Rep. 135. Mr. Justice Miller has expressed the
opinion that a defrauded subscriber has the right to repudiate the con-
tract of subscription after the insolvency of the corporation, if he has
not had a reasonable time to examine into the affairs of the corpora-
tion before the appointment of the assignee. Farrar v. Walker, 3
Dill. 506. See also Haskell v. WortUngton, 94 Mo. 560.
198 PROMOTERS AND PROMOTION OF CORPORATIONS.
CHAPTER X.
RIGHTS AND LIABILITIES OF CORPORATION ON PROMOTERS*
CONTRACTS.
ARTICLE I. — Enforcement by or against the Corporation of
Contracts made in its Name and for its Benefit by its
Promoters before it comes into Existence.
ARTICLE II. — Liability of Corporation to pay its Promoters,
or Persons employed by them, for Services and Expenses
incident to its Formation.
ARTICLE I. — ENFORCEMENT BY OR AGAINST THE CORPORATION OF
CONTRACTS MADE IN ITS NAME AND FOR ITS BENEFIT BY ITS
PROMOTERS BEFORE IT COMES INTO EXISTENCE.
§ 194. Such contracts as a rule
primarily not binding
upon or enforceable by
the corporation.
195. Penn Match Co. v. Hapgood,
141 Mass. 145.
196. Long v. Citizens' Bank, 8
Utah, 104.
197. Gooday v. Colchester, &c.
Ry.Co., 17Beav. 132. .
198. Buffington v. Barden, 80
Wise. 635.
199. By weight of authority, cor-
poration cannot ratify
contract made for it be-
fore its creation.
200. Doctrine held by Lord Cot-
tenham.
201. Decisions of Lord Cottenham
questioned.
202. Corporation may accept or
adopt contracts made for
it prior to its creation.
203. Effect of such adoption or
acceptance.
§ 204. Acceptance or adoption may
be express.
205. Stanton v. New York &
Eastern R. R. Co., 69
Conn. 272.
206. Acceptance or adoption by
corporation may be in-
ferred from its acts.
207. Taking benefit of contract
may be evidence of ac-
ceptance or adoption.
208. Circumstances under which
it establishes acceptance
or adoption.
209. Battelle v. Northwestern
Cement & Concrete Pave-
ment Co., 37 Minn. 89.
210. Pittsburg & Tennessee Cop-
per Co. v. Quintrell, 91
Tenn. 693.
211. Acceptance by corporation
of subscriptions for shares
made before its forma-
tion.
EIGHTS AND LIABILITIES OF COKPORATION.
199
§ 212. Cases in which term ratifica-
tion used in sense of adop-
tion or acceptance.
213. Paxton Cattle Co. v. First
National Bank of Arrapa-
hoe, 21 Neb. 021.
214. Distinction between ratifica-
tion and adoption or ac-
ceptance.
§ 215. English doctrine as to pro-
moter's contracts.
216. Howard v. Patent Ivory
Mfg. Co., 38 Ch. D. 156.
217. Corporation cannot adopt
or accept ultra vires con-
tracts.
§ 194. Contracts made for corporation before it comes into
existence as a rule not enforceable by or against corporation.
— Promoters are merely persons who for purposes of their
own bring about the formation of the corporation. In as-
suming to make contracts in its name or behalf before it
comes into existence, they do not stand in a relation of
agency, and they represent only themselves, inasmuch as a
non-existing body cannot have agents. Moreover, it is
ordinarily the case that the body of shareholders who ulti-
mately constitute the corporation have no connection with
the promoters or their acts, and take their shares on the
assumption — and the reasonable assumption — that such
contracts as it may be desirable for the corporation to make
will be made by it through its known and duly constituted
officers or agents.1 Contracts made for a corporation by its
promoters prior to its creation are therefore not enforce-
able by or against the corporation after its organization,2
1 Earl of Shrewsbury v. North Staffordshire Ry. Co., 1 Eq. 593, 614.
2 Kelnerv. Baxter, L. R. 2 C. P. 174 ; Melhado v. Porte Allegre, New
Hamburgh, Sf Brazilian Ry., L. R. 9 C. P. 505; Eley v. Positive Assur-
ance Co., 1 Ex. D. 88; Caledonian, fyc. Ry. Co. v. Helensburg, 2 Macq.
391 ; In re Empress Engineering Co., 16 Ch. D. 125 ; In re Northumber-
land Hotel Co., 33 Ch. D. 16 ; Franklin Fire Ins. Co. v. Hart, 31 Md.
59; Bluehill Academy v. Witham, 13 Me. 403; Munson v. Syracuse, fyc.
Ry. Co., 103 N. Y. 58; Lorillard v. Clyde, 122 N. Y. 498; Western
Screw Sf Mfg. Co. v. Cawsley, 72 111. 531 ; Penn Match Co. v. Hapgood,
141 Mass. 145; Abbott v. Hapgood, 150 Mass. 252 ; Buffington v.
Barden, 80 Wise. 635; Long v. Citizens' Bank, 8 Utah, 104; Moore
fy Handly Hardware Co. v. Tower's Hardware Co., 87 Ala. 206; Carey
v. Des Moines Coal Sf Mining Co., 81 Iowa, 674.
200 PROMOTERS AND PEOMOTION OF COEPORATIONS.
unless its charter provides otherwise,1 or unless, under
the doctrines held in this country, they acquire validity
through acceptance, adoption, or ratification by the corpora-
tion when formed. And this is so, though the promoters
become, upon the formation of the corporation, its only
shareholders, directors, and officers.2
§ 195. In Penn Match Co. v. Hapgood,3 certain persons
agreed to form a corporation and to build a factory for the
manufacture of matches, provided they could obtain certain
machinery of the defendant, who was a manufacturer of
the machinery desired, and the only person from whom it
could be obtained. They informed the defendant of the
premises, and in the name and for the benefit of the pro-
posed corporation applied to him for the machinery. There-
upon the defendant made contracts in writing to furnish
the corporation with the machinery upon specified terms.
The corporation was then formed, and a factory built for
it, but the defendant refused to furnish the machinery. In
1 Tilson v. Warwick Gaslight Co., 4 B. & C. 962 ; In re Brampton Ry.
Co., 10 Ch. 177; Gent v. Manufacturers1 Mut. Ins. Co., 107 111. 652;
Earl of Shrewsbury v. North Staffordshire Ry. Co., 1 Eq. at p. 615.
2 Battelle v. Northwestern Cement fr Concrete Co., 37 Minn. 89. But
it has been held that, when persons associated together to carry on a
business, contract debts in the course of the business, and afterwards
convey the property of the association to a corporation formed by
them to prosecute the business, and in which they are the only share-
holders, the corporation maybe liable in equity for the payment of the
debts. "Under such circumstances," said the Court, "the property
of no one but those who contracted the debt and were originally lia-
able would be taken or subjected to the payment of it. The same
persons continue the same business, with the same property, with no
substantial change except in name. In such a case there is no reason
why, in equity, the corporation should not be primarily liable for the
debts, as it has succeeded to the property of the association." Paxton
v. Bacon Mill, frc. Co., 2 Nev. 257. See also Bergen v. Porpoise Fishing
Co., 41 N. J. Eq. 238.
8 141 Mass. 145.
EIGHTS AND LIABILITIES OF COKPOKATION. 201
an action for a breach of the contract brought by the cor-
poration against the defendant, it was held that on the
facts stated it could not recover.
§ 196. in Long v. Citizens' Bank,1 certain persons agreed
to form a corporation to carry on a banking business under
the name of the Citizens' Bank. It was arranged that one
Barbour should become the Cashier ; and when the corpora-
tion was organized he was elected as such. Prior to the
formation of the corporation, a certificate of deposit was
issued, purporting to be a certificate of deposit of the Citi-
zens' Bank for $1,000 payable to a person named, and
signed by Barbour as Cashier. The plaintiff, being an
innocent holder for value, brought suit on the certificate
against the corporation. It did not appear that the cor-
poration had received any of the moneys represented by
the certificate. It was held that the corporation was not
liable.
§ 197. In Gooday v. Colchester, &c. Ry. Co.,2 a land-
owner had withdrawn his opposition to a bill for the
incorporation of the defendant company, on an agreement
that the company when incorporated should buy his lands.
The bill passed, but the company did not take his lands.
The Court refused to decree specific performance.
§ 198. in Buffington v. Barden,3 the promoters of a cor-
poration, before the corporation came into existence, em-
ployed the plaintiff as an architect to prepare plans and
specifications for certain buildings which it was designed
should be erected for the purposes of the corporation,
and agreed that he should be paid a stated sum for his
services. The agreement was made in the name of the in-
tended corporation. The plaintiff performed the required
services. The corporation was subsequently formed, but
1 8 Utah, 104. » 17 Beav. 132. • 80 Wise. 635.
202 PROMOTERS AND PROMOTION OF CORPORATIONS.
it was not shown that it had availed itself of the labor
of the plaintiff. It was held that he could not recover
from the corporation.
§ 199. By weight of authority corporation cannot ratify
contract made for it before its creation. — According to the
weight of authority, a contract made in the name and for
the benefit of a projected corporation by its promoters,
cannot, either at law or in equity, be ratified by the
corporation when it comes into existence. Ratification
implies an existing person on whose behalf the contract
might have been made at the time. There cannot be a
ratification of a contract which could not have been made
binding on the ratifier at the time it was made because the
ratifier was not then in existence.1 In Spiller v. Paris
Skating Rink? Malins, V. C., held that the contract might
be ratified in equity ; but this was overruled by later
decisions.3 The only thing which results from what is
called ratification of such a contract is not the ratifica-
tion of a contract qua contract, but the creation of an
equitable liability depending upon equitable grounds.*
Thus, when promoters have rendered necessary services
prior to the creation of the corporation, of which the
corporation avails itself, it may be inequitable for the
1 Kelner v. Baxter, L R. 2 C. P. 174; Gunnv. London Sf Lanca-
shire Ins. Co., 12 C. B. (N. s.) 694 ; Melhado v. Porte Allegre, New
Hamburgh, Sf Brazilian Railway, L. R. 9 C. P. 503; Abbott v. Hapgood,
150 Mass, at p. 252; Queen City Furniture If Carpet Co. v. Crawford,
127 Mo. 356; Me Arthur v. Times Printing Co., 48 Minn. 319; Cook
v. Tullis, 18 Wall, at p. 338; Pratt v. Oshkosh Match Co., 89 Wise.
406; Stainsby v. Frazer Metallic Life Boat Co., 3 Daly (N. Y.), 98;
Weatherford Mineral Wells Sf Northwestern Ry. Co. v. Granger, 86
Tex. 350.
2 17 Ch. D. 368.
8 In re Empress Engineering Co., 16 Ch. D. 125; In re Northumber-
land Hotel Co., 33 Ch. D. 16.
4 James, L. J., in In re Empress Engineering Co., 16 Ch. D. 125.
RIGHTS AND LIABILITIES OF CORPORATION. 203
corporation not to pay the fair value of those services
of which it has taken the benefit.1
§ 200. Doctrine held by Lord Cottenham. — It has also
been held in a line of cases decided by Lord Cottenham,
that a corporation in whose name and for whose benefit
its promoters have, prior to its coming into existence,
made a contract with a person touching his property,
may be equitably bound not to exercise its legal rights
in relation to that property, save in accordance with
the requirements of the contract. In Edwards v. Grrand
Junction Ry. (7o.,a promoters of a railway company, a
bill for the incorporation of which was pending in Par-
liament, in order to do away with the opposition of the
trustees of a turnpike road which it was designed that
the railway should cross, agreed with the trustees that
the road should be carried over the railway by a bridge
fifty feet wide, the width of the road. In consideration
of this agreement, the trustees withdrew their opposition,
and the bill passed. The company then undertook to
construct a bridge only thirty feet wide. An injunction
was granted to restrain the company from interfering with
the road in any manner other than that specified in the
agreement made by the promoters. In Petre v. Eastern
Counties Ry. (70. ,3 the promoters of a railway agreed with
the plaintiff, a peer, that, if he would not oppose the bill,
the corporation in case the railway should pass through
his lands would pay him before entering them £120,000.
The corporation having been formed, and having the
power under the act to condemn the plaintiff's land, pro-
1 In re Hereford Engineering Co., 2 Ch. D. 621 ; In re Empress En-
gineering Co., 16 Ch. f). 125; In re Dale & Plant Co., 61 L. T. Rep.
206 (1889).
2 1 My. & Cr. 650.
» 1 Ry. Cases, 462.
204 PROMOTERS AND PROMOTION OF CORPORATIONS.
ceeded to do so. It was enjoined.1 See also Stanley v.
Chester $ Birkenhead Ry. Co.2 In these cases the con-
tract was not enforced by compelling the corporation to
take the land or to deal with it according to the contract.
The corporation was at liberty to make its entry on the
land, or not, as it saw fit ; but when it elected to do so,
it was held that, having had the benefit of the considera-
tion of the contract, it was equitably bound not to inter-
fere with the rights of the other party in the land, save
in accordance with the terms of the contract. The rea-
sons upon which Lord Cotteuham founded his judgment
were thus explained by him in a later case : 3 " The
right is not properly speaking a right of contract, but
rather arises out of the contract; but the equity is this,
that what has subsequently taken place, and the position
in which the parties stand, give the party seeking the
benefit of the contract a right to the interference of
this Court, by virtue of an equity which induces the
Court to prevent the company from exercising their legal
right, unless upon the terms of adopting and giving effect
to the contract which has been entered into by other
parties."
§ 201. Decisions of Lord Cottenham questioned. — These
decisions of Lord Cottenham have been questioned in
Preston v. Liverpool, Manchester, $c. Ry. Co.? Scottish
North Eastern Ry. Co. v. Stewart,5 Caledonian Ry. Co. v.
1 This decision has been severely criticised on the ground that a
contract of the nature disclosed, when made with a peer or other legis-
lator, is opposed to public policy. The decision, said Lord Cranworth
in Preston v. Liverpool, fyc. Ry. Co., 5 H. L. C. 631, " made everybody
start when they heard it." See Green's Brice's Ultra Vires, 2d ed.,
581, n. A.
2 3 My. & Cr. 773.
8 Greenhalgh v. Manchester, Sfc. Ry. Co., 3 My. & Cr. 784.
* 5 H. L. Cas. 605. * 3 Macq. 282.
EIGHTS AND LIABILITIES OF CORPORATION. 205
Helenslurgh? Earl of Shrewsbury v. North Staffordshire
Ry. Co.2 On the other hand, their principle was approved
by Page-Wood, Y. C., in Earl Lindsey v. Great Northern
Ry. Co. ; 3 and Mr. Brice in his work on Ultra Vires, sub-
mits that they still hold good, with this qualification, that
it is necessary to except all engagements which are either
ultra vires the corporation, or mere bribes to secure the
good will of powerful interests, neither of which can, under
any circumstances, be enforced against the corporation.4
§ 202. Corporation may accept or adopt contracts made
for it prior to its creation. — While a corporation cannot,
according to the weight of authority, ratify contracts made
in its name or behalf before it has acquired life, it may,
under what is perhaps the prevailing American doctrine,
exercise its power to make contracts, when it comes into
existence, by accepting or adopting such contracts. There
can be no difference in this respect, it is said, between its
making a contract by accepting or adopting an agreement
originally made in advance for it, and its making an
entirely new contract.5 This doctrine seems to rest on the
conception that the original contract is in the nature of a
1 2 Macq. 391. 2 1 Eq. 593.
» 10 Hare, 665. See also Earl Lindsey v. Capper, 3 H. L. C. 293.
4 Green's Brice's Ultra Vires, 2d ed., 584.
6 Battelle v. Northwestern Cement if Concrete Pavement Co., 37 Minn.
89; Me Arthur v. Times Printing Co., 48 Minn. 319; Pratt v. Oshkosh
Match Co., 89 Wise. 406; Queen City Furniture §• Carpet Co., 127 Mo.
356; Pittsburg if Tenn. Copper Co. v. Quintrell, 91 Tenn. 693; Huron
Printing if Binding Co. v'. Kittleson, 4 So. Dak. 520 ; Gent v. Manu-
facturers' Ins. Co., 107 111. 652; Penn Match Co. v. Hapgood, 141
Mass. 145; Rogers v. New York fr Texas Land Co., 134 N. Y."197;
Boomer v. American Spiral Co., 81 N. Y. 468 ; Swisshelm v. Swiss-
vale Laundry Co., 95 Penn. 367; Morawetz on Corporations, Sect.
549 ; Grand River Bridge Co. v. Rollins, 13 Col. 4 ; Schreyer v. Turner
Flouring Mills Co. (Or.), 43 Pac. Rep. 719; Weatherford Mineral Wells
if Northwestern R. R. Co. v. Granger, 86 Tex. 350.
206 PROMOTERS AND PROMOTION OF CORPORATIONS.
continuing proposal which, if , not withdrawn, the corpora-
tion upon its organization may accept. An offer need not
be made to an ascertained person ; a contract results
from the offer when, before withdrawal, it is accepted
by an ascertained person.1 If acceptance takes place be-
fore withdrawal of the offer, there is then a meeting of
minds resulting in a mutual contract. Where the parties
who made the original contract intended that the corpora-
tion when formed should become, or have an opportunity
to become, a party to it, it seems entirely reasonable to
treat the contract as constituting or including an offer open
to the corporation to accept, if it sees fit, when it comes
into existence.2 If there is such acceptance, it amounts in
legal effect, to the making of a new contract, the validity
and operation of which must depend upon the common law
rules applicable to the making of an original contract.3
§ 203. Effect of such adoption or acceptance. — Thus, in
Me Arthur v. Times Printing Co.,* the promoters of the
defendant corporation, which was formed for the purpose
of publishing a newspaper, prior to the formation of the
corporation made a contract with the plaintiff, in behalf of
the contemplated corporation, for his services as an adver-
tising solicitor for the period of one year from October 1,
1889, the date at which it was expected the corporation
would be organized. The corporation was not in fact
organized until October 16th, but the promoters began the
publication of the paper on October 1st, and the plaintiff
then entered upon the performance of his duties according
to the requirements of the contract, and continued to act
1 Anson on Contracts, 35.
2 Morawetz on Corporations, Sect. 548.
* Me Arthur v. Times Printing Co., 48 Minn. 319 ; Morawetz on
Corporations, Sect. 549.
4 48 Minn. 319.
RIGHTS AND LIABILITIES OF CORPORATION. 207
until the following April, when he was discharged. In a
suit brought by him against the corporation, the Statute of
Frauds was interposed as a defence, on the theory that the
corporation had ratified the contract, and that, the ratifica-
tion relating back to the time when it was made, it was a
contract for services not to be performed in one year. But
the court held that, the corporation having adopted the
contract when it came into existence, such adoption was
in legal effect the making of a new contract of the date of
the adoption, and that while the contract made by the
promoters was not to be performed within one year, the
new contract was as a fact to be performed within a year,
and so the statute was not applicable.
§ 204. Acceptance or adoption may be express. — The
acceptance or adoption1 by a corporation of contracts
made in its name and for its benefit prior to its coming
into existence may be formal or express. Thus, in Pratt
v. Oshkosh Match Co.? Jones and Wyman were copartners
engaged in the manufacture and sale of matches under the
name of the Oshkosh Match Company. The plaintiff con-
tracted with the partnership to deliver to it a specified
number of feet of boards at a stated price. Subsequently,
Jones informed the plaintiff that the defendant corporation
was to be formed to take over the business of the partner-
ship, and that the corporation would take the boards ; but
that owing to changes in the business which would arise
from the incorporation, certain alterations of the terms of
the order were necessary. The plaintiff agreed to the al-
terations, and made a new memorandum of sale in his book.
The corporation was then organized, and through Jones as
its agent ordered the plaintiff to manufacture the boards
1 The terms "adoption" and "acceptance" seem to be inter-
changeably used in the cases.
2 89 Wise. 406.
208 PROMOTERS AND PROMOTION OF CORPORATIONS.
according to the terms of the agreement, but with certain
modifications. This the plaintiff did. In an action brought
by him against the corporation to recover the purchase
price of the boards, it was held that on the facts stated he
was entitled to recover.
§ 205. In Stanton v. New York & Eastern R. R. Co.,1 — the
promoters of a railroad corporation, previous to its in-
corporation, entered into a contract with the plaintiff in
the name and for the benefit of the intended corporation,
by the terms of which the plaintiff was to purchase at his
own expense the lands necessary for the location of the pro-
jected railroad, and to convey the same to the corporation
when formed, and the corporation was to pay him therefor
by the transfer of a stated number of shares of its capital
stock. The corporation was organized, and, by a duly
authorized committee of its directors, executed an instru-
ment in writing declaring the contract in question to be " a
binding contract upon the parties." The plaintiff devoted
much time, both before and after the organization of the cor-
poration, and after the execution of the instrument referred
to in carrying out his part of the contract, but the
corporation finally abandoned the enterprise. In a suit
brought against the corporation by the plaintiff to recover
for his services under the contract, it was held that he was
entitled to recover. The liability of the corporation is put
by the court on the ground of ratification of the contract ;
but the facts clearly show an express acceptance.2
§ 206. Acceptance or adoption by corporation may be in-
ferred from its acts. — The acceptance or adoption may be
implied from the acts of the corporation, — " acts from
1 59 Conn. 272.
2 See also Reichwald v. Commercial Hotel Co., 106 111. 439; Davis v.
Dexter Butter fr Cheese Co., 52 Kan. 693; McKnight v. Pittsburgh, 91
Penii. 273; Colorado Land #• Water Co. v. Adams, 5 Col. App. 190.
EIGHTS AND LIABILITIES OF COKPORATION. 209
which you can infer, and from which you ought to infer,"
that there was an adoption of the contract by the corpora-
tion after its formation. This may be inferred from the
acceptance by the corporation of property directly delivered
to it by the other party to the contract, or received from
him through the promoters, to whom it was delivered to be
turned over to the corporation when formed ; or it may be
inferred from the retention by the corporation of the ben-
efit of services rendered under the contract subsequent, or
ordinarily prior, to the formation of the corporation.1
§ 207. Taking benefit of contract may be evidence of accept-
ance or adoption. — But such inference is not necessarily in
all cases to be drawn from the fact that the corporation has
benefited by the contract. This circumstance is no more
than evidence of acceptance or adoption of the contract.
The question upon which the liability or non-liability of the
corporation depends is not, Has the corporation had the
benefit of the contract ? but, Has the corporation adopted
the contract and made it its own ? If the contract was not
made in the name of the intended corporation, but was
made on the credit of the promoter, who received goods or
money under it, which he subsequently turned over to the
corporation when formed, the mere acceptance and reten-
tion of the goods or money by the corporation would not
amount to an adoption of the promoter's contract. The
corporation does not in such case enter into any contract,
express or implied, with the person dealing with the pro-
moter, and does not incur any obligation towards that per-
son, by reason of the circumstance that it gets the benefit
of what he has done. The principle applicable here may be
1 Under some circumstances, the corporation is not rendered liable
for services by retaining the benefit of them. See discussion of
liability of corporation to pay for services in obtaining subscriptions
for stock, infra.
14
210 PKOMOTEKS AND PROMOTION OF CORPORATIONS.
illustrated by a decision in a partnership case. In Emly
v. Lye? a partner drew bills in his own name, and sent
them to an agent of the firm in order that he might get
them discounted. They were discounted, and the money
obtained was remitted by the agent, and was paid to the
account of the firm. It was held that the firm was neither
liable for the amount of the bills on the bills themselves,
nor for their proceeds on the common counts. There was
no loan to the partnership ; no contract with it ; and no
liability attached to the firm by the fact that the partner
who alone was liable had applied the money after he got it
for the benefit of his copartners as well as for the benefit
of himself.2
§ 208. Circumstances under which taking benefit of con-
tract establishes acceptance or adoption of contract. — When,
however, the contract is made in the name or in behalf of
the projected corporation, and is treated as a proposal to
such corporation, to be acted upon by it when it comes into
existence, then, in the absence of other controlling circum-
stances, acceptance of benefits under the contract, justi-
fies the inference that the corporation has accepted or
adopted it.
§ 209. In Battelle v. Northwestern Cement and Concrete
Pavement Co.,3 the plaintiff with two other persons organ-
ized the defendant corporation, becoming its only share-
holders and its directors and officers. Prior to the
formation of the corporation it was agreed that certain
property belonging to the plaintiff should be transferred by
him to the corporation, when formed, and that in consider-
ation thereof the corporation should assume and pay certain
notes which the plaintiff had given in payment of the pur-
chase price of the property when he acquired it. After the
1 15 East, 7. 2 1 Lindley on Partnership, 361.
8 37 Minn. 89.
I
RIGHTS AND LIABILITIES OF CORPORATION. 211
corporation was organized, the property in question was
transferred by the plaintiff to it, and was accepted and
used by it, every member of the corporation having knowl-
edge of the contract under which the corporation ac-
quired the property. It was held that the corporation
had accepted and adopted the contract, and was bound
to pay the notes according to its requirement. " It is
not necessary," said the Court, " that such adoption or
acceptance be express, but it may be inferred from acts
or acquiescence on the part of the corporation or its author-
ized agents, as a similar original contract might be shown."
§ 210. In Pittsburg & Tennessee Copper Co. v. Quintrell,1 —
the evidence showed that one of the incorporators of a
mining company contracted with the plaintiff for services
before the application for incorporation was made ; that
after the formation of the corporation, he sent word to the
plaintiff to report for work ; that when the plaintiff re-
ported, some one else had been employed in his place, but
he was promised work if he would wait ; that while so wait-
ing he was told by the president of the corporation that he
knew of the contract, and was surprised not to find him at
work ; that later he was given work, but soon after was
discharged without fault. It was held that the jury were
warranted in inferring that the contract between the plain-
tiff and the projectors of the corporation had been adopted
by the corporation after its organization.2
1 91 Tenn. 693.
2 For additional illustrations, see Me Arthurs. Times Printing Co.,
48 Minn. 319; Boomer v. American Spiral Co., 81 N. Y. 468; Grand
River Bridge Co. v. Rollins, 13 Col. 4; Rogers v. New York fr Texas
Land Co., 134 N. Y. 197; Huron Printing Sf Binding Co. v. Kittleson,
4 So. Dak. 520; Swisshelm v. Swissvale Laundry Co., 95 Penn. 367;
Schreyer v. Turner Flouring Mills Co. (Or.), 43 Pac. Rep. 719; Brown-
ing v. Great Central Mining Co., 5 H. & N. 856; Frankfort Sf S. T.
Co., 6 T. B. Monroe, 427.
212 PEOMOTEES AND PROMOTION OF CORPORATIONS.
§ 211. Acceptance by corporation of subscriptions for shares
made before its formation. — In accordance with the rule
stated, the corporation may avail itself of subscriptions for
shares made before its formation, if when it comes into exist-
ence it accepts the subscriptions, either expressly by formal
acceptance or by an issue of a certificate to the subscriber,
or impliedly by acts amounting to a recognition of the sub-
scriber in the capacity of a shareholder. Although the
subscription is originally in the nature of an open proposi-
tion, yet when accepted and acted on by the corporation,
before the subscriber retracts it, the right to revoke is lost,
and the subscription then becomes an accepted mutual
contract, binding upon both the subscriber and the cor-
poration.1
§ 212. Cases in -which term " ratification " used in sense of
adoption or acceptance. — There are cases in which the acts
1 Hudson Real Estate Co. v. Tower, 156 Mass. 82 ; Athol Music Hall
Co. v. Carey, 116 Mass. 471 ; Richlieu Hotel Co. v. International Military
Encampment Co. , 140 111. 248 ; Ashuelot Boot fr Shoe Co. v. Hoit, 56
N. H. 348; Miller v. Wild Cat Gravel Road Co., 52 Ind. 51; Buffalo fr
Jamestown R. R. Co. v. Gifford, 87 N. Y. 294; Peninsular R. R. Co.
v. Duncan, 28 Mich. 130 ; Penobscot R. R. Co. v. Dummer, 40 Me.
172; Essex Bridge Co. v. Tuttle, 2 Vt. 393; Sanger v. Upton, 91 U. S.
56; Bell's Appeal, 115 Perm. 88; Mohan v. Wood, 44 Cal. 462;
Starrett v. Rockland Insurance Co., 65 Me. 374. It has been held that
where the subscription does not purport to run to the corporation,
the corporation cannot enforce it. Lake Ontario Shore R. R. Co. v.
Curtis, 80 N. Y. 219. It is held in most of the New England States,
contrary to the rule in other jurisdictions, that the corporation can-
not enforce a subscription for stock unless the subscriber has expressly
promised to pay, or the charter expressly obliges him to do so ; and
there are cases holding that the subscription once made is irrevocable,
and in itself constitutes a contract which upon the formation of the
corporation becomes binding. For a review of the law on these
points, and a citation and examination of the decisions, see Thompson
on Corporations, Sect. 1162 et seq. See also a statement of the law
by Professor Collins of the Cornell University Law School, quoted in
Cook on Stockholders, 3d ed., Sect. 75.
RIGHTS AND LIABILITIES OF CORPORATION. 213
of the corporation in relation to contracts made for it be-
fore its formation are spoken of, inaccurately, it would seem,
as ratification ; but the facts disclosed in most of these
cases bring them within the rule stated as to acceptance or
adoption.1 Two cases will serve as illustrations. In
Oakes v. Cattaraugus Water Co.? Cowan, who was engaged
in organizing a water-works company, and was the princi-
pal promoter of the enterprise, in the name of the intended
corporation entered into a written contract with the plain-
tiff to pay him $1,000 for his services in securing a right of
way and in other matters pertaining to the proposed water-
works. The company was thereafter incorporated, and
Cowan became its managing agent, and had full direction
and charge of the business. The water-works were con-
structed, and the plaintiff, at the request of Cowan, ren-
dered services of the character called for by the contract.
It was held that it was fairly within the powers of Cowan
as managing agent of the corporation to adopt or ratify the
contract, and that if he intended in behalf of the corpora-
tion, by calling upon the plaintiff to do the things which he
had agreed to do in the writing, to adopt and ratify the
agreement made before the incorporation, instead of mak-
ing a new one, there was no good reason why the corpora-
tion should not become bound by his action, and that
whether or not this was his intention was a question of
fact. In a dissenting opinion, Gray, J., pointed out that
there could be no ratification of the contract, because it
was made before the corporation came into existence.
Conceding that a corporation may become obligated by a
1 Stanton v. New York fr Eastern R. R. Co., 59 Conn. 272 ; Rogers v.
New York §• Texas Land Co., 134 N. Y. 197, 211 ; Davis v. Montgomery
Furnace §• Chemical Co., 8 So. Rep. 496; Whitney v. Wyman, 101
U. S. 392; Grape Sugar fr Vinegar Mfg. Co. v. Small, 40 Md. 395;
Bruner v. Brown, 139 Ind. 600.
2 143 N. Y. 430.
214 PROMOTERS AND PROMOTION OF CORPORATIONS.
contract made for it before its incorporation, through ac-
ceptance or adoption, " it should at least appear," he said,
" in order to justify a verdict from the facts, that those
facts established a knowledge by its agents of its existence
and of its terms ; or that the benefits, the acceptance of
which is relied upon to constitute adoption, were of that
nature as to presuppose and charge the company or its
agents with knowledge of a contract with the person from
whom derived." But in his opinion, the adoption of the
contract could not rest in implication from the mere state-
ment or acts of the interested party who made it, with no
evidence to show any knowledge or acquiescence on the
part of any other officer or member of the corporation. It
is apparent that the point of difference between the majority
and minority of the Court in this case was the authority of
Cowan to bind the corporation by his acts. Assuming that
he had the requisite authority, it was on the facts a ques-
tion of name and not of substance whether his acts amounted
to a ratification or to an acceptance or adoption of the con-
tract ; and in the majority opinion, it is said that " in this
case ratification and adoption mean the same thing."
§ 213. In Paxton Cattle Co. v. First National Bank of
Arrapahoe,1 — the promoters of the Paxton Cattle Com-
pany, after executing articles of incorporation, but before
the corporation acquired life by the recording of the arti-
cles, caused to be executed and delivered to one Meserve,
in the name of the corporation, a note in consideration of
the sale and in payment for a certain ranch, horses, cattle,
and other property, which after the corporation came
into existence were delivered to and retained by it, the
directors and officers having full knowledge of the facts in
relation to the execution of the note. It was held that the
assignee of Meserve could recover against' the corporation
1 21 Neb. 621.
EIGHTS AND LIABILITIES OF COEPOEATION. 215
on the note. The Court said : " The conclusion is inevi-
table, granting the entire want of power on the part of the
officers and promoters of the corporation to act as such at
the date of the note, that the retaining possession by the
corporation after its organization is a ratification of the
contract with all its terms and obligations." It seems
clear on the facts presented by this case that there was a
contract by the corporation, to be implied from its acts, to
pay the note according to its terms.
§ 214. Distinction between ratification and adoption or ac-
ceptance. — Possibly in some of the cases the term " rati-
fication " is employed, not in its strict legal sense, but to
express the same meaning which is conveyed by the terms
" adoption " and " acceptance." It must be admitted how-
ever, that, while in perhaps most cases it is a question not
of substance but of name, whether the act obligating the
corporation is to be styled ratification or adoption or ac-
ceptance, the question may in some circumstances be an
important one. Under the theory of ratification, the con-
tract is deemed to have been valid and operative from its
inception, the ratification relating back to the moment
when the contract was made by the promoters. Under the
theory of adoption or of acceptance of a continuing offer,
there is no contract until there have been such acts of
adoption or acceptance as will fix the rights of both parties.
In cases involving a defence based on the Statute of Limita-
tions or on that provision of the Statute of Frauds touching
certain contracts not to be performed within one year, the
contract might be enforceable under one theory and un-
enforceable under the other.1 This would also be true in
cases where the corporation sought to enforce the contract
against the resistance of the other party to it.2
1 See Me Arthur v. Times Printing Co., 48 Minn. 319.
2 Penn Match Co. v. Hapgood, 141 Mass. 145.
216 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 215. English Doctrine. — The English doctrine as to
promoter's contracts differs from those stated, in that the
contract is not treated as a proposal, subject, at any time
before it is withdrawn, to acceptance by the corporation
when it comes into existence, but, on the contrary, as a
contract between the promoter in his individual capacity
and the person with whom he deals, to which the corpora-
tion cannot become a party by adoption, acceptance, or rat-
ification. If it appears that the promoter and the other
party intended to enter into a binding contract, they must
be deemed to have contracted in the only way in which
they could lawfully contract, — that is, with each other
individually. In order to create any obligation as between
the corporation and the party with whom the promoter
has contracted, there must be a distinctly new contract
made between them, although it may be in the same
terms as the old contract. It must be supported by a new
consideration. The retention of property which has been
handed over to the promoter under the old contract, and
by him delivered to the corporation, will not suffice. The
making of a new contract will not be inferred from the
fact alone that the corporation has received and retained
the property.1 But under some circumstances the corpora-
tion may become liable in equity to pay a fair compensation
for benefits which it has received.2 The fact that a new
contract has been made may, however, be inferred from
the acts of the parties.
1 Kelner v. Baxter, L. R. 2 C. P. 174; Scott v. Ebury, L. R. 2 C. P.
255; Gunn v. London Sf Lancashire Ins. Co., 12 C. B. (N. s.) 694;
Melhado v. Porte Allegre, New Hamburgh, Sf Brazilian Ry. Co., L. R.
9 C. P. 503; In re Northumberland Hotel Co., 33 Ch. D. 16. The
English doctrine has apparently met with favor in Massachusetts:
Abbott v. Hapgood, 150 Mass. 252; but compare Penn Match Co. v.
Hapgood, 141 Mass. 145. See Winters v. Hub Mining Co., 57 Fed.
Rep. 287.
2 In re Empress Engineering Co., 16 Ch. D. 125.
EIGHTS AND LIABILITIES OF CORPORATION. 217
§ 216. In Howard v. Patent Ivory Manufacturing Co.,1 —
Jordan entered into an agreement with Wysler, who pur-
ported to act on behalf of a company about to be formed, to
sell certain property to the projected company. The com-
pany was formed shortly afterwards, with a memorandum
and articles of association containing provisions for the
adoption of the agreement by the directors on behalf of the
company, with or without modification. At meetings of
the directors at which Jordan was present, resolutions were
passed adopting the agreement, accepting an offer of Jordan
to take payment of part of the purchase money in deben-
tures instead of in cash, and directing that the seal of the
company should be affixed to an assignment by Jordan to
the company of leasehold property comprised in the agree-
ment, and to debentures to be issued to Jordan. The
assignment was executed by Jordan, and sealed by the
company ; the debentures were issued to him, and the
company took possession of the leaseholds and carried on
their business thereon. The company was afterwards
wound up, and the liquidator took from Jordan an assign-
ment of other property comprised in the agreement. In
the winding up, the issue was raised whether the deben-
tures were valid. It was held that there was evidence that
a contract had been entered into by the company with Jor-
dan to the effect of the previous agreement as subsequently
modified by the acceptance of debentures instead of cash ;
that there was, therefore, at the time when the debentures
were issued, an existing debt due from the company, and
that they were consequently validly issued. Kay, J., in his
judgment, quotes the language of Turner, L. J., in Wilson
v. West Hartlepool Ry. Co.,2 that " there is authority for say-
ing that in the eye of this Court it is a fraud to set up the ab-
sence of agreement when possession has been given upon the
1 38 Ch. D. 156. 3 2 De G., J. & Sm. 475.
218 PROMOTERS AND PROMOTION OF CORPORATIONS.
faith of it;" and that "where possession has been given
upon the faith of an agreement, it is the duty of the Court,
as far as it is possible to do so, to ascertain the terms of the
agreement, and to give effect to it." He also quotes Sir
George Jessel, who said in In re Empress Engineering Co.J-
that the contract between the promoters and the so-called
agent for the company was not a contract binding upon the
company, nor could it become binding upon it by ratifica-
tion ; but that " it does not follow from that that acts may
not be done by the company after its formation which make
a new contract to the same effect as the old one."
§ 217. Corporation cannot adopt or accept ultra vires con-
tracts. — In stating that a corporation may adopt or accept
a contract made in its behalf by its promoters prior to its
creation, contracts which are ultra vires the corporation
must of course be excluded. And here a suggestion made
by Mr. Taylor seems worthy of consideration, namely, that
it may be ultra vires for a corporation to adopt acts done
before its formation, although the acts are of the same
nature as those which the corporation was formed to do.
" The true test," says Mr. Taylor, " by which to determine
whether the adoption of a given contract is ultra vires the
corporation is, not, Would the contract in question have
been within the powers of the corporation had it been
organized when the contract was made ? but, Is it within the
powers of the corporation to make the same contract now,
supposing it had not been made then ? or, Can the company
legally carry out that very contract ? To illustrate, sup-
pose certain persons, with a view of forming an insurance
company, and wishing to find out for certain how much
business a company would get from the beginning, go
about making contracts of insurance on behalf of the
future company, the insurance to begin at a point of time
i 16 Ch. D. at p. 128.
EIGHTS AND LIABILITIES OF COKPOKATION. 219
anterior to the formation of the company ; the company
is afterwards organized. These were contracts which the
company could legally have made had it been organized at
the time ; yet it seems doubtful whether the company
could assume those contracts so as to render itself liable
for losses which occurred before it was organized. If the
promoters had contracted that the company should insure,
the insurance to begin with the formation of the company,
in that case the company could have adopted and ratified
the contracts, for, after its organization, it could legally
have made those very contracts." * The test proposed seems
sound, but the apparent assumption as to the law in the
case, put by way of illustration, would seem to be too broad.
The company could not ratify the contract, because it was
not in existence when the contract was made. On the
theory of adoption or acceptance of the contract treated as
a continuing offer, the contract could acquire validity only
as of the date of adoption or acceptance, and at that date
the subject-matter of the insurance not being in existence,
the contract would be ultra vires the company, if the truth
as to the non-existence of the thing insured were known
to the company. But an insurance company has power to
make a retrospective contract of insurance, and the policy
may by its terms relate back so as to cover a loss which
happened anterior to the date of the policy.2 An insurance
company might issue a policy of insurance on a vessel which
some months prior thereto had sailed on a whaling voyage
to the Pacific Ocean. If the policy were written to cover
a loss during the entire voyage, it is not conceived that, in
the absence of misrepresentation or concealment, the fact
that the loss occurred prior to the formation of the insur-
ance company would constitute a defence to a suit on
1 Taylor on Corporations, 2d ed., p. 87, note.
3 Paddock v. Franklin Ins. Co., 11 Pick. 227.
220 PKOMOTERS AND PROMOTION OF CORPORATIONS.
the policy. The company could, therefore, in the case put
by Mr. Taylor, have made the very contract stated by him,
and having the power to make it, it follows that it would
have the power to adopt such a contract made in advance
for it, provided that it did not know that the loss to be in-
sured against had already occurred.
ARTICLE II. — LIABILITY OF CORPORATION TO PAY ITS PRO-
MOTERS, OR PERSONS EMPLOYED BY THEM, FOR SERVICES AND
EXPENSES INCIDENT TO ITS FORMATION.
§ 218. Statutory liability.
219. Liability under the English
Companies Acts.
220. Melhado v. Porte Allegre,
New Hamburgh. & Brazil-
ian Ry. Co., L. R. 9 C. P.
503.
221. Liability on quantum meruit.
§ 222. Doctrines held in this coun-
try as to liability of corpo-
ration.
223. Liability to pay for services
and expenses in obtaining
subscriptions for shares.
224. Doctrine held in Vermont
and New Hampshire.
§ 218 . Statutory liability. — In the case of corporations
created by a special act of the legislature, the act some-
times contains a clause that the expenses, costs, and
charges incidental and preparatory to the formation of
the corporation shall be paid by the corporation after it is
organized. This creates a legal liability on the part of the
corporation to pay the proper expenses of obtaining its
charter. It enables the promoters who have performed
necessary services, or incurred proper expenses, in the
work of formation, to recover from the corporation.
There is in such cases a statutory obligation of which
the person named can take the benefit, — an action for
debt on a statute being a well known old form of action
at common law.1 But those only who are acting directly
for the proposed corporation, and who have no other pay-
1 Per Lindley, J., in In re Rotherham Alum §• Chemical Co., 25 Ch.
D. at p. Ill ; Scott v. Lord Ebury, L. R. 2 C. P. at p. 264.
EIGHTS AND LIABILITIES OF CORPORATION. 221
master to look to, are entitled to recover payment from the
corporation when it is formed. Those who are employed by
any other person for hire or reward to do the work must
look for payment to the person who employed them.1
§ 219. Liability under English Companies Acts. — The
power, without imposition of liability, to pay for such
services and expenses may be given to the corporation
by statute. Thus, in the English Companies Acts, it is
provided that the directors " may pay all expenses incurred
in getting up and registering the company." 2 In cases
arising under those acts, it has been held that the fact
of incorporation does not entail upon the corporation a
liability at law to pay for these preliminary services and
expenses. The corporation, having the power, may of
course pay them if it sees fit to do so; but a provision
in the articles of association that the corporation shall
pay or shall adopt an agreement for payment for services
to be rendered in the formation of the corporation is not
enforceable against the corporation, for it cannot be taken
advantage of by an outsider, nor by a member to secure
benefits outside his rights as a member.3
§ 220. In Melhado v. Porte Allegre, New Hamburgh, &
Brazilian Ry. Co.,4 — it was held that promoters who have
incurred necessary preliminary expenses in the establish-
ment of the company, cannot recover the same from the
company. Lord Coleridge, stating that he had reluctantly
come to the conclusion that no such action would lie,
1 In re Skegnors $• St. Leonards Tramway Co., 58 L. J. Ch. 737, in
which the cases on the subject are cited and considered.
8 Companies Act, 1862, Table A, paragraph 55.
8 In re Rotherham Alum fr Chemical Co., 25 Ch. D. 103; Melhado v.
Porte Allegre, New Hamburgh, fr Brazilian Ry. Co., L. R. 9 C. P. 503;
Browne v. La Trinidad, 37 Ch. D. 1; Eley v. Positive Assurance Co., 1
Ex. D. 88.
4 L. R. 9 C. P. 503.
222 PKOMOTEES AND PROMOTION OF CORPORATIONS.
observed: "It does seem just, in general, if a company
takes the benefit of the work and expenditure by which
its existence has been rendered possible, and voluntarily
comes into existence on the terms that it shall be liable to
pay for such work and expenditures, that a cause of action
should be given. I can find, however, no legal principle
upon which such an action can be maintained. It appears
to me that there is no contract between the plaintiffs and
the defendant. The doctrine of ratification is inappli-
cable, for the reasons given in the judgment in Kelner v.
Baxter." l
§ 221. Liability on quantum memit. — The corporation,
it has been held, however, may be liable in equity on a
quantum meruit.2 This enables the promoters or persons
employed by the promoters, and looking exclusively to the
projected corporation for payment, to recover from the
corporation fair compensation for services rendered and ex-
penses incurred in bringing it into existence. But when
persons perform work for the promoters in the formation of
the corporation, for payment of which they look to the pro-
moters, they cannot afterwards hold the corporation on
the ground that it has had the benefit of their work. As a
general rule, it is inequitable for a person not to pay for
the services of which he has taken the benefit ; but this is
not true when the work was done for a third party dealing
with such person. Thus, in In re Rotlierham Alum $
Chemical Co.,3 Mycrofts promoted a company in order that
he might sell certain property to it. He employed Pease
as a solicitor in its formation, and Pease, on Mycroft's
retainer, rendered necessary services in the incorporation
1 L. R. 2 C. P. 174.
2 In re Hereford Sf South Wales Wagon Co., 2 Ch. D. 621 ; In re
Empress Engineering Co., 16 Ch. D. 125.
3 25 Ch. D. 103.
EIGHTS AND LIABILITIES OF CORPOKATION. 223
of the company. In the winding up, Pease presented a
claim for services as solicitor, which was disallowed as to
all items incurred before the formation of the company, it
not appearing that the company had agreed to pay them.
It having been contended that the company was liable on
the ground, among others, that it had taken the benefit of
the services, Lindley, L. J., observed: "It is said that Mr.
Pease has an equity against the company because the com-
pany has had the benefit of his labor. What does that
mean ? If I order a coat and receive it, I get the benefit
of the labor of the cloth manufacturer ; but does any one
dream that I am under any liability to him ? It is a mere
fallacy to say that because a person gets the benefit of
work done for somebody else he is liable to pay the person
who did the work." 1
222. Doctrines held in this country as to liability of cor-
poration. — In this country, so far as the corporation is
concerned, in the absence of statutory obligation, there is
some authority for the proposition that services rendered
or expenditures made in bringing the corporation into
existence are to be taken as voluntary, no promise by the
corporation to pay for them being implied from acceptance
of the benefit by the corporation, or created by any contract
made by the promoters in the name of the intended corpora-
tion.2 But the subject has not received much consideration.
The doctrine has been put forward in Pennsylvania, that
the corporation, when formed, is liable for services ren-
dered or money expended in procuring the charter, pro-
vided such services were rendered or expense incurred
under an agreement for payment authorized by a majority
1 See also Perry v. Little Rock fr W. S. R. Co., 44 Ark. 383, 395.
2 Taylor on Corporations, Sect. 86; Bishop on Contracts, Sect.
221; Hall v. Vermont §• Mass. R. R. Co., 28 Vt. 401; Marchand v.
Loan §• Pledge Association, 26 La. Ann. 389.
224 PEOMOTEES AND PEOMOTION OF COEPOEATIONS.
of the persons associated together for incorporation.1 The
theory seems to be that the corporation, by taking the
benefit of the agreement made by its corporators or pro-
moters, thereby ratifies the agreement. But, as has been
observed by a learned writer, if the corporation ratifies
the agreement, it is not a case of being bound by the
act of a majority of the promoters or corporators.2 In
Kentucky, the same conclusion has been reached as in
Pennsylvania, but on the theory of estoppel, instead of that
of ratification. In Morton v. Hamilton College? the pro-
moters of an incorporated college assumed an obligation to
pay the interest on a subscription to a fund for the pur-
chase of property for the college. It was necessary to do
this in order to obtain the subscription, and it was done at
the request of some and with the consent of all of those
who constituted a committee to organize the college and
raise the necessary moneys, and with the understanding
that the corporation, when formed, should save the pro-
moters harmless. In an action brought by the promoters
against the corporation to recover the amount of interest
which they had been compelled to pay, and which went
into the fund used in buying the college property, it was
held that the corporation was estopped from claiming that
the committee had no power to bind it by an agreement
made prior to its coming into existence.
The question of the power of a private corporation, in the
absence of provision therefor in the enabling act, to devote
any of its funds to paying for the preliminary services and
expenditures incident to its formation, does not seem to
1 Bell's Gap R. R. Co. v. Christie, 79 Penn. 54; Tift v. Quaker City
Nat. Bank, 141 Penn. 550.
2 Promoters' Contracts, by Austin Abbott, in 1 Amer. & Eng.
Corp. Cas., Anno. 1.
* 38 S. W. Rep. 1.
EIGHTS AND LIABILITIES OF CORPORATION. 225
have been raised in any of the cases. But it has been held
that a town has no authority to appropriate money for the
payment of expenses incurred by individuals, prior to its
corporate existence as a town, in procuring the passage of
its act of incorporation, the act not authorizing the pay-
ment of such expenses.1 If the corporation has power to
pay for the services and expenses necessary to bring it into
existence, and actively takes the benefit of such services
and expenditures by entering upon the corporate enter-
prise, and if as a fact the work was not done or the expense
incurred gratuitously, or upon the credit of a third party,
but with the expectation that the corporation, when formed,
would make payment, it would seem that the corporation,
ought in equity to be holden for payment to a fair and
reasonable amount.2
§ 223. Liability to pay for services and expenses in obtain-
ing subscriptions for shares. — While it seems just that the
corporation should reimburse those persons who have paid
the necessary and reasonable expenses of its creation, ser-
vices performed or expenditures made in procuring sub-
scriptions for stock ordinarily stand on a different footing.
In some cases, it is true, as under the National Banking
Act, that the subscription of the capital stock is a condi-
tion precedent to the existence of the corporation. But in
many cases the procurement of subscriptions may follow
the organization of the corporation after it comes into
existence. As applied and limited to the latter cases, the
doctrine held by some courts would seem to be sound,
namely, that if expense is to be incurred by the corporation
in obtaining subscriptions for its stock, it should only be
by the authority of its duly constituted officers.3 " It is
1 Frost v. Belmont, 6 Allen, 152.
2 In re Hereford v. So. Wales Wagon Co., 2 Ch. D. 621 ; In re
Empress Engineering Co., 16 Ch. D. 125.
8 Rockford, Rock Island, if St. Louis R. R. Co. v. Sage, 65 111. 328;
15
226 PROMOTERS AND PROMOTION OF CORPORATIONS.
soon enough," it has been said, " for corporate bodies to
enter into contracts encumbering their property, when they
are duly organized according to their charters, and have
their chosen and impartial directors to conduct their1 busi-
ness." 1 To bring a corporation into existence, the promot-
ers must necessarily take action; but there is no reason
in the cases referred to why the promoters should be per-
mitted to usurp the power of the directors to determine what
expense shall be incurred in procuring subscriptions for the
capital stock ; and that is in effect what it comes to if the
directors cannot accept subscriptions which have been influ-
enced by the promoters, or by persons employed by the pro-
moters, without thereby placing the corporation under obli-
gation to pay such persons or the promoters for their services.
§ 224. Doctrine held in Vermont and New Hampshire. —
Contrary to this view, it has been held in Vermont and
New Hampshire that when the promoters of a corporation
have, after its charter but prior to its organization, agreed
with a person that he shall be paid by the corporation for
his services in obtaining subscriptions for shares, and sub-
scriptions are thus procured, which are accepted by the
corporation, the benefits must be taken cum onere, and the
corporation is liable to pay for the services rendered ac-
cording to the contract.2 This view has been much criti-
cised. Judge Red field refers to it " as of too great laxity
and too susceptible of abuse to afford a safe guide in these
lax times, when every possible avenue to corruption is sure
to find some one desperate to enter." 3 May it not also be
said that it rests upon a fallacy ? The theory is that all
New York $ New Haven R. R. Co. v. Ketchum, 27 Conn. 170 ; Western
Screw fr Mfg. Co. v. Cousley, 72 111. 531 ; Stove v. Flagg, 72 111. 397 ;
Franklin Ins. Co. v. Hart, 31 Md. 59.
1 New York $• New Haven R. R. Co. v. Ketchum, 27 Conn. 170.
2 Low v. Conn. Sf Passumpsic R. R. Co., 45 N. H. 370; Hall v.
Vermont fr Masxachuxetts R. R. Co., 28 Vt. 401.
8 1 Redfield on Railways, Sect. 14, note.
EIGHTS AND LIABILITIES OF CORPORATION. 227
burdens must be taken with the benefit. But this is not
always true. In receiving and accepting a subscription for
shares, the corporation deals solely with the subscriber.
It takes his money and delivers to him therefor a certifi-
cate of membership. Clearly the corporation, not being
bound by the contracts of its promoters, has a right to
deal with any person who may come forward as a sub-
scriber, unhampered by any terms save those agreed upon
between it and the subscriber. It may get the benefit of
labor performed by some third person in inducing the sub-
scriber to apply to the corporation for shares. But that
person, in the absence of employment or authority or an
agreement for payment by the corporation, has no more
right to claim payment from the corporation than has the
manufacturer who has furnished cloth to a tailor to claim
payment for his cloth from a person buying a coat from
the tailor. The purchaser of the coat gets the benefit of
the labor of the cloth manufacturer, yet no one would
claim that its acceptance rendered him liable therefor to
the manufacturer. By accepting the coat, he becomes
liable merely to pay the purchase price to the tailor. The
corporation, by accepting a subscription becomes bound to
admit the subscriber to membership, and that is all. In
these cases there is no privity of contract save between the
contracting parties. The third party is not brought into
privity by the acceptance of the subscription in the one
case, or by the acceptance of the coat in the other. If A.
without authority, in the name and for the benefit of B.,
orders goods of C., acceptance of the goods by B. is a rati-
fication or adoption of the contract to pay C. for them, but
it is not a ratification or adoption of an unauthorized agree-
ment made by a stranger to B. that B. shall pay A. for his
trouble in the matter.1
1 See Weatherford Mineral Wells Sf Northwestern R, R. Co. v.
Granger, 86 Tex. 350.
228 PKOMOTERS AND PROMOTION OF CORPORATIONS.
CHAPTER XL
RIGHTS AND LIABILITIES OP PROMOTERS UNDER CONTRACTS
MADE BY THEM, OR BY THEIR CO-PROMOTERS, IN BEHALF
OF OR FOR THE BENEFIT OF A PROJECTED CORPORATION.
— CONTRACTS BETWEEN PROMOTERS.
I 225. Promoter not liable on con-
tract made in name of in-
tended corporation, unless
he agreed to be so.
226. Presumption as to intent of
parties.
227. Landman v. Entwistle, 7 Ex.
632.
228. On written contract question
of intent is for the Court.
— Kelner v. Baxter, L. U.
2 C. P. 174.
229. Scott v. Ebury, L. R. 2 C. P.
255.
230. Promoter usually not liable
on contract made in name
of corporation. — Liable
for misrepresentation as to
existence of corporation.
231. Effect of adoption by corpo-
ration of contract on which
credit was given to pro-
moter.
232. Abbott v. Hapgood, 150
Mass. 248.
233. Promoters not prima facie
partners.
234. English cases as to liability
of promoters on contracts
made by co-promoters.
235. Ordinarily promoter not li-
able from allowing his
name to appear in pro-
spectus or signing articles
of incorporation, if he does
not act in undertaking.
236. Statements in prospectus in
which promoter allows his
name to be used may im-
pose liability upon him.
§ 237. When promoter has acted in
undertaking, question for
jury whether he has au-
thorized co-promoters to
bind him.
238. Riley v. Packington, L. R.
2 C. P. 536.
239. Promoter's liability on con-
tract made before he be-
came a promoter. — Effect
of admission of liability.
240. To hold promoter, credit
must have been given to
him.
241. Joint liability of promoters.
— Effect of release of one.
242. Right of promoter to indem-
nity from co-promoters.
243. Right of promoter to contri-
bution from co-promoters.
244. Batard v. Hawes, 2 El. & B.
287.
245. In absence of agreement,
promoter cannot enforce
payment for services from
co-promoters.
246. No contract between pro-
moters to go forward im-
plied from their association
together.
247. Legality of agreements be-
tween promoters as to
formation of corporation
and its future management
and control.
248. Agreement between promo-
ters restricting sale of
their stock.
EIGHTS AND LIABILITIES OF PROMOTERS. 229
§ 225. Promoter not liable on contract made in name of
intended corporation unless he agreed to be so. — As the
promoter in contracting in the name and in behalf of
the intended corporation assumes to act as its agent,
the rules applicable to persons who contract professedly
as agents must be followed in determining the rights
and liabilities of the promoter under such a contract.
According to the weight of argument and authority, one
who is known to be professedly or really acting as an
agent, and who discloses his real or avowed principal, and
contracts in the name of such principal, cannot, although
he acts without authority, or has no principal, be made
liable on the contract unless he expressly or impliedly
agreed to be so.1 Whether he is to be personally bound
on the contract is always a question of the intention and
understanding of the parties. The fact that a binding
contract does not result, because it turns out that the
professed agent has no principal who can be holden, as
was contemplated, is not a reason for the creation by
judicial construction of a different contract which neither
of the parties intended to make.2
§ 226. Presumption as to intent of parties. — The pre-
sumption is that one contracting avowedly as an agent
for a principal competent to act does not intend and is
not taken to bind himself. But when one assumes to
represent a principal who has no legal existence or status,
1 Howard v. Yunker, 83 111.208; Hersey v. Tully (Col. 1896), 44
Pac. Rep. 854; Johnson v. Smith, 21 Conn. 627; Hall v. Crandall, 29 Cal.
567; Stetson v. Patten, 2 Me. 358; Weare v. Gove, 44 N. H. 196; White
v. Madison, 26 N. Y. 117; Cole v. O'Brien, 34 Neb. 68; Farmers'
Cooperative Trust Co. v. Floyd, 47 Ohio St. 525 ; Me Curdy v. Rogers, 21
Wise. 199 ; Randall v. Taimen, 18 C. B. 793. Contra: Terwilliger v.
Murphy, 104 Ind. 32; Andrew v. Tetlford, 37 Iowa, 314; Solomon v.
Penoyer, 89 Mich. 11 ; Bay v. Cook, 22 N. J. L. 343 ; Ennis Cotton
OH Co. v. Burks (Tex. 1897), 39 S. W. Rep. 966.
2 Whitney v. Wyman, 101 U. S. 392; Higgins v. Senior, 8 M. & W.
834 ; Johnson v. Smith, 21 Conn. 627.
230 PROMOTERS AND PROMOTION OF CORPORATIONS.
the presumption is the other way, for in the absence of
evidence to show the contrary, it is unreasonable to sup-
pose that the person with whom the alleged agent contracts
consents to look only to a non-existent person.1 This
presumption, however, may be overcome, for a person
dealing with one assuming to act for an intended cor-
poration might expressly or impliedly agree to look only
to the future corporation, taking the risk of its coming
into existence and adopting the contract made in advance
for it,2 or it might be stipulated that the agent should
in no event be personally liable.3 In such cases, it would
seem to follow that the agent, not being bound, could
not enforce the contract, unless he had given the other
party a valid consideration for his promise. Applying
these rules to the case of the promoter who has made
a contract in the name and behalf of an intended corpo-
ration, the rights and liability of the promoter under the
contract will depend upon the questions of fact whether
credit was given to him or to the inchoate corporation,
or whether he expressly or impliedly agreed to be bound.
If the contract was oral, it is for the jury to determine
the intention and understanding of the parties.4
§ 227. In Landman v. Entwistle,5 — the plaintiff brought
an action to recover for his services as engineer of a pro-
jected railway company against the defendant, who was
one of the provisional committee of the company. It
appeared that at a meeting of the committee, at which
the plaintiff was present, it was resolved " that the pro-
visional committee disclaim the intention of taking on
1 Eichbaum v. Irons, 6 Watts & Serg. 67.
2 Higgins v. Hopkins, 3 Ex. 163; Rennie v. Clarke, 5 Ex. 292;
Landman v. Entwistle, 7 Ex. 632 ; Case Mfg. Co. v. Soxman, 138 U. S.
431.
8 Shoe if Leather Nat. Bank v. Dix, 123 Mass. 148.
4 Higgins v. Hopkins, supra.
6 7 Ex. 632.
EIGHTS AND LIABILITIES OF PROMOTEKS. 231
themselves any personal responsibility as regards the ex-
penses incurred or to be incurred in or about the company,
and that no such responsibility shall attach to them." At
another meeting, at which the plaintiff was also present, a
resolution was passed which contained a statement that
the plaintiff had said " that he would make no claim for
his services until there should be sufficient funds of the
company to meet any demand he might be entitled to
make." - The plaintiff stated in a letter that " he never
understood that, unless the project was successful, the
engineers were to abandon all claim; but he did under-
stand that the individuals comprising the committee were
not to be held personally liable." At a subsequent meet-
ing of the committee it was resolved " that the committee
bind themselves to be answerable to the extent of £1,000,
to be applied to engineering and surveying purposes."
The scheme was abandoned, and deposits to the amount
of £4,168, which had been received by the committee,
were returned to the shareholders. It was held that the
defendant was not responsible, the contract being that
the plaintiff should be paid out of such funds as could be
properly applied in satisfaction of his claim, and there were
no funds of that description.
§ 228. On -written contract question of intent is for Court.
— If the contract is in writing, it is for the Court to pass
upon the question of the intent of the parties, and in con-
struing a written contract of this nature parol evidence of
the real intent of the parties is inadmissible. The intent
must be drawn from the language employed. No parol
evidence can exclude personal liability in the promoter, if
the written document itself makes him liable.1 If the
promise is made in the name of the intended corporation,
and exclusively as its contract, and is accepted as such, the
1 Higgins v. Senior, 8 M. & W. 834.
232 PROMOTERS AND PROMOTION OF CORPORATIONS.
promoter cannot, under what would seem to be the true
rule, be held liable upon it. If, on the other hand, the
contract contains apt words to bind the promoter person-
ally, he will be held on the contract, although he may sign
as an agent.1 Thus, in Kelner v. Baxter? the plaintiff
was a wine merchant and the proprietor of the Assembly
Rooms at Gravesend. It was proposed that a company
should be formed under the name of the Gravesend Royal
Alexander Hotel Company, Limited, to purchase the plain-
tiff's premises and stock, and carry on a hotel business.
The plaintiff was to be the manager, and the defendants
directors of the proposed company. Pending the nego-
tiations, the business was carried on by the plaintiff, and
for that purpose additional stock was purchased by him,
as to which the following agreement was entered into : —
To JOHN DACIER BAXTER, NATHAN JACOB CALISHER, AND JOHN
DALES, ON BEHALF OF THE PROPOSED GRAVESEND ROYAL ALEX-
ANDER HOTEL COMPANY, LIMITED,
GENTLEMEN, — I hereby propose to sell the extra stock now at the
Assembly Rooms, Gravesend, as per schedule hereto, for the sum of
£900, payable on the 28th of February, 1866.
(Signed) JOHN KELNER.
Then followed a schedule of the stock to be purchased,
and at the end was written as follows : —
To MR. JOHN KELNER,
SIR, — We have received your offer to sell the extra stock as above,
and hereby agree to and accept the terms proposed.
(Signed) J. D. BAXTER,
N. J. CALISHER,
J. DALES,
On behalf of the Gravesend Royal Alexander Hotel
Company, Limited.
1 Hall v. Crandall, 29 Cal. 567 ; Johnson v. Smith, 21 Conn. 627 ;
Hurst v. Salisbury, 55 Mo. 310.
2 L. R. 2 C. P. 174.
RIGHTS AND LIABILITIES OF PROMOTERS. 233
The goods were handed over to the representatives of
the proposed company, and were consumed in the business.
Subsequent to the purchase of the goods, the company was
incorporated, but collapsed before the money was paid. It
was held that the defendants were personally liable on
their agreement, as for goods sold and delivered ; that no
subsequent ratification by the company could relieve them
from that liability without the assent of the plaintiff ; and
that parol evidence was not admissible to show that per-
sonal liability was not intended. " Construing the docu-
ment ut res magis valeat quam pereat" said Willes, J.,
" we must assume that the parties contemplated that the
persons signing it would be personally liable. Putting in
the words, * on behalf of the Gravesend Royal Alexander
Hotel Company,' would operate no more than if a person
should contract for a quantity of corn < on behalf of my
horses.' "
§ 229. in Scott v. Ebury,1 — one Jeyes, acting as the
solicitor and secretary of a projected railway company,
by the authority of the promoters, and by means of a check
signed by two of them, obtained from the plaintiff an ad-
vance of £500, to be applied in payment of parliamentary
fees, upon the agreement contained in the following letter
addressed to the plaintiff : —
I have to request that you will allow the directors of the Rick-
mansworth, Amershan, and Chesham Railway to draw to the extent
of £1,000, to be repaid out of the calls on shares.
The £1,000 was placed to the credit of the company in
an account in the plaintiff's books, and £500 was drawn
therefrom. An act authorizing the construction of the
railway subsequently passed, the promoters being named
therein as the first directors, and at a directors' meeting it
1 L. R. 2 C. P. 255.
234 PROMOTERS AND PROMOTION OF CORPORATIONS.
was resolved that the acts of Jeyes should be adopted and
confirmed. No shares were allotted or calls made, and the
undertaking was not proceeded with. It was held that
the advance was made upon the personal responsibility of
those who signed the check, and that the subsequent
adoption of their acts by the directors did not alter their
position. On the part of the defendants, it was contended
that the loan was not to them personally, but to the com-
pany, to be repaid out of the funds of the company when
funds should be obtained by means of calls. As to this
contention, Willes, J., said : " The true explanation of the
expression of the letter, * to be repaid out of calls on
shares,' is this. Parties who emb.ark in schemes like this
do not always contemplate the true future. They assume
that everything will go on according to their hopes and
expectations, and provide for what shall be done in that
event, without regarding the possibility of failure. Here,
they provided for the case which they hoped for, and in
that case stipulated that the money should be repaid out
of calls. Would any person have advanced the money
upon an agreement such as the defendants contend this
to be ? Clearly not. Suppose a farmer were to borrow
money to be repaid when he sold his crop of hay, and
after the lapse of a reasonable time for effecting a sale the
ricks were burnt down, would he be excused from repaying
the loan ? Or, suppose goods in course of transit to be
sold, to be paid for on arrival, and they are lost on the
way, could it be contended that the non-arrival of the
goods would be an answer to an action for the price ? I
need hardly say it would not. In each of these cases, it is
simply a provision for the time of payment."
§ 230. Promoter making contract in name of corporation
usually not liable on the contract. — But may be liable for mis-
representation as to existence of corporation. — As has been
RIGHTS AND LIABILITIES OF PROMOTERS. 235
said, when the promise has been made in the name of the
intended corporation, and exclusively as its contract, and
has been accepted as such, the promoter cannot, under what
would appear to be the true rule, be held liable upon it.
The mere fact that he does not bind his assumed principal
cannot make him responsible upon the contract ; but he
may be liable in damages for misrepresentation, by hold-
ing himself out as an agent for an existing corporation,
when in fact the corporation named as such is not in
existence.1 The reason why the promoter should not
be made personally liable on such a contract is, as it has
been well put in the caae of an agent, this : " The
man whom he induced to enter into the contract did
not contemplate him as the other party to it, or look
to any one but the alleged principal. The remedy should
be, as it is, for misrepresentation, innocent or fraudu-
lent." 2 In order to sustain an action for damages against
the promoter, it is obviously essential to show that the non-
existence of the corporation was not known to the person
dealing with the promoter ; 3 and that such person was
misled to his injury. If he knew that the corporation was
not in existence he could not have been deceived, and if
the corporation should subsequently come into existence
and adopt the contract the element of damage might be
wanting. It is immaterial whether the promoter made the
representation as to the existence of the corporation inno-
cently or fraudulently. In the former case, his liability
1 Je/ls v. York, 10 Cash, at p. 395; fiartlett v. Tucker, 104 Mass. 337;
Gilmore v. Bradford, 82 Me. 547; McCurdy v. Rogers, 21 Wise. 199 ;
Patterson v. Lippencott, 47 N. J. L 457 ; Duncan v. Niles, 32 111. 532 ;
Johnson v. Smith, 21 Conn. 627 ; Hall v. Crandall, 29 Cal. 567. Contra,
Keener v. Harrod, 2 Md. 63 ; Lewis v. Tilton, 64 Iowa, 220 ; Lagrone v.
Timmerman (S. C. 1896), 24 S. £. Rep. 290.
2 Anson on Contracts, 344.
3 Jefts v. Fork, 10 Cush. at p. 395.
236 PROMOTERS AND PROMOTION OF CORPORATIONS.
may be put on the ground of the breach of an implied
warranty,1 or on the ground of liability for an innocent
misrepresentation, as an exception to the general rule
of law that an action for damages will not lie against
a person who honestly makes a misrepresentation which
misleads another.2 In the latter case, his liability is for
deceit.
§ 231. Effect of adoption by corporation of contract on
which credit was given to promoter. — If it appears that
credit was given to the promoter, and that he is personally
bound on the contract, then the adoption or ratification of
the contract by the corporation, when formed, would not
free him from liability without the creditors' assent. In
such case the creditor could elect whether to sue the cor-
poration or the promoter ; but it would seem that he could
not hold both.3 If the promoter should be held, under
such circumstances, the corporation would probably be iin-
pliedly bound to indemnify him, inasmuch as it would be
entitled to the full benefit of the contract against the pro-
moter, who would stand in such respect in the position
of its agent. If the promoter is held to the duties and
liabilities of an agent under a contract adopted or rati-
fied by the corporation, he should have the rights of an
agent.4 If credit was not given to the promoter, then he
would be free from liability, whether the corporation did
or did not subsequently adopt or ratify the contract ; and
in such case, not being bound himself, and the contract
having been made for and on the credit of the intended
1 Gotten v. Wright, 7 El. & Bl. 301 ; 8 El. & Bl. 647.
3 Per Lindley, J., in Fairbanks Ex"rs v. Humphreys, 18 Q. B. D. 62.
8 Queen City Furniture tf Carpet Co. v. Crawford, 127 Mo. 356;
Meachara on Agency, Sect. 698 ; Case Mfg. Co. v. Soxman, 138 U. S.
431. Contra, Ennis Cotton Oil Co. v. Burks (Tex. 1897), 39 S. W.
Rep. 966.
4 Taylor on Corporations, Sects. 82, 85.
RIGHTS AND LIABILITIES OF PEOMOTEKS. 237
corporation, he could not enforce it, unless he had given
the other party a valid consideration for his promise. But
if the contract was made with the promoter personally, he
may enforce it.
§ 232. in Abbott v. Hapgood,1 — the plaintiffs had agreed
to form a manufacturing corporation, under the name of
Penn Match Company, Limited, if they could obtain certain
machinery from a firm which alone could furnish it ; and,
for the purpose of carrying out the agreement, and in
the name and for the benefit of the projected corporation,
applied therefor, informing the firm that the organization
of the corporation would be proceeded with and a factory
built for it only in case they could make a contract with the
firm for the machinery. The firm agreed " to furnish the
Penn Match Company, Limited, with the machinery " at a
price stated, but subsequently refused to deliver it, where-
upon an action was brought against the firm in the name
of the projected corporation to recover damages for such
refusal, in which judgment was rendered for the defend-
ants. Subsequently the corporation was fully organized, the
factory was built for it, and it started in business. Upon
the facts reported, the Court was of opinion that the de-
fendants as well as the plaintiffs must have understood
that the corporation was only projected, that the plaintiffs,
acting jointly as individuals, constituted the only party
who could contract with the defendants in the manner
proposed, that it was evident that both parties intended to
enter into binding contracts, and that the plaintiffs assumed
the name " Penn Match Company, Limited," as that in
which they chose to do business in reference to the projected
company until their organization should be completed, and
they should turn over the business to the new company,
which would be composed of themselves in a new relation.
1 150 Mass. 248.
238 PROMOTERS AND PKOMOTION OF CORPORATIONS.
The trial court ordered a verdict for the defendants, and
reported the case for the determination of the appellate
court, which set aside the verdict and ordered a new trial.
The plaintiffs were allowed to amend the declaration so
as to state the contract truly, that is, by setting out their
own agreement to take and pay for the machinery which
constituted the consideration for the agreement made by
the defendants.
§ 233. Promoters not prima facie partners. — Co-promot-
ers are not, as such, partners. A mere agreement to form a
partnership in the future .does not create a present partner-
ship. A fortiori, an agreement by persons simply to organ-
ize a corporation does not constitute such persons partners.
Nor are promoters prim a facie each other's agents. In order
to render a promoter liable for the acts of his co-promoters,
it must be shown as matter of fact that the former author-
ized the latter to bind him, or held them out as so author-
ized. In an action against a promoter on a contract not
made personally by him, but by a co-promoter, the point to
be decided is whether the latter was the former's agent, or
was held out by him as his agent, for the purpose of mak-
ing the contract, and made it as such. The agency or
holding out, as in any other case where such question is in
issue, may be implied from words or conduct.1
§ 234. English cases as to liability of promoters on con-
tracts made by co-promoters. — In England, the preliminary
1 Reynell v. Lewis, Wylde v. Hopkins, 15 M. & W. 517; Capper's Case,
1 Sim. N. s. 178; Forrester v. Bell, 10 Ir. Law Rep. 555; Norris v.
Cottle,2 H. L. Cas. 647; Button v. Thompson, 3 H. L. Gas. 161;
Bright v. Hutton, 3 H. L. Cas. 348; Wood v. Argyll, 6 M. & G. 928;
Newton v. Belcher, 12 Q B. 921 ; Rutherford v. Hill, 22 Or. 218; Horn-
blower v. Crandall, 78 Mo. 581 ; Ward v. Brigham, 127 Mass. 25. Com-
pare Dole v. Wooldredge, 135 Mass. 140 ; Sproat v. Porter, 9 Mass.
300. It was at one time held otherwise in England : Holmes v. Hig-
gins, I B. & C. 74 ; Lucas v. Beach, 1 M. & G. 417 ; Hutton v. Uphill,
2 H. L. Cas. 674 ; but these cases are no longer law.
RIGHTS AND LIABILITIES OF PEOMOTEES. 239
work of getting up a company is usually, it would appear,
performed under the direction of a provisional committee
or a managing committee of the intended company, con-
sisting of the promoters or of others selected by them.
The reports contain many cases presenting the question of
the liability of a particular member or members of such a
committee to tradesmen and others for work performed or
materials furnished in the formation of the company, at
the request, not of the defendants personally, but of other
members or of the secretary or solicitor of the committee.
As the existence of an authority proceeding from the mem-
ber sought to be charged to others to bind him is a question
of fact, to be determined by a jury, more or less apparent
conflict will be found in these cases.1 But certain general
rules may be deduced from them.
§ 235. Ordinarily promoter not liable from allowing his
name to appear in prospectus, or signing articles of incorpo-
ration, if he does not act in undertaking. — A COmmittee-
man, who merely allows his name to appear in a prospectus,
which states the names of the committee, and nothing
more from which liability on his part might be inferred,
and who does not act with relation to the undertaking,
incurs no liability for work or supplies furnished at the
request of other members, or of the solicitor or secretary.
The mere announcement that several persons are acting
together to organize a company does not justify the in-
ference that one has authorized the others to pledge his
credit in the matter.2 Thus, in the leading cases of Rey-
1 For example, in Wood v. Argyll, 6 M. & G. 928, and in Lake v.
Argyll, 6 Q. B. 477, the same acts were relied on to show that the
defendant had authorized others to pledge his credit. In the first
case the verdict was for the defendant, in the last for the plaintiff,
and iu each case the Court declined to disturb the verdict.
2 Reynell v. Lewis, Wylde v. Hopkins, 15 M. & W. 517 ; Barker v.
Stead, 3 C. B. 946; Norris v. Cattle, 2 H. L. Caa. 647 ; Ex parte Roberts,
240 PROMOTERS AND PROMOTION OF CORPORATIONS.
nell v. Lewis, and Wylde v. Hopkins? which were actions
brought by advertising agents and map makers against
members of the provisional committee of two railway com-
panies, it appeared in each of the cases that prospectuses
and advertisements had been issued by the committee, in
which the name of the defendant was set forth as a mem-
ber of the committee ; the plaintiff was employed by the
solicitor of the committee ; the defendant knew what was
being done ; but no other facts appeared to show that the
defendant had authorized his credit to be pledged. The
jury having found for the plaintiff, the Court in each case
granted a new trial.
The mere act of executing and filing articles of incor-
poration by several promoters does not render one respon-
sible for contracts made in the course of the undertaking
by the others. Thus in Rutherford v. Hill, articles of in-
corporation were executed and filed by three persons, one
of whom assumed to do business under the proposed cor-
porate name, and contracted debts, before the corporation
came into existence. It was held that the others were not
liable for such debts. " It is not doubted," said the Court,
" that cases might arise, and can readily be imagined,
where the incorporators sought to be charged might take
such part in conducting the business or hold themselves
2 Mac. & G. 192 ; Patrick v. Reynolds, 1 C. B. N. s. 727 ; Bailey v.
Macaully, 13 Q. B. 815.
In Sproat v. Porter, 9 Mass. 300, decided in 1812, it was held that
where persons associate together for the purpose of instituting a
banking corporation, and at a meeting of the associates, an agent is
employed to attend the legislature for the purpose of procuring a
charter, all the associates, including those who did not attend the
meeting and did not know of the employment, are jointly liable to
the agent for his services. The opinion is very brief, and no author-
ities are cited. Compare Ward v. Brigham, 127 Mass 25; Dole v.
Wooldredge, 135 Mass. 140.
1 15 M. & W. 517.
RIGHTS AND LIABILITIES OF PEOMOTERS. 241
out to the world as principals in the business, that they
would be held liable, but this would grow out of their con-
duct in carrying on the business, and not out of the mere
fact of signing and filing the articles." 1
§ 236. Statements in prospectus in -which promoter allows
his name to be used may impose liability upon him. — A
prospectus or advertisement setting forth the name of
the defendant as a member of the committee may, how-
ever, contain such announcements as to justify the infer-
ence that a general authority has been conferred by the
defendant on his co-committee-men, or on others, sufficient
to make their acts his acts. Thus, in Collingwood v. Berk-
ley? a prospectus of a projected company for the convey-
ance of emigrants to British Columbia contained statements
calculated to induce intending emigrants to believe that ar-
rangements had been perfected for the object in view, and
inviting them to take tickets for their passage and the public
to purchase shares. This prospectus was shown by the
secretary to the defendants and they were asked to allow
their names to be inserted therein as directors ; to which
they consented on being qualified,, that is, presented each
with two hundred paid-up shares, and indemnified. Their
names were accordingly inserted, and the prospectus ad-
1 22 Or. 218; Johnson v. Corsner, 34 Miun. 355; Railroad Gazette v.
Wherry, 58 Mo. App. 423. Contra, Wechselberg v. Flour City Nat.
Bank, 64 Fed. Rep. 90, Woods, J., dissenting. In this case nothing
appeared to show that the party sought to be charged had authorized
his credit to be pledged, unless it was the fact that he was one of the
incorporators. His co-incorporators began business under the corpo-
rate name, before the corporation acquired life, and held him out as
an officer. He knew that they were doing business as stated, but did
not know that they were holding him out as an officer, and did not
participate in the business, nor receive any emolument or profit there-
from. Yet because by slight attention to the matter he might have
obtained knowledge of the use of his name, the majority of the Court
held that he must be taken to have had that knowledge.
2 15 C. B. N. s. 145.
16
242 PROMOTERS AND PROMOTION OF CORPORATIONS.
vertised in the Times. Held that from these facts the
jury were warranted in inferring that one who contracted
with the secretary for a passage, and paid his money upon
the faith of the representations contained in the prospectus,
did so upon the credit of the defendants, and consequently
that he was entitled to sue them for a breach of such con-
tract. The transaction of the prospectus authorized the
secretary to hold out that the defendants were really direct-
ing him in obtaining fares from emigrants for transport.
As against the defendants, the jury was warranted in find-
ing that they did whatever the Secretary by their authority
represented they were doing, within the limit of the opera-
tions described in the prospectus, and that therefore,
within that limit, they were liable on the contract which
the secretary made for them on the credit of their names.
It appeared that the secretary had given to the plaintiff a
copy of the prospectus, and the plaintiff stated that he was
induced, after reading it, to make the contract in reliance
on the credit of the defendants as directors.
§ 237. When promoter has acted in undertaking, question
for jury •whether he has authorized co-promoters to bind him.
— If a committee-man not only takes upon himself that
character, but also acts in the affairs of the intended com-
pany, it is a question for the jury whether or not he has by
his acts authorized his fellow members or the solicitor or
secretary to pledge his credit for the expenses to be in-
curred in the formation of the company. For example, if
he has attended a meeting of the committee at which it
was decided, without dissent on his part, to do all that
could be considered necessary to start the company by
means of work and materials of a particular description,
this is evidence that he sanctioned what it did in the
progress of the affair. It tends to show that he knew what
the committee was doing, and concurred therein. If the
EIGHTS AND LIABILITIES OF PEOMOTERS. 243
authority is found to have been given, it is immaterial that
he did not intend to pledge his credit.
§ 238. In Riley v. Fackington,1 — the defendant was asso-
ciated with one Whitehead and others in the formation of
a company. At a meeting of the projectors at which the
defendant was chairman, a resolution was passed that the
prospectus then read and marked with the defendant's in-
itials be approved and printed for circulation. At a subse-
quent meeting, of which also the defendant was chairman,
a further resolution was passed, " that the prospectus, as
altered and marked with the chairman's initials, be ap-
proved as the prospectus of the company, and that the
same be printed for circulation and advertised at the dis-
cretion of Whitehead, as early as possible." Whitehead
employed the plaintiffs to print the prospectus, showing
them the initial copy and telling them that he was au-
thorized by the defendant to get it printed. The pro-
spectus when printed was delivered at the office of the
company, and was adopted and circulated by the defendant.
There was an arrangement, not communicated to the plain-
tiffs, between the defendant and Whitehead, that all ex-
penses of forming the company, down to the allotment of
shares, were to be borne by Whitehead. Held that there
was evidence from which the jury might infer that White-
head had authority to pledge the defendant's credit for the
printing.2
§ 239. Promoter's liability on contract made before he be-
came a promoter. — Effect of admission of liability. — Ordina-
rily, one who becomes a member of the provisional committee
1 L. R. 2 C. P. 536.
2 See also Maddickv. Marshall, 16 C. B. N. 8. 387; in error, 17
C. B. N. 8. 829 ; Reynell v. Lewis, 15 M. & W. 517 ; Norburtfs Case,
5 DeG. & S. 423 ; Pearson's Case, 3 DeG. M. & G. 241 ; Bailey v.
Macaully, 13 Q. B. 815 ; Burbridge v. Morrii, 3 H. & C. 664; Roberts
Mfg. Co. v. Schlick, 62 Minn. 332; Fredenhall v. Taylor, 26 Wise. 286.
244 PROMOTERS AND PROMOTION OF CORPORATIONS.
is not liable on a contract made by the other members prior
thereto, even though the contract is in part executed after
he becomes a member.1 As the liability of the committee-
man arises, not from his filling that character, but from his
authorizing, expressly or impliedly, the orders for goods or
services, his admission of general liability may be evidence
of his having authorized such orders before his name ap-
peared on the committee. The jury are to consider whether
the admission was made because the actual liability in law
was questionable, and for the purpose of preventing litiga-
tion, or whether the admission is referable to a conscien-
tious conviction that his acts have made him personally
liable. In the latter case, they may infer his general
liability.2
§ 240. To hold promoter, credit must have been given to
him. — If it is found as a fact that a committee-man has
authorized his co-committee-men, or others, to hold him out
as personally responsible, then the further inquiry is neces-
sary whether or not the credit was given on the faith of his
being so personally responsible. He cannot be held if the
creditor has looked solely to the deposits on shares, as the
fund from which payment is to be made, or solely to
the credit of the future company.3
§ 241. Joint liability of promoters. — Effect of release of
one. — If promoters are jointly liable on a contract, a re-
lease of one releases all.4 Thus, in Burgess v. Sherman?
the plaintiff assigned his invention, and patent therefor, to
1 Beale v. Monk, 10 Q. B. 976.
2 Newton v. Belcher, 12 Q. B. 921 ; Newton v. Liddiard, 12 Q. B.
925 ; Bailey v. Macaully, 13 Q. B. 815.
8 Bailey v. Macaully, supra ; Thompson v. First Nat. Bank of Toledo,
111 U. S. 529.
* Newton v. Blunt, 3 C. B. 675 ; Turner v. Davies, 2 Wms. Saund.
148.
6 147 Penn. 254.
EIGHTS AND LIABILITIES OF PKOMOTERS. 245
five persons, on their agreement to form a corporation to
carry the invention into effect, and to pay him a certain
sum out of the first sales of its stock. Three of them
transferred to a fourth all their interest in the agreement,
without the plaintiff's consent, before the corporation was
formed. Thereafter powers of attorney to transfer the
patent were given to the plaintiff by such transferee, as
owner of four-fifths of the patent, and by the remaining
party to the agreement as owner of one-fifth, under which
the plaintiff transferred the patent to the corporation.
Held that having thereby assented to the withdrawal of said
three persons from the agreement, he could not recover in
an action thereon against any of the parties thereto.
§ 242. Right of promoter to indemnity from co-promoters.
— If, as matter of fact, a relation of partnership, or agency,
exists between promoters, they will, as among themselves,
be held in their dealings to the accountability imposed
by the rules applicable to partners and agents.1 If their
conduct or words have been such as to induce third per-
sons, acting reasonably, to believe that they were partners
or agents for each other, and to give credit accordingly, on
the order of one or more of the members, yet in truth no
such relation existed, those upon whom liability has been
fixed by the order, but who did not expressly or impliedly
authorize it, are entitled to be indemnified by those who
have thus put them to loss.2
§ 243. Right of promoter to contribution from co-promoters.
— In case promoters are jointly liable for an indebtedness,
and one is obliged to pay the whole debt, he can enforce
contribution from his co-promoters.3
1 See Chapter VII. as to fiduciary rights and liabilities ; Hawk v.
Brownell, 120 111. 161.
2 Taylor on Corporations, 2d ed., Sect. 80.
8 Boulton v. Peplow, 9 C. B. 483 ; Spottiswoode's Case, 6 DeG. M. &
246 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 244. In Batard v. Hawes,1 — it appeared that the plain-
tiff, the defendant, and several other persons had jointly
employed an engineer to make plans and sections and to
do engineering work, preparatory to bringing a bill before
Parliament for the incorporation of a railway company.
The plaintiff was sued by the engineer for the amount of
his bill, and was obliged to pay him ; and he then brought
an action to recover from the defendant his share of contri-
bution. The jury found that there were twelve persons, in-
cluding the plaintiff and the defendant, who were parties to
the original employment of and contract with the engineer,
and that two of those persons had died before the plaintiff's
payment of the engineer's bill. It having been decided that
the plaintiff was entitled to enforce contribution from the
defendant, the question arose whether the amount to be
contributed by the defendant was to be calculated according
to the number of original joint contractors, or according
to the number of those who were alive when the payment
was made, and against whom the right of the creditor to
sue at law had survived. It was held that the plaintiff
was entitled to recover from the defendant one-twelfth of
the debt, the liability of a co-contractor to one who has
paid the entire debt being, at law, to contribute an aliquot
part according to the number of persons originally liable,
without reference to the number liable at law at the time
of payment.
§ 245. In absence of agreement, promoter cannot enforce
payment for his services from co-promoters. — In the absence
of agreement, promoters are not entitled to remuneration
G. 345; Lefray v. Gore, 1 Jo. & Lat. 571. But promoters are not, as
such, contributories under the English Winding-Up Acts. Bright v.
Hutton, 3 H. L. Cas. 341. In 2 Lindley on Partnership (4th ed.),
1375, the cases directly or indirectly overruled by Bright v. Hutton are
enumerated.
i 2 El. & B. 287.
EIGHTS AND LIABILITIES OF PEOMOTERS. 247
from each other for services in promoting the company.
Thus, if one who is the inventor of a scheme procures
others to act as a committee, with the intention of forming;
* o
a company to carry the scheme into effect, and he himself
acts as secretary to the committee, he cannot maintain an
action against one of the committee for his services, as such
secretary, or for his trouble, or for journeys he undertakes
in furtherance of the execution of the scheme.1
§ 246. No contract between promoters to go forward im-
plied from their association together. — The law does not
imply, from the mere association together of promoters to
organize a corporation, that they have contracted with one
another to carry out the enterprise. Accordingly, it has been
held that a promoter who is to sell land to a projected cor-
poration cannot hold his co-promoters liable for damages for
failure to organize the corporation.2 There may, however,
be a valid agreement to form a corporation, and, although
a Court of Equity will not on well settled principles decree
its specific performance, damages may be recovered for
loss or injury occasioned by its breach.3
§ 247. Legality of agreements between promoters as to
formation of corporation and its future management and con-
trol. — There is no principle of public policy which forbids
competent parties from entering into an agreement to form
a corporation and providing for its future management and
control, if the corporation is created according to statutory
requirements, and the objects contemplated are lawful and
proper. In King v. Barnesf the bill of complaint con-
tained in substance the following allegations. The plain-
tiffs and the defendant B. entered into a parol agreement
1 Parkin v. Fry, 2 C. & P. 311 ; Wilson v. Curzon, 15 M. & W. 532;
Bailey v. Burgess, 48 N. J. Eq. 411.
2 Crow v. Green, 4 Cent. Rep. (Penn.) 273.
8 A very v. Ryan, 74 Wise. 591.
4 109 N. Y. 267.
248 PROMOTERS AND PROMOTION OF CORPORATIONS.
to the effect that certain real estate should be purchased on
joint account, the parties to contribute equally thereto :
that a corporation should be organized to take the title, the
capital stock to be equally divided between them. B. was
made agent of the parties for the purpose of buying the
property and organizing the corporation, with authority to
select persons temporarily as directors, who were to give
place, upon request, to the real parties. The corporation
was organized with a capital of $100,000 and the defend-
ants P., C.,D. and G., together with B., were made directors.
All of the capital stock was subscribed for by B., except
twenty shares, each of the other directors subscribing for
five shares. Real estate was purchased by the associates
for $100,000 and conveyed to the corporation, in payment
for which it issued its entire capital stock. This was
delivered to B., with the exception of the twenty shares
taken to qualify the directors, but B. refused to transfer to
the plaintiffs the shares which they were entitled to under
the agreement, contending that the agreement was void by
the statute of frauds, as creating an interest in real estate
by parol ; that it was contrary to public policy and without
adequate consideration and was so incomplete and uncer-
tain in its terms that specific performance of its provisions
could not be decreed. The court considered these objections
to be untenable ; and held that the allegations of the com-
plaint presented a case of equitable cognizance, and showed
a clear case for an accounting, and trial of all issues inci-
dentally arising upon such accounting.
§ 248. Agreement bet-ween promoters restricting sale of
their stock. — An agreement in writing between the promo-
ters of a corporate enterprise owning ninety-nine one-hun-
dredths of its capital stock as tenants in common to partition
their holdings after first placing in the treasury one-fifth
of all the stock, to be sold to provide working capital, and,
BIGHTS AND LIABILITIES OF PEOMOTEKS. 249
in order to prevent a sacrifice thereof, providing for the
deposit of their individual stock certificates with a trust
company, each agreeing that he would not withdraw the
same for six months except by mutual consent, unless
enough treasury stock should be sooner sold to realize a
sum named, in which event any one could withdraw his
certificates on five days' notice to the others, does not con-
stitute an unlawful suspension of the power of alienation,
and is not against public policy, as being in restraint of
trade.1
1 Williams v. Montgomery, 148 N. Y. 519.
250 PROMOTERS AND PROMOTION OF CORPORATIONS.
CHAPTER XII.
BIGHTS AND LIABILITIES UNDER CONTRACTS MADE BY PRO-
MOTERS CLAIMING TO BE INCORPORATED WHEN THE PRO-
CEEDINGS TAKEN TO INCORPORATE HAVE BEEN DEFECTIVE
OR ILLEGAL.
§ 249. Question as to consequences
of illegal or defective in-
corporation by promoters.
250. Theory that corporation can-
not come into existence
without substantial com-
pliance with enabling stat-
ute.
251. Conclusiveness of certificate
of incorporation.
252. Nature and attributes of a
de facto corporation.
253. Promoters and stockholders
of a de facto corporation
not liable for its debts.
254. What is necessary to consti-
tute a de facto corporation.
255. A valid enabling statute.
256. Color of apparent organiza-
tion under statute and user.
257. Effect of apparently real but
in fact sham or fraudulent
compliance with require-
ments of statute.
258. Construction of statute by
courts of State where en-
acted followed by courts
of other States.
§ 259. Incorporation for apparently
lawful, but in reality un-
lawful purpose, will not
protect promoters.
260. Rule when corporation
formed in good faith for
lawful purpose.
261. Estoppel to deny corporate
existence. Estoppel of the
alleged corporation.
262. Estoppel of stockholders and
promoters.
263. Estoppel of persons dealing
with association as a cor-
poration.
264. Estoppel to deny corporate
existence of association in
order to hold members in-
dividually liable on its
contracts.
265. Eights and liabilities under
contracts by or with asso-
ciation acting as a corpo-
ration, when there is no
estoppel and no corporate
existence even de facto.
§ 249. Question as to consequences of illegal or defective
incorporation by promoters. — The subject of rights and lia-
bilities under contracts made by promoters in behalf of a
future corporation having been discussed in preceding
chapters, a consideration may now be had of the question
RIGHTS AND LIABILITIES UNDER CONTRACTS. 251
of rights and liabilities under contracts made by promoters
claiming to be incorporated and acting professedly as a
corporation, but without a de jure organization. Enabling
laws under which a corporation may be formed usually
provide that, upon compliance with specified requirements,
the persons seeking to incorporate shall become a corpora-
tion. If such requirements are substantially complied
with, a corporation de jure comes into being. The fact of
its legal existence cannot be questioned, even by the State,
although the State may for lawful cause put an end to that
existence by a direct proceeding instituted for the purpose.1
Promoters undertaking to bring a corporation into exist-
ence for the purpose of doing business under the form of
corporate organization may, however, by reason of some
illegality, irregularity, defect, or omission in the proceed-
ings taken under the enabling law, fail to form a corpora-
tion de jure, and yet in the belief that they have acquired
corporate existence, proceed to carry on business as a cor-
poration. In such case, it is important to determine what
their status and that of those who become members of the
supposed corporation is, — whether for any purpose or as
to any persons they may be treated as having corporate
existence, and if not what are their rights and liabilities.
§ 250. Theory that corporation cannot come into exist-
ence without substantial compliance with enabling statute. —
Probably all courts would agree that there may be a cor-
poration de facto when the only illegality in the steps taken
to incorporate is non-compliance or a defective compli-
1 Eakright v. Logansport, Sfc. R. R. Co., 13 Ind. 404; Rogers v.
Danby Universalist Society, 19 Vt. 187; State v. Central Ohio Mutual
Relief Ass'n, 29 Ohio St. 399; Buffalo fr Pittsburgh R. R. Co. v. Hatch,
20 N. Y. 157; Thompson v. People, 23 Wend. 537; People v. Cheeseman,
7 Col. 376; Mokelumne Hill Mining Co. v. Woodbury, 14 Cal. 424;
People v. Stockton fl- Visalia R. R. Co., 45 Cal. 306.
252 PROMOTERS AND PROMOTION OF CORPORATIONS.
ance with provisions of the enabling statute which are
directory or in the nature of conditions subsequent. But
there are cases which maintain the rule that requirements
of the enabling statute other than those which are merely
directory or plainly made conditions subsequent are to be
construed as conditions precedent, which must be met
before a corporation can in law or in fact be created, pro-
ceedings to incorporate under the statute being void if they
do not meet such conditions.1 The result of this rule is
that in case of non-compliance with all the conditions pre-
cedent of the statute, the corporate existence may be at-
tacked by private individuals. " It is," said the Maryland
court, " a question of legal birth. If the corporation had
been legally born, its life could only be forfeited and its
death declared at the instance of the State ; but whether
it ever did have life, or in other words, ever was born,
seems to us, upon both reason and authority, open to in-
quiry and contest at the instance of any one suffering from
its unauthorized acts." 2
It is plain that the statute should be given such effect
only as the Legislature intended. When the statute itself
provides that omissions or irregularities in the proceedings
shall render the incorporation void, or subject the members
1 Ferris v. Thaw, 72 Mo. 446 ; Abbott v. Omaha Smelting Co., 4 Neb.
416 ; Mokelumne Hill Mining Co. v. Woodbury, 14 Cal. 424 ; Hurt v.
Salisbury, 55 Mo. 311; Boyce v. Trustees of Towsonton Station of M. E.
Church, 46 Md. 359 ; Bonaparte v. Baltimore, Hampden, $f Lake Roland
R. R. Co., 75 Md. 340; Harrix v. McGregor, 29 Cal. 125; Unity Ins.
Co. v. Cram, 43 N. H. 636 ; Bigelowv. Gregory, 73 111. 197; Walton v.
Oliver, 49 Kan. 107 ; In re National Debenture §• Assets Co. (1891), 2
Ch. 505 ; Childs v. Hurd, 32 W. Va. 66 ; Garnett v. Richardson, 35
Ark. 144 ; Montgomery v. Forbes, 148 Mass. 249 ; Guckert v. Hacke,
159 Penn. 303.
3 Bonaparte v. Baltimore, Hampden, §• Lake Roland R. R. Co., supra.
In Lord v. Essex Building Ass'n, 37 Md. 320, it was held that a
second mortgagee might question the corporate existence of the first
mortgagee.
EIGHTS AND LIABILITIES UNDEK CONTRACTS. 253
to individual liability, there is no room for question as to
the legislative intent. Such is the case in Iowa, where the
statute provides that the individual property of the mem-
bers of a corporation shall be liable for corporate debts in
case of failure substantially to comply with the require-
ments of the statute as to organization and publicity.1 But
in the absence of an express provision of such nature, should
the legislative intent so to provide be inferred ? The prin-
ciple of construction applied by the courts which have
adopted the rule in question would seem to be that some-
times employed in the case of a statute which prohibits an
act, but imposes no penalty, namely, that the Legislature
must have intended to make the prohibited act void, as
otherwise the law would be simply " an expression of legis-
lative opinion without means for its enforcement." But
the case of the exercise of corporate franchises under an
enabling statute without a compliance with all its require-
ments is to be distinguished from that class of cases in
which it is necessary to hold prohibited acts or acts done
without a compliance with prescribed conditions void be-
cause to hold otherwise would be to render the law nugatory,
there being no other way to enforce it. In the case under
consideration, this end may be reached by a better and
more equitable process. The proper officers of the State
may, by quo warranto proceedings, prevent the unlawful
exercise of corporate franchises.2
It is therefore, in the absence of express provision other-
wise, reasonable to infer that this is the sole remedy
intended by the Legislature when corporate franchises are
1 Iowa Code, sect. 1618 ; Kaiser v. Lawrence Savings Bank, 56 Iowa,
104 ; Clegg v. Grange Co., 61 Iowa, 121. See also the Louisiana Act,
and Field v. Cooks, 16 La. Ann. 153.
2 Elizabethtown Gas Co. v. Green, 46 N. J. Eq. 118 ; Greene v.
People (111.), 21 N. E. Rep. 605; People v. Montecilo Water Co., 97 Cal.
276; AtCy Gen. v. Hanchett, 42 Mich. 436.
254 PROMOTERS AND PROMOTION OF CORPORATIONS.
exercised by virtue of an organization under the statute,
but without a full or substantial compliance with all its
conditions ; it is in the interest of the public so to hold,
and the wrong being to the State, and not to private
individuals, if redress is to be sought it should be only at
the instance of the State.1
§ 251. Conclusiveness of certificate of incorporation. —
General laws authorizing the formation of corporations
upon performance of stated conditions sometimes contain a
provision for the issue of a certificate of incorporation by
a public officer designated for the purpose. In such case,
notwithstanding non-performance of conditions or fraudu-
lent or evasive compliance therewith, the certificate, if
issued, may, even under the strict theory stated in the
preceding section, be conclusive as to the existence of the
corporation against all persons but the State.2 The con-
clusiveness of a certificate of incorporation, however, under
the theory in question, must depend upon the language of
the statute under which it is issued, and it may be conclu-
sive as to some things and not as to others. The English
Companies Act, 1862, provides that u any seven or more
persons associated for any lawful purpose may, by subscrib-
ing their names to a memorandum of association, and
otherwise complying with the requirements of this Act in
respect of registration, form an incorporated company";
and that " A certificate of the incorporation of any company,
given by the registrar, shall be conclusive evidence that all
1 Thus, when a corporation takes a conveyance of land without
complying with statutory requirements made conditions precedent to
the right so to do, the conveyance is good unless the legislative intent
is expressed to make it void for lack of such compliance, and the State
alone can take action in the matter. Fritts v. Palmer, 132 U. S. 282;
American Mortgage Co. of Scotland v. Ternille, 87 Ga. 28.
2 See Rice v. Nat' I Bank of the Commonwealth, 126 Mass. 300 ; Boston
Rubber Shoe Co. v. Boston Rubber Co., 149 Mass. 436.
EIGHTS AND LIABILITIES UNDER CONTRACTS. 255
requisitions of this Act in respect of registration have been
complied with." In In re National Debenture and Assets
Corporation,1 it was held that a certificate of incorporation
under the Act in question was not conclusive that seven
persons had signed the memorandum of association, and
therefore conclusive of the existence of the corporation.
The memorandum in this case purported to bear the sub-
scription of the names of seven persons ; it was alleged,
however, that in fact it had been signed by six persons
only, as one of the signatories had signed twice, once in his
own name and once under an assumed name. " The certifi-
cate of the registrar," said Bowen, L. J., " cannot cover a
fatal blot which is caused by a smaller number of persons
purporting to form a corporate body than the Act of Par-
liament requires. That is clear by the language of sect. 6
and sect. 18 of the Act of 1862. Sect. 6 provides that
seven or more persons may form a company. How ? By
subscribing their names to a memorandum of association,
and otherwise complying with the requisitions of this Act.
It does not say less persons than seven will do. What does
it mean by the seven persons complying with the requisi-
tions of the Act ? It means that they are to do that which
is prescribed by sects. 17 and 18. Sect. 18 says, 'A cer-
tificate . . . shall be conclusive evidence that all the requi-
sitions of this Act in respect to registration have been
complied with.' Amongst others there is the requisition
that seven persons shall subscribe their names. It does
not say that less than seven persons can do it." 2
In the United States Banking Act, it is provided that
when the Comptroller shall give a banking association a
1 (1891) 2 Ch. 505.
2 See also W. Laxon Co. No. 2 (1892), 3 Ch. 555. Compare Bird's
Case, 1 Sim. (K. s.) 47; Peel's Case, 2 Ch. 674; Oakes v. Turquand,
L. B. 2 H. L. 325.
256 PROMOTERS AND PROMOTION OF CORPORATIONS.
certificate that the requirements of the Act have been com-
plied with, the association shall have the powers of a bank
under the Act, and may begin business as a corporation.
It has been held that the Comptroller's certificate is conclu-
sive as against a stockholder in a suit to enforce his liabil-
ity, and as against a party upon his contract with the bank.1
§ 252. Nature and attributes of a de facto corporation. —
The better view, whether the statute does or does not pro-
vide for the issue of a certificate of incorporation, and the
one sustained by the weight of modern authority, although
some courts of high authority, as we have seen, do not ac-
cede to it, is that while a corporation de jure cannot result
from anything short of a substantial compliance with all
the conditions of the enabling law, a corporation de facto
may arise from an incomplete, defective, or irregular com-
pliance with such conditions, whether they are mandatory
or directory, conditions precedent or conditions subsequent.
A de facto corporation is one which is illegal or illegitimate
by reason of some omission, defect, or irregularity in the
proceedings taken under the enabling law, but neverthe-
less has in fact come into being, and accordingly must
be treated as existent until its existence is questioned by
the State in a direct proceeding brought for that purpose.2
So long as the State acquiesces in its existence and exercise
of corporate functions, it is under the protection of the same
law and governed by the same legal principles as a corpora-
1 Casey v. Galli, 94 U. S. 673.
2 Whitney v. Wyman, 101 U. S. 392 ; Mackall v. Chesapeake Canal
Co., 94 U. S. 308 ; Supreme Court of Independent Order of Foresters
of Canada v. Supreme Court of United Order of Foresters (Wise., 1896),
68 N. W. Rep. 1011; Me Clinch v. Sturais, 72 Me. 295; Hamilton v.
Clarion R. R. Co., 144Peun. 34; North v. State, 107 Tnd. 356 ; Duggan
v. Colorado Mortgage and Investment Co., 11 Col. 113; Tarbellv. Page,
24 111. 46; Lehman v. Warner, 61 Ala. 455; Finch v. Ullman, 105 Mo.
255; Saunders v. Farmer, 62 N. H. 572. See also cases cited infra,
note 1, page 200.
EIGHTS AND LIABILITIES UNDER CONTRACTS. 257
tion de jure.1 " A corporation de facto" said the California
court,2 " may legally do and perform every act and thing
which the same entity could do or perform were it a de jure
corporation. As to all the world except the paramount
authority under which it acts, and from which it receives
its charter, it occupies the same position as though in all
respects valid ; and even as against the State, except in
direct proceedings to arrest its usurpation of power, it is
submitted, its acts are to be treated as efficacious."
The assumption and exercise of corporate functions
under an imperfect or irregular compliance with the con-
ditions of the statute is a wrong to the State alone, and
does not concern individuals as such, unless the Legislature
provides otherwise. In the absence of a declaration in the
statute itself that a failure to comply with all the condi-
tions specified shall render any attempt to incorporate
thereunder absolutely void, or of some other declaration of
similar nature or to the same effect, it is the exclusive pre-
rogative of the State to elect whether to waive or to insist
upon the conditions. If a private individual could raise the
question, the State's sole prerogative of waiver would be
destroyed. Moreover, as the Alabama court has said, " it
would produce only disorder and confusion, and embarrass
and endanger the rights and interests of all dealing with the
association, if the legality of its existence could be drawn
in question in every suit to which it was a party, or in
which rights were involved springing out of its corporate
existence. No judgment could be rendered which could
settle the question finally. But when the government
intervenes by an appropriate proceeding, the judgment is
final and conclusive, putting an end to controversy." 3
1 Snider' s Sons' Co. v. Troy, 91 Ala. 224.
2 People v. La Rue, 67 Cal. 530.
8 Central Agricultural Sf Mechanical Association v. Alabama Gold
17
258 PROMOTERS AND PROMOTION OF CORPORATIONS.
§ 253. Promoters and stockholders of a de facto corpora-
tion not liable for its debts. — Tt follows from what has been
said as to the nature and attributes of a de facto corporation
that promoters and others who are members of such a cor-
poration, or who act and contract in its name and behalf,
cannot be held individually liable for the corporate debts,
in the absence of an express statutory provision imposing
such liability.1
§ 254. What is necessary to constitute a de facto corpora-
tion. — The logic of the theory that the State alone is con-
cerned in a case of an unlawful assumption of corporate
functions would seem to lead to the conclusion that per-
sons who in fact act as a corporation must in all cases
without exception be treated as a corporation, until the
State intervenes. But the courts have not gone so far as
this, and there is reason for holding that there should be
some limitation. " We must not," as Judge Thompson
observes, " get too far away from the primal proposition
that the Legislature alone can create a corporation, and
that a collection of individuals cannot make themselves a
corporation by merely resolving to be such or calling
themselves such." 2 Accordingly, in order to create a cor-
Life Ins. Co., 70 Ala. 120. But the rule would not apply against a
subscriber for stock in a future corporation. It is an implied condition
of such a contract that the corporation shall be created de jure. Rick-
hoff\. Brown's Sewing Machine Co., 68 Ind. 388 ; Schloss v. Trade Co.,
87 Ala. 411; Columbia Electric Co. v. Dixon, 46 Minn. 463.
1 Stout v. Zulick, 48 N. J. L. 600; Cochran v. Arnold, 58 Penn.
399; Duggan v. Colorado Investment Co., 11 Col. 113; Vanneman v.
Young, 52 N. J. L. 403; Snider's Sons' Co. v. Troy, 91 Ala. 224; Gart-
side Coal Co. v. Maxwell, 22 Fed. Rep. 197; Whitney v. Wyman, 101
U. S. 392; Earned v. Real, 65 N. H. 184 ; Finnegan v. Knights of Labor
Building Ass'n, 52 Minn. 239; American Salt Co. v. Heidenheimer, 80
Tex. 344.
2 Thompson on Corporations, sect. 502. Pettis v. Atkins, 60 111.
454. " To give to a body of men assuming to act as a corporation
EIGHTS AND LIABILITIES UNDER CONTRACTS. 259
poration de facto it is held to be necessary that there should
be a statute under which the corporation might lawfully be
formed, some steps taken to form the corporation under
that statute, and user of the corporate franchises assumed.
If there is no enabling statute, there cannot be a corpora-
tion, for a corporation can exist only by legislative sanc-
tion. If there is no attempt at incorporation under the
statute, there can be no valid claim that a corporation has
been formed under it. And if there is not a corporation in
law, there can be none in fact, unless there is an exercise
of corporate functions.
§ 255. A valid enabling statute. — There must be a stat-
ute under which the corporation might have been formed.1
And the statute must be a valid one. Accordingly, an
unconstitutional statute will not suffice.2 But it has been
held that an attempted incorporation under a special act
which is unconstitutional may give rise to a corporation de
facto, if there is a general law under which the corporation
might lawfully have been formed.3
§ 256. Color of apparent organization under statute and
user. — There must be color of apparent organization under
the statute in order that the corporation may exist de facto
where there has been no attempt to comply with the provisions of any
law authorizing them to become such, the status of a de facto cor-
poration might open the door to frauds upon the public, and it would
certainly be impolitic to permit a number of men to have the status of
a corporation because there is a law under which they might have be-
come incorporated, and they have agreed among themselves to act, and
they have acted, as a corporation." Finnegan v. Knights of Labor
Building Ass'n, 52 Minn. 239.
1 Evenson v. Ellingson, 67 Wise. 634; Chicora Co. v. Crews, 6 S. C.
243 ; American Loan if Trust Co. v. Minnesota §• N. W. R. R. Co., 157
111. 641 ; State v. Critchett, 37 Minn. 13.
2 Eaton v. Walker, 76 Mich. 579 ; Bradenstein v. Hoke, 101 Cal. 131 ;
Re Mendenhall, 9 Nat. Bank Reg. 497 ; Vredenburg v. Behan, 33 La.
Ann. 627. Contra, Coxe v. State, 144 N. Y. 396.
8 McTighe v. Macon Construction Co., 94 Ga. 306.
260 PROMOTERS AND PROMOTION OF CORPORATIONS.
under that statute. The promoters must take proceedings
under the statute to such an extent as unequivocally to indi-
cate that their organization is really intended and attempted
to be in pursuance of the statute, by virtue of which alone
they can acquire corporate existence. When this appears,
although neither full nor substantial compliance with all
the conditions of the statute is shown, and although there
may have been a failure as to some substantial requirement,
color of apparent organization under the statute is made
manifest, and if the statute is valid and authorizes the for-
mation of the corporation, and there is user pursuant to
the organization, a corporation de facto is created.1
Thus in Duggan v. Colorado Mortgage $• Investment (70., a
the promoters took various steps under the statute to
organize a corporation, and proceeded to do business as a
corporation. But their articles were not acknowledged,
as the statute required. And although the articles pur-
ported to be signed by three persons, the statute requiring
at least three, it was offered to show that one of the sig-
natures was a forgery. It was held that there was a de
facto corporation, the court saying : " We are aware of
1 Vanneman v. Young, 52 N. J. L. 403 ; Stout v. Zulick, 48 N. J. L.
601; Finnegan v. Knights of Labor Building Ass'n, 52 Minn. 239;
Duggan v. Colorado Mortgage Sf Investment Co., 11 Col. 113; McTighe
v. Macon Construction Co., 94 Ga. 306 ; Snider's Sons' Co. v. Troy, 91
Ala. 224 ; Hudson v. Green Hid Seminary, 113 111. 618; Bushnell v.
Consolidated Ice Machine Co., 138 111. 67; Methodist, fyc. Church v.
Pickett, 19 N. Y. 482 ; Buffalo §• Allegheny R. R. Co. v. Gary, 26 N. Y.
75; People v. Montecito Water Co., 97 Cal. 276; Allen v. Long, 80
Tex. 261; Hassleman v. U. S. Mortgage Co., 97 Ind. 368 ; Society of
Perun v. Cleveland, 43 Ohio St. 481 ; Haas v. Bank of Commerce, 41
Neb. 754 ; Pape v. Capital Bank, 20 Kan. 440 ; Merriman v. Magiveny,
12 Heisk. (Tenn.) 494; Lamning v. Galusha, 81 Hun, 247; Supreme
Court of Independent Order of Foresters of Canada v. Supreme Court
of United Order of Foresters (Wise., 1896), 68 N. W. Rep. 1011 ; Clark
on Corporations, pp. 90, 94.
2 11 Col. 113.
EIGHTS AND LIABILITIES UNDEK CONTRACTS. 261
the distinctions between mere omissions or irregularities
and what are called ' prerequisites of the statutes. ' The
distinction may well be taken in a direct proceeding, or
other exceptional case where strict proof is required.
What is or is not a prerequisite is often a difficult ques-
tion for a professional man, and much more for a layman,
to determine. To cast such a burden upon the public as
between the individual members is to lose sight of the
reason for, and largely abrogate, the salutary rule respect-
ing de facto corporations. " In Society Perun v. Cleveland^
the certificate of incorporation filed by the promoters did
not state the manner of carrying on the proposed business
as required by the statute. In Finnegan v. Knights of Labor
Building Association* the articles filed did not meet the
condition of the statute that the place of business should
be set forth. But in both cases the court held that there
was a corporation de facto. The same conclusion was
reached in East Norway Lake Church v. Froislie, 3 where
the certificates of incorporation were not properly executed,
acknowledged, or recorded, as prescribed by the statute.
8 257. Effect of apparently real, but in fact sham or
fraudulent compliance with requirements of statute. — It is
held by some courts to be essential to the existence of a
corporation de facto that the attempt to incorporate un-
der the statute shall have been made in good faith, and
that when there has been an apparently real, but in fact
merely pretentious, sham, or evasive compliance with
the requirements of the statute, the lack of good faith
or fraud, in the absence of a conclusive certificate of
incorporation, vitiates the proceedings, and a corporation
de facto is not created. Thus, in Montgomery v. Forbes,4
the question of the existence of a corporation under the
1 43 Ohio St. 481. 8 37 Minn. 447.
2 52 Minn. 239. 4 148 Mass. 249.
262 PROMOTERS AND PROMOTION OF CORPORATIONS.
New Hampshire statute was raised. Under this statute,
" any five or more persons of lawful age may, by written
articles of agreement, associate together for carrying on
any lawful business, except banking and the construction
and maintenance of a railroad, and when such articles
have been executed and recorded in the office of the clerk
of the town in which the principal business is to be car-
ried on, and in that of the Secretary of State, they shall
be a corporation. " " The object for which the corporation
is established, the place in which the business is to be
carried on, and the amount of the capital stock to be paid
in, shall be distinctly set forth in the articles of agree-
ment. " It appeared that the defendant, who was a woollen
manufacturer in Massachusetts, for the purpose of limit-
ing his personal responsibility and because the laws of
New Hampshire were more favorable to corporations than
Massachusetts laws, went to Nashua, New Hampshire, to
form a corporation through which to carry on his busi-
ness. With a local attorney and three other persons se-
cured by the attorney, he executed articles of agreement
which were recorded in the office of the clerk of the city of
Nashua and in the office of the Secretary of State. These
articles recited that the subscribers associated themselves
for the purpose of forming a corporation to be called the
Forbes Woollen Mills, fixed the amount of the capital
stock, and stated that the object of the corporation
was to manufacture and sell woollen and other goods,
and the places of business were at Nashua, N. H., and East
Brookfield, Mass. Meetings of the subscribers were sub-
sequently held, at which the defendant was elected presi-
dent and treasurer, and such other officers were elected as
were necessary under the laws of New Hampshire. All
the stock was issued to the defendant, no other person
being interested in it. The corporation then began the
EIGHTS AND LIABILITIES UNDER CONTRACTS. 263
manufacture of woollen goods in East Brookfield, and
purchased supplies of the plaintiff, for which the notes of
the corporation were given and taken. There was no
manufacturing done in Nashua, nor any other business,
except the holding of corporate meetings In the trial
court the jury found that at the time of the attempted
organization the alleged corporation and its members did
not intend to carry on its business (other than holding
meetings) in whole or in part in Nashua; that there was
no attempt in good faith by the defendant to form the
corporation; but that the defendant believed that the
organization was a valid corporation. The suit was to
recover from the defendant individually the price of the
supplies in question, and, on the findings stated, the judge
directed a verdict for the plaintiff, which was sustained.
In Jersey City Gas Co. v. D wight,1 the plaintiff corpora-
tion sought to be protected against an invasion of its
franchise. It had authority under a special charter to lay
gas pipes in the streets of Jersey City, and to generate
and sell gas for lighting purposes in that city. The de-
fendants claimed the same right, as a corporation formed
by them under the name of the Consumers' Gas Company,
pursuant to the provisions of a general law. The decision
hinged on the question whether the defendants had
acquired corporate existence. The law in question pro-
vided that a corporation formed under it should exist
from the filing of the articles, but that the articles should
not be filed until at least one-half of the capital stock had
been subscribed, and twenty per cent paid thereon in
good faith and in cash, and an affidavit of compliance
with such requirement filed. There was an ostensible
compliance on the part of the defendants, but in fact a
part of the subscription of one-half of the capital stock
* 29 N. J. Eq. 242.
264 PEOMOTEES AND PEOMOTION OF COEPOEATIONS.
was fictitious, and the required twenty per cent was not
paid in in cash, although an affidavit to that effect was
filed. The court said: "Any attempt to acquire corpo-
rate functions by a pretentious or evasive compliance,
no matter what the papers may say, must be denounced
as a fraud upon the law. By this law a corporation is
made self-creative and a grant of a franchise is made to
flow from the act of the grantee ; the act is the grant, but
to have this effect it must be what the law requires, and
not a sham." The defendants, it was accordingly held,
had not acquired corporate life and power, and an injunc-
tion was issued restraining them from using the public
streets of Jersey City for the purpose of laying gas pipes
therein. 1
But the principles on which the rule in relation to a
corporation de facto is based apply with peculiar force
when private individuals seek to impeach the existence of
a corporation on the ground of fraud or lack of good faith
in the proceedings taken to secure incorporation. If
defects and omissions in the proceedings which are
apparent of record and may easily be ascertained, and the
effect of which is a question of law, can be taken advan-
tage of only by the State, a fortiori should this be so in a
case of alleged fraud or lack of good faith which presents
a question of fact in respect to which prospective stock-
holders or others, however honest or diligent, might
reach the wrong conclusion and different juries might
decide differently. In one case as much as in the other
the wrong is to the State, and not to individuals, and it
should rest with the State alone to raise the question.2
1 To the same effect, see Farnham v. Benedict, 107 N. Y. 159 ; Hill
v. Beach, 12 N. J. Eq. 31.
2 Charles River Bridge Co. v. Warren Bridge, 7 Pick. 344; Dug-
gan v. Colorado Mortgage Sf Investment Co., 11 Col. 113 ; Demarest v.
Flack, 128 N. Y. 205.
EIGHTS AND LIABILITIES UNDER CONTEACTS. 265
The difficulties in the way of the contrary doctrine and
the confusion which might result from its adoption are
set forth in the opinion of the court in Cochran v. Arnold,1
as follows : " By one jury a charter may be set aside. By
another it may be sustained. One creditor may sue the
corporation as such, obtain a judgment, and sell its land,
himself becoming the purchaser. Another creditor may
sue the corporators, alleging that their charter is null,
furnishing no immunity to them. He may obtain a
judgment and sell the same land to another purchaser, as
the property, not of the corporation, but of the stock-
holders. In such a case which purchaser would hold the
title ? Again, new stockholders may come in, totally
ignorant of any fraud or mistake in making out the cer-
tificate. Are they to be charged individually because
there was a secret vice in obtaining corporate being?
That would be monstrous.2 . . . Yet, if a charter can
be shown invalid by collateral attack at the suit of a
creditor, why are not new stockholders who have come in
after the birth of the corporation equally liable as partners,
or joint contractors, with all the original stockholders ?
Can the charter be effective and yet not effective ? In
Patterson v. Arnold,3 it seems to have been thought a
charter may be good as to some stockholders and a nullity
as to others. What confusion must this produce ? Some
may be sued as partners, and others through the corpora-
tion, and under judgments obtained executions be levied
upon the same property. Or all the original stockholders
1 58 Perm. 399.
2 There are cases which, while recognizing the doctrine that the
corporate existence may be impeached by private individuals as
against the guilty parties, hold otherwise as to innocent stockholders.
A merican Salt Co. v. Heidenheimer, 80 Tex. 344 ; Medill v. Collier, 16
Ohio St. 599.
8 45 Penn. 410.
266 PBOMOTEES AND PROMOTION OF COEPOEATIONS.
may go out and give place to successors. Then that
which was incurably vicious, because an usurpation upon
the Commonwealth, has become good. It is impossible,
however, that a charter can be good as to some stock-
holders and bad as to others. Every one has an interest
in the property of his associates invested in the common
stock. Such is his corporate right. If that property can
be withdrawn by action against his associates individually,
the charter ceases to be to him all that it purports to be.
It is said, that those who certify falsely for the purpose
of obtaining a charter are guilty of fraud. Doubtless this
is so. There is a fraud upon the State. If it be also a
fraud upon creditors, the law furnishes a remedy. An
action will lie for the fraud. But to deny the corporate
existence of a de facto corporation, and to hold as partners
those who were guilty of fraud in obtaining the charter,
is to confound an action ex contractu with one essen-
tially for a tort."
§ 258. Construction of statute by courts of State where
enacted followed by courts of other States. — When a court
in one State has to determine the interpretation to be
placed upon a statute of another State authorizing the
formation of corporations, it will inquire whether the
courts of the latter State have construed it. If they have
passed on the question whether given omissions or defects
in the proceedings required for incorporation render an
attempted incorporation under the statute void, the courts
of the State in which the existence of a corporation alleged
to have been formed under the statute in question is
denied will, pursuant to the rule of comity, follow the
construction adopted by the courts of the State where
the statute was enacted. Therefore , when an action was
brought in the State of New York against certain stock-
holders of a company purporting to have been incorporated
EIGHTS AND LIABILITIES UNDER CONTKACTS. 267
in the State of Iowa, seeking to charge such stockholders
with an indebtedness of the company, on the ground that
its failure to file its charter in the office of the Secretary
of State as required by the Iowa statute had rendered the
incorporation void, it appearing that the Supreme Court
of Iowa had decided that such filing was not essential to
the validity of the incorporation, and that the omission to
cause the charter to be so filed would not render the
private property of the stockholders liable for the debts
of the company, it was held by the New York court that
such decision was conclusive as to the construction to be
placed on the statute, and that the action was not main-
tainable.1
§ 259. Incorporation for apparently lawful, but in reality
unlawful purpose, will not protect promoters. — Promoters
may bring a corporation into existence for the purpose of
doing some unlawful act or carrying on some unlawful
business under the form of corporate organization as a
shield against personal liability. In such case, they may
be held responsible as individuals for their wrong doing,
although it is accomplished through the medium of the
corporation. The articles of association or charter may
indicate that the purpose of the corporation is lawful, but
the courts will not, if it is proved that the real intent is
to transact an unlawful business, and such business is
transacted by the promoters, permit them when sued as
individuals to shelter themselves behind the answer of
corporate organization. The corporation may have a
legal existence,2 as a de facto corporation, but of that the
wrong doers cannot avail themselves.
1 Jessup v. Carnegie, 80 N. Y. 441.
8 The distinction between calling in question the existence of a
corporation and refusing to permit its existence to be availed of in a
case of the nature stated must be borne in mind. It is evidently the
268 PROMOTERS AND PROMOTION OF CORPORATIONS.
McG-rew v. City Produce Exchange1 exemplifies the
rule. In this case the plaintiff brought suit to recover
moneys lost by him on wagers made with the defendants.
The defendants were the incorporators of the City Produce
Exchange. It appeared that they had combined and con-
federated together, styling themselves and chartered as
the City Produce Exchange for the purpose of buying and
selling " futures " in cotton and grain, ostensibly, while
in reality this was a pretence, the real business intended
to be done, and in fact done, being the pretended purchase
or sale of such products, for future delivery, under con-
tracts legal and valid in form, but in fact illegal and
invalid because of the non-existence of any real intention
to buy or sell for such delivery, and so framed and
executed as to conceal the real purpose of the parties,
which was to gamble on the rise and fall of the products
pretended to be bought or sold. It was contended by way
of defence to the action that the corporation was alone
liable ; that, being chartered for a legal purpose, the incor-
porators could not be held liable for the illegal acts of the
managers or officers of the corporation. But the court
said: "There is nothing in this defence. The facts
justify the finding that the corporation was but a cloak
used to cover the illegal acts contemplated in the organ-
ization and done as a business ; and in such case the form
first case that Mr. Morawetz has in mind when he says : " The mere
motive and intention of the parties forming a corporation cannot be
inquired into. If the purpose of a corporation, as indicated by its
articles of association, is legal, and the incorporation is effected in the
manner prescribed by law, the intention of the incorporators is imma-
terial. Even if the corporation should afterwards, in pursuance of the
pre-existing intention of those forming it, depart from its authorized
purposes, that would merely be a ground for dissolving it at the suit
of the State, as in other cases where a corporation violates the law."
Morawetz on Corporations, sect. 758.
1 85 Tenn. 572.
EIGHTS AND LIABILITIES UNDER CONTRACTS. 269
of the transaction is disregarded, and the intent and sub-
stance ascertained, and liability fixed for the thing done,
•without respect to the pretence under which it was
attempted to be concealed." On the same principle it
was held in Smith v. Standard Laundry Machine Co.1
that the president of a corporation who owned all the
stock was personally liable in damages for the infringe-
ment of a patent. " The pretext of doing business in the
name of the corporation," the court observed, "is too
flimsy to shield him from accounting to the owner of the
patent. "
§ 260. Rule -when corporation formed in good faith for
lawful purpose. — But a corporation may commit fraudu-
lent or ultra vires acts, and ordinarily the corporators and
shareholders are not liable therefor. ]t may become
insolvent, and its creditors cannot in such case, in the
absence of statutory liability, look to the corporators or
shareholders to make up the deficiency in the corporate
assets.2 The rule stated in the preceding section is not
applicable when the corporation is really formed to do
that which as a corporation it lawfully may do, and is not
employed as a mere cloak to cover designed fraud.3
§ 261. Estoppel to deny corporate existence. — Estoppel
of the alleged corporation. — Promoters who have failed to
form a corporation either in law or in fact may yet, in
the belief or without the belief that they have formed a
valid corporation, claim to have corporate existence, and
contract and carry on business professedly as an existing
corporation. It is well settled in this case that, if the
1 19 Fed. Rep. 826.
2 Cook's Stock and Stockholders, and Corporation Loan, sect. 663 b.
8 Atchison, Topeka, §• Santa Fe Ry. Co. v. Dains, 34 Kan. 209. See
Kankakee fy Seneca R. R. Co. v. Horan, 131 111. 288, the decision in which
ignores the doctrine stated in the text. See also article " Liability of
an Organizer of a Corporation," 27 American Law Review, 361.
270 PROMOTERS AND PROMOTION OF CORPORATIONS.
association gotten up by them holds itself out as a corpo-
ration in business transactions with other persons, it will
be estopped against such persons as to such transactions
to deny that it is a corporation for the purpose of defeat-
ing their rights.1
§ 262. Estoppel of stockholders and promoters. — The
estoppel extends to the members or stockholders of the
association, as against persons with whom the associa-
tion has dealt as a corporation. Thus, when an organiza-
tion assumes to act as a corporation, and issues and puts
in circulation bonds secured by a mortgage, stockholders
in the organization, as such, cannot defeat the bonds and
mortgage by alleging that the organization was not duly
incorporated.2 And stockholders in a professed corpora-
tion when called upon, as such, to respond to a liability,
are not permitted to deny the existence or the legal valid-
ity of the corporation.3 Promoters- are likewise estopped
to question the existence of the corporation when suit is
brought against them in its behalf to enforce rights grow-
ing out of their acts as promoters. For example, if they
have improperly obtained secret profits at the expense of the
corporation they are estopped in a suit brought by it to re-
cover such profits to deny the legality of the organization.1
1 Callender v. Plainsmlle Sf Hudson R. R. Co., 11 Ohio St. 516;
Stewart Paper Mfg. Co. v. Rau, 92 Ga. 511 ; Ten Eyck v. Pontiac,
Oxford, if Port Austin R. R. Co., 74 Mich. 226 ; Dooley v. Cheshire
Glass Co., 15 Gray, 494. Contra, Boyce v. Trustees of Towsonton Sta-
tion of M. E. Church, 46 Md. 359. If the defendant has contracted
as an association or organization under the name by which it is sued,
it is immaterial, so far as the plaintiff's right of recovery is concerned,
whether it is a corporation de jure, a corporation de facto, or a mere
voluntary association. Perine v. Grand Lodge, 48 Minn. 82.
2 Phinizyv. Augusta tf K. R. Co., 62 Fed. Rep. 678. See also
Beal v. Bass, 86 Me. 325.
8 Casey v. Galli, 94 U. S. 673.
4 Pittsburg Mining Co. v. Spooner, 74 Wise. 307.
EIGHTS AND LIABILITIES UNDER CONTRACTS. 271
§ 263. Estoppel of persons dealing with association as a
corporation. — Persons who contract with an association as
a corporation are estopped when it seeks to enforce the
contract to deny that it is a corporation. " Parties must
take the consequences of the position the}7 assume. They
are estopped to deny the reality of the state of things
which they have made appear to exist, and upon which
others have been led to rely. Sound ethics require that
the apparent, in its effects and consequences, should be
as if it were real, and the law properly so regards it. " 1
Thus the execution of a note to the payee as a corporation
will estop the maker to deny that the payee is a corpora-
tion, in a suit brought upon the note.2 And so one who
makes a conveyance to persons assuming to be a corpora-
tion, and describes them in the deed as a corporation,
will be debarred thereby from disputing their corporate
existence, for the purpose of defeating the deed.3 A
person who has recognized, dealt with, and become a stock-
holder in a de facto corporation, is estopped in an action
on his subscription to assert that it never was legally
organized.4 But a subscriber for stock in a future cor-
poration, as distinguished from one held out to be in
existence, is not from that fact alone estopped, in a suit
brought to enforce the contract of subscription, to set up
as a defence that the corporation has not come into being.
1 Swayne, J., in Casey v. Galli, 94 U. S. 673; Close v. Glenwood
Cemetery, 107 U. S. 467 ; Commercial Bank of Keokuk v. Pfeiffer, 108
N. Y. 242; Ragan v. McElroy, 98 Mo. 349 ; Searcy v. Yarnell, 47 Ark.
269 ; Stofflett v. Strome, 101 Mich. 197 ; Wingett v. Quincy Building
Association, 128 111. 67; Bank of Shasta v. Boyd, 99 Cal. 604 ; Butchers
fy Drovers' Bank v. McDonald, 130 Mass. 264 ; Spahr v. Farmers'
Bank, 94 Penn. 429; Tuckaseegee Mining Co. v. Goodhue, 118 N. C.
981.
2 Brickley v. Edwards, 131 Ind. 3.
8 Whitney v. Robinson, 53 Wise. 309.
* Hausev. Hannenheimer (Minn., 1896), 69 N. W. Rep. 810.
272 PROMOTERS AND PROMOTION OF CORPORATIONS.
Such a contract does not recognize the corporate existence,
and it is an implied condition that the corporation shall
be created de jure.1
§ 264. Estoppel to deny corporate existence of associa-
tion in order to hold members individually liable on its
contracts. — • It follows from the rule stated in the preced-
ing section that persons who contract with an association
as a corporation are estopped, at least in those jurisdic-
tions where the rule of estoppel is not limited to de facto
corporations, from setting up that the association is not a
corporation for the purpose of holding the members indi-
vidually liable on the contract.2 To support the estoppel
1 Rickhoffv. Brown's Sewing Machine Co., 68 Ind. 388 ; Columbia
Electric Co. v. Dixon, 46 Minn. 463 ; Schloss v. Trade Co., 87 Ala.
411. There are direct decisions to the effect that the rule of estoppel
stated in the text is applicable only when the association contracted
with as a corporation is at least a de facto corporation. Jones v. Aspen
Hardware Co., 21 Col. 263; Bradenstein v. Hoke, 101 Cal. 131 ; Empire
Mills v. Alston Grocery Co. (Tex. App.), 15 S. W. Rep. 505; Snyder
v. Studebaker, 19 Ind. 462; and there are dicta and apparent holdings
to the same effect in quite a number of cases. But ordinarily there
would seem to be no sound reason for such a distinction. For a dis-
cussion of the question, see Clark on Corporations, p. 105 et seq.,
where the cases are collected. Perhaps the rule should not be applied
in the case of a subscription for stock in what is held out and supposed
to be an existing corporation, but in reality is not even a corporation
de facto. If it is applied, the subscriber may be compelled to take
what he has not bargained for — shares in a mere voluntary associa-
tion, and this would seem to be unjust, except in those cases where he
is estopped by reason of his participating in the organization or busi-
ness of the association as a promoter or stockholder.
2 Snider's Sons' Co. v. Troy, 91 Ala. 224 ; Stout v. Zulick, 48 IST. J.
L. 599; Planters Sf Miners' Bank v. Padgett, 69 Ga. 159; Merchants
if Manufacturers' Bank v. Stone, 38 Mich. 779; Johnston v. Gumbel
(Miss., 1896), 19 So. Rep. 100 ; Nebraska Nat. Bank of York v. Fer-
guson (Neb., 1896), 68 N. W. Rep. 370. The cases on the individual
liability of members of a pretended corporation fall into several
classes : —
(1) Those which, without taking into account the doctrine of es-
RIGHTS AND LIABILITIES UNDER CONTRACTS. 273
in such case, however, it must appear that in the making
of the contract the corporate existence has been recognized,
and that the contract was made with the association as
a corporate body. One who contracts with an associa-
tion, in ignorance of its claim to be a corporation, is not
estopped to contend that the members are individually
liable to him. The mere fact that the contract is in the
name of a company, and is signed by officers of the com-
pany as such, does not create a presumption that the com-
pany is a corporation ; it is equally consistent with the
theory that the company is a voluntary association, or a
partnership, or composed of a single individual. Unin-
corporated associations, partnerships, and individuals a»
frequently use company names, perhaps, as do corpora-
tions, and often adopt the forms and methods of business
corporations, conducting their business by a president or
treasurer. 1
§ 265. Rights and liabilities under contracts by or with
association acting as a corporation, when there is no estop-
pel and no corporate existence even de facto. — Under these
conditions the rights of the association will be protected
toppel, hold the members exempt on the ground that the association
is a de facto corporation; e. g. American Salt Co. v. Heidenheimer, 80
Tex. 344.
(2) Those which hold, apart from any question of estoppel, that
the association is not a partnership; e. g. Fay v. Noble, 7 Gush. 188.
(3) Those which expressly hold that, the association not being even
ade facto corporation, the rule of estoppel does not apply. Empire
Mills v. Alston Grocery Co. (Tex. App.), 15 S. W. Rep. 505. The re-
maining cases are perhaps inferentially within this class. See, for
example, Montgomery v. Forbes, 148 Mass. 249.
1 Duke v. Taylor, 37 Fla. 64; Guckert v. Haeke, 159 Penn. 303;
New York Nat. Exchange Bank v. Crowell (Penn., 1896), 35 At. Rep.
613; Clark v. Jones, 87 Ala. 474; Eaton v. Walker, 76 Mich. 579;
Hunaerford Nat. Bank v. Van Nostrand, 106 Mass. 559 ; Clark on Cor-
porations, p. 102.
18
274 PROMOTERS AND PROMOTION OF CORPORATIONS.
by the courts. Thus, in Insurance Company v. Harbor
Protection Co.,1 certain corporations had attempted with-
out right to form a corporation under the general laws,
and the supposed new corporation had acquired property.
It was held that this property belonged to the holders of
certificates of stock, and that the court would order it
sold and the proceeds divided among them. As to the
liability of the members, the rule is maintained in quite
a number of jurisdictions that the association is a partner-
ship, the members being liable to creditors accordingly,
although they have not agreed to become partners or held
themselves out as a partnership.2 But it seems clear that,
in the absence of such an agreement or holding out, this
rule cannot be justified by any principle of the law of
partnership.3 In some of the cases in which it has been
announced and applied, it has apparently been made to
rest on the ground of public policy. In other words, it has
been established by judicial legislation.4 In other cases
it appears to have resulted from the theory that every asso-
ciation or organization must be either a partnership or a
corporation ; but this is not true ; a voluntary association
may or not be a partnership, and its members may or may
not be liable as partners to creditors. This must depend
upon what they have agreed, or held themselves out to be.
1 37 La. Ann. 233.
2 Bigelow v. Gregory, 73 111. 197; Loverin v. McLaughlin, 161 111.
417, 435; Abbott v. Omaha Smelting Co., 4 Neb. 416; Guckert v. Hacke,
159 Penn. 303; New York Nat. Exchange Bank v. Crowell (Penn.,
1896), 35 At. Rep. 613 ; Garnett v. Richardson, 35 Ark. 144; Ferris v.
Thaw, 72 Mo. 446 ; Coleman v. Coleman, 78 Ind. 344 ; Empire Mills v.
Alston Grocery Co. (Tex. App.), 15 S. W. Rep. 505; Smith v. Warden,
86 Mo. 382; Dukev. Taylor, 37 Fla. 64; Eaton v. Walker, 76 Mich.
579 ; Shields v. Clifton Land §• Improvement Co., 94 Tenn. 123.
8 Bates's Law of Partnership, sect. 4.
4 But in Iowa the statute expressly imposes the liability. Clegg v.
Hamilton Sf Wright Grange Co., 61 la. 121.
EIGHTS AND LIABILITIES UNDER CONTRACTS. 275
Moreover the rule is unjust to innocent stockholders, and
tends to produce great inconveniences and hardships,
imposing, as it does, on purchasers of stock in the mar-
ket the burden of causing an investigation to be made to
determine whether or not the corporation has been legally
formed. Ordinarily this is not practicable.
If the members of a supposed or alleged corporation
have not agreed to form a partnership or held themselves
out as partners, and the statute does not in terms impose
upon them partnership liability, the true view is that
their liability is to be tested by the principles of the law
of agency.1 When the members of an association sought
to be charged on a contract made with it as a corporation
supposed the association to be a corporation, and did not
enter into the contract personally, and there is no statu-
tory liability, no valid reason exists why they should be
individually held on the contract, unless the officers or
managers who made it were their agents with authority to
make it in their behalf. And there is no justification for
inferring such agency and authority from the mere fact of
their membership. That fact does not tend to show an
agency for them as individuals. On the contrary, it
establishes only an attempted agency for the supposed
corporation. And so far as a holding out of an agency in
such case goes, it is not a holding out of an agency for
the members individually, but of an agency for a corpora-
tion. The result, it is true, is that the officers or
managers making the contract have no principal behind
them, the corporation being non-existent; but this is
1 Fay v. Noble, 1 Gush. 188; Stafford National Bank v. Palmer, 47
Conn. 443; First National Bank v. Almy, 117 Mass. 476; Ward v.
Brigham, 127 Mass. 24; Seacard v. Pendleton, 55 Hun, 579; Hum-
phreys v. Mooney, 5 Col. 282 ; Medill v. Collier, 16 Ohio St. 599 ; Blan-
chard v. Kaull, 44 Cal. 440.
276 PEOMOTEKS AND PROMOTION OF CORPORATIONS.
not anomalous. Not infrequently a contract fails because
one of the parties in whose behalf it purports to have been
made, and whom it was intended to charge, turns out to
be non-existent, or because such party did not authorize
the contract to be made for him. The remedy here is
plain, those who actually made the contract as that of an
existing corporation being liable in damages to the other
party to the contract, if they have misled him to his in-
jury by their action.1
The agency of promoters, officers, or managers of an
alleged corporation for the members thereof, as individu-
als, may , however, be expressly created by or implied from
the acts of such members. For reasons already stated,
the inference is not to be drawn from the mere fact that
the members chose or appointed the officers or managers
who made the contract, and authorized them to act for
the supposed corporation, nor from the mere fact that
the members have received dividends as stockholders.
But if they knew at the outset or subsequently became
aware that the association was not a corporation, and
then, by continuing as members or otherwise, acquiesced
in the carrying on of the business by the officers or
managers, they may be held as principals.2
1 See sect. 230.
2 Seacard v. Pendleton, 55 Hun, 579 ; Fuller v. Rowe, 57 N. Y. 23 ;
Central City Savings Bank v. Walker, 66 N. Y. 583 ; Medill v. Collier,
16 Ohio St. 599 ; Johnson v. Corsner, 34 Minn. 355.
INDEX.
INDEX.
References are to Sections.
ABORTIVE CORPORATION,
promoter's liability to subscribers for shares for money advanced,
162.
expenses not to be deducted unless authorized, 163.
payment to promoter or his agent must be shown, 164-166.
lien, none in favor of subscriber for shares as against creditors,
167.
remedy at law unless fraud or necessity for accounting shown, 168.
bill for an accounting, 169.
ACCEPTANCE,
by corporation of promoter's contracts. (See CONTRACTS of
Promoters.)
ACCOUNTABILITY,
of promoters generally, 23.
of promoters to corporation,
for benefit of purchase, 42-57.
none from mere fact that purchase made by promoter while
such, 44.
none when made before promoter became such, 46-48.
unless certain declarations are made, 51-53.
for benefit of option, 54—56.
for benefit of option held by one confederating with pro-
moter, 58, 59.
effect of certain declarations, 55-57.
for benefit when corporation makes payment in its stock, 83.
remedy 1, by recovery of stock and dividends paid
thereon, 83.
remedy 2, by recovery of highest intermediate value of
stock, 83.
remedy 3, by recovery of amount received by promoter
for stock, if sold, with dividends, 83.
distinction between benefit and profit, 60.
for profit on sale to corporation of property bought by pro-
moter before he became such, 60-82.
when property has a market price, 61.
none when purchase by corporation has been properly
approved, 61.
where property has no market price, 62.
net profit only to be accounted for, 79.
280 INDEX.
References are to Sections.
ACCOUNTABILITY — continued,
for promotion money, 64-74.
net proceeds only to be accounted for, 79.
but no allowance for expenses ultra vires the corporation, 80.
for commissions received from vendor to corporation, 64-75,
77, 78, 83.
for interest, 82.
action survives against promoter's administrator or executor,
89.
burden of proof, 104.
statute of limitations, 84-87.
estoppel of corporation, 88.
of promoter to shareholders and subscribers for shares, 123-125.
joinder of plaintiff, 126.
for misrepresentations. (See SUBSCRIBERS FOR SHARES.)
for money advanced, when project fails. (See ABORTIVE
CORPORATION.)
of persons confederating with promoters, 76.
for benefit of option, 58, 59.
of vendor to corporation having secret agreement with promoter, 75.
distinguished from liability for damages, 46.
ACTION,
by corporation against promoter,
for an accounting, may be barred by statute of limitations,
84-87.
may be divested, how, 88.
for damages, will not ordinarily lie for misfeasance, 90.
will lie for fraud, 76, 90, 92.
for injurious violation of duty to corporation, 91.
if misfeasance causes pecuniary loss, 91, 92.
form of action, deceit, 92.
when for accounting, survives against executor or adminis-
trator of promoter, 89.
for rescission. (See RESCISSION.)
suit by minority shareholders. (See SHAREHOLDERS' BILL.)
by subscriber for shares against promoter,
for damages for concealment or misrepresentation or for ac-
counting, when fiduciary relation exists, 123-129.
for damages for concealment or misrepresentation, when
fiduciary relation does not exist. (See SUBSCRIBERS FOR
SHARES.)
by subscriber for shares against corporation,
ordinarily none for frauds of promoter before organization, 171.
action of deceit, 170-172.
effect of insolvency of corporation upon, 172.
action for money had and received, 174.
rescission of contract of subscription. (See RESCISSION.)
INDEX. 281
References are to Sections.
ADMISSION,
by promoter of liability on contract made by him before he be-
came such, effect of, 239.
ADOPTION,
by corporation of promoter's contracts. (See CONTRACTS of
Promoters.)
AGENT,
not necessarily a promoter, 2-4.
may be promoter although compensation does not come from cor-
poration, 5.
of vendor to corporation, when liable as promoter, 4.
of stranger becomes a promoter, when, 5, 6.
promoters not prima facie each other's agents, 233.
AGREEMENT TO PROMOTE,
does not alone make one a promoter, 16.
AGREEMENTS,
of promoters must be disclosed in prospectus, in England, 154.
different rule in United States, 153.
(See also CONTRACTS.)
ASSOCIATION ACTING AS A CORPORATION, BUT NOT
SUCH EVEN DE FACTO,
estoppel to deny legal incorporation, 261-264.
members held as partners in some jurisdictions ; rule criticised,
265.
question of agency, one member for another, question of fact, 265.
ordinarily no agency for members individually, 265.
may be imposed upon members by statute, 265.
agency may arise from knowledge by members of illegality of in-
corporation, 265.
BENEFIT, (See ACCOUNTABILITY.)
of option held by promoter, when corporation may have, 54, 56, 57.
corporation may have, if promoter offers corporation advan-
tage of option, 55.
of option held by third person confederating with promoter, when
corporation may have, 58, 59.
of secret promotion money, corporation entitled to, 64-74.
of purchase made by promoter acting as such ; corporation's right
to claim, 42, 43.
no right from mere fact that purchase made by promoter
while such, 44.
no right in corporation to benefit of purchase or option in case
of certain disclosures by promoter, 42.
of purchase made by promoter before he became such, corporation
may not have, 46-48.
unless promoter has made certain declarations, 51-53.
282 INDEX.
References are to Sections.
BURDEN OF PROOF,
in actions to rescind, 104, 190.
to recover secret profits, 104.
upon corporation to show waiver or laches, when, 190.
CAVEAT E MPT OR,
applicable in dealings between promoter and subscriber for shares,
130, n. 1, 182.
not applicable to dealings between promoter and corporation, 98.
CERTIFICATE OF INCORPORATION,
how far conclusive, 251.
COLORABLE TRANSFER OF PROPERTY TO PROMOTER,
court will go behind in determining measure of accountability,
49, 50.
COMMENDATORY EXPRESSIONS,
by promoters to subscribers for shares privileged, not actionable,
133.
COMMISSIONS,
when secretly paid promoter by vendor to corporation, to be ac-
counted for, 4, 63-74.
when secretly secured by promoter, not at expense of corporation,
to be accounted for, 77, 78.
analogy of trustee, 78.
accountability of persons confederating with promoters, 76.
rule as to recovery when commission in form of shares of corpora-
tion's stock, 83.
interest, 82.
statute of limitations, 84-87.
estoppel of corporation, 88.
COMPANIES ACTS,
English decisions in some cases based upon, 80.
corporation allowed to pay promoter reasonable expenses, 81.
requirements of, as to disclosure of promoter's contracts in pro-
spectus, 154.
CONCEALMENT, (See NON-DISCLOSURE BY PROMOTERS.)
of material facts implies fraudulent misrepresentation, 147.
when fiduciary relation exists, ground for damages in suit by
shareholders against promoters, 127-129.
CONFEDERATES OF PROMOTERS,
liable to account or in damages to corporation, 58, 59, 76.
CONSPIRACY,
what misrepresentations of promoters will support indictment for,
156.
INDEX. 283
References are to Sections.
CONTRACTS.
between promoters,
none implied for payment by co-promoters for services, 245.
none implied as to going forward with undertaking, 246.
as to formation and management of corporation, 247.
restricting sale of their stock, legal and not against public
policy, 248.
between promoter and corporation,
in making corporation must ordinarily act through disinter-
ested board of directors, 26.
promoter's duty to see that corporation does so act, 24.
rule otherwise when full disclosure made and shareholders
consent, 27.
when promoter has received secret benefits, corporation may
have accounting, 94.
under some circumstances corporation may ratify contract,
100.
under some circumstances corporation may rescind contract,
94-96, 100.
caveat emptor not applicable to dealings by promoters with
corporation, 98.
corporation may not rescind when promoter has disclosed his
position and interest, 94-96.
in case of rescission, consideration to be returned, 102.
except in cases, its equivalent, 102.
when worthless, need not be returned, 102.
laches, effect of, on right to rescind, 101.
by promoters in behalf of projected corporation,
corporation not ordinarily bound by, 194-198.
corporation cannot ordinarily enforce, 194-197.
liability of corporation in equity where promoters are the only
shareholders, 194 n.
corporation not liable where it has not availed itself of con-
tract, 198.
contract cannot be ratified by corporation, 199.
equitable doctrine of Lord Cottenham, 200.
Lord Cottenham's doctrine not universally accepted, 201.
contract may be accepted or adopted by corporation, 202.
effect of such adoption or acceptance, 203.
distinguished from ratification, 203, 214.
acceptance or adoption may be express or implied, 204, 205.
acceptance or adoption may be inference of fact, 206-210.
inference may be from taking of benefit of contract, 207-
210.
taking of benefit of contract only evidence of acceptance, 207.
ordinarily proof when contract is in name of corporation,
208.
or in its behalf, 209.
284 INDEX.
References are to Sections.
CONTRACTS — continued.
rule of acceptance or adoption applicable to subscription for
shares, 211.
modification in some jurisdictions, 211, n. 1.
" ratification " distinguished from " acceptance " and " adop-
tion," 214.
" ratification " used meaning acceptance or adoption, 212, 213.
distinction sometimes of vital importance, 214.
English doctrine, new contract with new consideration, 215,
216.
new contract may be inferred from facts, 215, 216.
but not from mere taking benefits of prior contract, 215.
followed apparently in Massachusetts, 215, n. 1.
ultra vires contracts cannot be accepted or adopted, 217.
test to determine what contract can be accepted or adopted,
217.
promoter's liability on, when made in name or on behalf of pro-
jected corporation,
ordinarily none, 225, 230.
unless credit given on promoter's responsibility, 240.
question of intention, 225-227.
presumption when corporation does not exist, 226.
presumption may be overcome, 226.
if contract oral, jury to interpret, 226, 227.
if contract written, court to interpret, 228, 229.
construing document " ut magis valeat quam pereat," 228,
229.
construction of words " on behalf of " corporation, 228.
•when credit given to corporation, promoter not liable on con-
tract, 230.
but may be liable for misrepresentation as to existence
of corporation, 230.
remedy when misrepresentations are innocent, 230.
when misrepresentations are fraudulent, 230.
when credit given promoter, effect of adoption by corpora-
tion, 231.
promoter still liable, 231.
creditor to elect between promoter and corporation, 231.
corporation to indemnify promoter if promoter held
liable, 231.
when made by co-promoters. (See LIABILITY of Promoters
for Acts of Co-promoters.)
right of promoter to enforce, when made in name or on behalf of
projected corporation, 231, 232.
rights and liabilities under, when incorporation defective, 249-265.
(See also ASSOCIATION and DE FACTO CORPORATION.)
right of corporation to rescind contracts for fraud or breach of
duty of promoters. (See RESCISSION by Corporation.)
INDEX. 285
References are to Sections.
CO-PROMOTERS,
right to contribution when held liable, 242-244.
right to payment for services, none unless agreed, 245.
misrepresentations by promoter, liable for, when, 157.
not presumptively partners ; authority must be shown, 233.
liability of promoter for acts of. (See LIABILITY of Promoters.)
CORPORATION,
when contracting with promoter, must act through disinterested
board of directors, 26.
exceptions to rule, 27.
interest of, duty of promoter to protect, 21.
burden upon, to show laches or waiver in suits on subscription for
shares, 190.
burden of proof in suits for rescission or to recover secret profits,
104.
liability of, for expenses incident to formation. (See LIABILITY
of Corporation.)
for misrepresentations of promoters. (See SUBSCRIBERS
FOR SHARES.)
usually none for misrepresentations or non-disclosures of
promoters before formation, 173.
rescission of subscription for shares, when, 173.
statements in prospectus not severable from application for
shares, 173.
none for frauds of promoters before organization, 171.
action of deceit lies, when, 170.
insolvency of corporation, effect of on its liability, 172.
on right of subscriber for shares to rescind subscription,
191, 192.
right to an accounting for benefit of purchase by promoter upon
sale by him to corporation, 42, 43.
none from mere fact that purchase made by promoter while
such, 44.
none if purchase made before promoter became such, 46-48.
unless promoter is bound by certain declarations, 51-53.
benefit of promoter from option, when to be accounted for,
54-57.
benefit of option held by third person confederating with
promoter, 58, 59.
for secret profit of promoter on sale of property having a
market value, 61.
when property has not market value, 62.
for promotion money in hands of vendor, 75.
for net profit of promoter only, 79.
but promoter not allowed for expenses ultra vires of cor-
poration, 80.
for promotion money in hands of promoter, 64-74.
286 INDEX.
References are to Sections.
CORPORATION — continued.
may have interest on money recovered from promoter, 82.
may rescind certain contracts for breach of duty or fraud by pro-
moters. (See RESCISSION.)
right of rescission may be barred by laches, 101 .
may ratify certain acts, expressly or impliedly, 100.
ratification irrevocable if intelligently made, 100. (See also
CONTRACTS of Promoters.)
actions by, against promoters,
foran accounting, may be barred by statute of limitations, 84, 85.
for an accounting, may be divested, how, 88.
for an accounting, survives against promoter's executor or
administrator, 89.
will lie for fraud, 76, 90, 92.
none ordinarily for damages for misfeasance, 90, 92.
will lie for misfeasance, occasioning pecuniary loss to cor-
poration, 91, 92.
will lie for injurious violation of duty to corporation, 91.
form of action, deceit, 92.
right of shareholders to sue to enforce corporate rights or redress
corporate wrongs. (See SHAREHOLDERS' BILL.)
de facto corporation, nature and attributes of, 252.
what necessary to constitute, 254-256.
estoppel of corporation to deny its legal organization, 261.
right and liabilities generally. (See ACCOUNTABILITY, ACTION,
CONTRACTS, SUBSCRIBERS FOR SHARES.)
DAMAGES, (See ACTION, LIABILITY, MISFEASANCE, MISREPRE-
SENTATION, SUBSCRIBERS FOR SHARES.)
measure of, various rules, 158.
Massachusetts rule, 159.
New Jersey rule, 160.
English rule, also in United States Supreme Court, 161.
DE FACTO CORPORATION,
rights and liabilities under contracts of, generally, 249.
nature and attributes, 252.
distinguished from corporation de jure, 252.
to be treated as corporation except by State, 252.
subscribers for shares before incorporation may question legal
existence of, 252, n. 3.
promoters and shareholders not liable for its debts, 253.
what constitutes, 254.
a. valid enabling statute under which incorporation possible,
255.
J. attempt to incorporate, and imperfect compliance with
law, 256.
attempt must be bonaf.de to avoid personal liability, 257.
INDEX. 287
References are to Sections.
DE FACTO CORPORATION— continued.
c. user of corporate privileges, 254.
results from allowing individuals to impeach legality of, 257.
construction of incorporation statute by domestic court followed
in foreign jurisdictions, 258.
DECEIT,
action of, lies against corporation, 170.
(See ACTION, CORPORATION, SUBSCRIBERS FOR SHARES.)
DECLARATIONS OF PROMOTERS,
of mere fact of interest, to shareholders, sufficient, 35.
of mere fact of interest, to directors, insufficient, 33, 34.
as to property purchased before becoming promoter, what make
him accountable, 51-53.
as to property sold corporation on which promoter had option,
what make him accountable, 55-57.
DEFECTIVE INCORPORATION, (See INCORPORATION.)
results of, upon contracts of promoters, 249
DIRECTOR,
promise to become, may make one a promoter, 13.
promising to qualify and qualifying of directors may make one a
promoter, 14.
what disclosure by promoter to directors sufficient, 33, 34.
DISABILITY OF CORPORATION,
ground for shareholders' bill, 106, 107.
DISCLOSURE,
duty of promoters to make, to corporation when selling property
to it, 26.
Lord Cairns' rule as to, 26.
rule when promoters are the sole shareholders, 27.
must be of nature and amount of interest, 28.
of price paid by promoters not necessary, when, 29.
of fact of interest alone, to directors, ordinarily insufficient, 33, 34.
of fact of interest alone, to body of shareholders, sufficient, 35.
to whom disclosure must be made and by whom acted upon, 38.
to all the shareholders, and assent by them, effect of, 39.
when binding on future shareholders, 39.
when stock not all issued, 40.
when transaction is ultra vires, 41.
necessary in spite of certain provisions in articles of association,
36, 37.
of agreements of promoters must be in prospectus in England, 154.
otherwise in United States, 153.
want of, as ground for action for damages by subscribers for
shares against promoters, 127-129, 148-152.
whether legal or moral duty of promoters to disclose material
facts to subscribers for shares, 178-183.
want of. (See also NON-DISCLOSURE.)
288 INDEX.
References are to Sections.
DUTIES OF PROMOTERS,
generally, 16.
similar to those of trustee or agent, 21, 42.
to make reasonable use of their powers, 21.
to exercise good faith in dealings with or for corporation, 23.
to provide competent and disinterested board of directors, 24, 27.
to see that directors act impartially, 25, 27.
not to receive commissions or gifts from vendors to corporation,
63, 64.
to make certain disclosures, 26.
to disclose their interest in transactions with corporation, 28, 36.
as vendors to corporation, when necessary to disclose price paid
by them, 28-30.
mere declaration of interest, without stating nature and amount,
not enough when made to directors only, 33, 34.
but such declaration sufficient if made to the shareholders, 35.
to disclose material facts to subscribers for shares, whether legal
or moral duty, 178-183.
remedy for breach of duty. (See ACCOUNTABILITY, ACTION,
CORPORATION, MISFEASANCE, SUBSCRIBERS FOR SHARES.)
ESTOPPEL,
of association and promoters to deny legal incorporation, 261, 262.
of persons dealing with association as corporation to deny its cor-
porate existence in suits by it, 263.
when subscriber for shares not estopped to deny existence of
corporation, 263.
of persons dealing with association as corporation to allege want
of corporate existence to hold members individually, 264.
recognition of corporate existence necessary to support estoppel,
264.
EVIDENCE OF PROMOTERSHIP,
generally, 1-18.
EXPENSES OF INCORPORATION,
liability of corporation to pay. (See LIABILITY of Corporation.)
FIDUCIARY RELATIONSHIP,
between promoter and corporation, 21, 22.
consequences of such relationship, 23.
between promoter and subscriber for shares, 123-126, 127-130.
FORMATION OF CORPORATION. (See DE FACTO CORPORA-
TION, DUTIES OF PROMOTERS, LIABILITY.)
FRAUD, (See LIABILITY.)
by promoters ground for action for damages by corporation, 90, 92.
for rescission of contracts, 97.
when prior to organization, not ground for action against
corporation, 171.
INDEX. 289
References are to Sections.
FRAUD — continued.
as a defence in action by corporation against subscriber for
shares, 174.
as ground for action of shareholders against promoters. (See
SUBSCRIBERS FOR SHARES.)
by majority shareholders, ground for shareholders' bill by minor-
ity shareholders, 108-112, 116, 118.
GIFT. (See COMMISSION, PROFIT.)
GOOD FAITH,
promoters must exercise, in dealings with or for corporation, 23.
GUARANTY OF STOCK SUBSCRIPTION,
does not necessarily make one a promoter, 15.
HIGHEST INTERMEDIATE VALUE,
rule of, in suit by corporation against promoter for accounting, 83.
INCORPORATION,
consequences of defective or irregular compliance with statutory
requirements for, 249-264.
de facto incorporation, 252-257.
de jure incorporation, 249.
construction of statute by courts of State where enacted followed
by courts of other States, 258.
certificate of incorporation, how far conclusive, 251.
INSOLVENCY OF CORPORATION,
effect on right of defrauded subscriber for shares to rescind sub-
scription or recover damages from corporation, 172, 190, 191.
INTEREST,
promoters chargeable with, when accountable to corporation for
profits and commissions, 82.
corporation chargeable with, on rescission of subscription, 174.
INTEREST OF PROMOTERS,
in certain contracts to be disclosed. (See DISCLOSURE, DUTIES
OF PROMOTERS.)
INVITATION OF PROMOTERS TO JOIN ENTERPRISE,
effect of, 123-125.
JOINT LIABILITY OF PROMOTERS,
if combination to secure secret profits jointly liable, 76.
effect of release of one, 241.
LACHES,
bar to corporation's right to rescind contract with promoter, 101.
bar to suit by subscriber for shares to rescind subscription, 188.
burden upon corporation to show, 190.
bar to shareholders' bill, 121.
19
290 INDEX.
References are to Sections.
LIABILITY,
of corporation in damages to subscribers for shares for misrepre-
sentation of promoters, 170, 171.
effect of corporate insolvency, 172, 191-193.
of corporation to promoters and agents,
for expenses and services incident to formation, 79.
statutory liability, to those looking to corporation for pay,
218.
under English Companies Acts, authority to pay, merely, 219.
no legal liability imposed, 220.
equitable liability on- quantum meruit for whose benefit,
221.
American doctrines of liability, 222.
power of private corporations to pay formation expenses
wanting statutory or charter provisions, 222.
ordinarily none for services and expenses in procuring sub-
scribers for shares, 223.
doctrine held in Vermont and New Hampshire criticised,
224.
of promoter to corporation,
for an accounting. (See ACCOUNTABILITY.)
for misfeasance, ordinarily none, 90.
otherwise when occasions pecuniary loss to corporation,
91, 92.
or injurious violation of fiduciary relation, 46, 91, 92.
for fraud, 90, 92.
for damages, distinguished from accountability, 46.
of promoters to subscribers for shares and shareholders,
for an accounting to individual shareholders, 123-125.
joinder of plaintiffs, 126.
for misrepresentations generally. (See also SUBSCRIBERS
FOR SHARES.)
when fiduciary relation exists, 127-129.
for misrepresentations of co-promoters, 157.
in action of deceit. (See SUBSCRIBERS FOR SHARES.)
when project fails of completion, 162.
expenses not to be deducted unless authorized, 163.
payment by subscriber to promoter or promoter's agent
must be shown, 164-166.
lien, none in favor of subscribers as against creditors,
167.
remedy at law, unless fraud or necessity of accounting
shown, 169.
bill for accounting, 169.
of promoter to purchasers of shares,
none ordinarily for misrepresentations in prospectus, 140.
otherwise if connection is shown between promoter and pur-
chaser of shares, 141, 142.
INDEX. 291
References are to Sections.
LIABILITY — continued.
of promoter to third parties,
on contracts made in name or on behalf of corporation.
(See CONTRACTS of Promoters.)
on contract before becoming promoter, 239.
upon non-compliance with provisions for incorporation, 249.
(See also ASSOCIATION and DE FACTO CORPORATION.)
individually, when incorporation really for unlawful pur-
pose, 259.
for misrepresentation of co-promoters, 157.
for acts of co-promoters,
ordinarily none, 233.
unless credit is placed on promoter's responsibility, 240.
authority, question of fact for jury, 234.
not ordinarily from appearance of name in prospectus,
235.
nor from announcement that promoter and others are
organizing a corporation, 235.
nor from signing and filing articles of incorporation,
235.
but may be from conduct in carrying on business, 235.
or from certain statements in prospectus coupled with
promoter's name, 236.
or from having acted in the undertaking, question for
jury, 237, 238.
or from acts showing knowledge and concurrence, 237,
238.
of promoter to co-promoter who has been held liable, 242.
must contribute when all are jointly liable, 243, 244.
none to pay for service, wanting agreement, 245.
of promoter for misrepresentations generally, 23.
(See also MISREPRESENTATION.)
LIEN,
none in favor of subscriber for shares as against creditors of
abortive corporation, 167.
LIMITATION,
of action against promoter for profits, 84, 85.
statute runs from time facts become known to corporation, 86, 87.
MAJORITY SHAREHOLDERS. (See SHAREHOLDERS' BILL.)
MEASURE OF ACCOUNTABILITY,
in actions by corporation against promoter where commission is
stock, 83.
1, transfer of shares to corporation, 83.
2, payment to corporation of highest intermediate value, 83.
3, payment to corporation of proceeds from sale of stock by
promoter, 83.
292 INDEX.
References are to Sections.
MEASURE OF ACCOUNTABILITY— continued,
of damages in actions by subscribers for shares against promoters,
various rules, 158.
Massachusetts rule, 159.
New Jersey rule, 160.
English rule ; also of United States Supreme Court, 161.
MINORITY SHAREHOLDERS. (See SHAREHOLDERS' BILL.)
MISFEASANCE OF PROMOTERS,
not ordinarily ground for action by corporation for damages, 90.
otherwise if occasions pecuniary loss to corporation, 91, 92.
otherwise if injurious violation of duty to corporation, 91, 92.
otherwise if fraud, 90, 92.
MISREPRESENTATIONS BY PROMOTERS, (See SUBSCRIBERS
FOR SHARES.)
a question of substance, not of mere words, 151.
liability of promoters therefor generally, 23.
liability of promoter to shareholders when fiduciary relation
exists, 127-129.
liability of promoter in damages to subscribers for shares when
no fiduciary relation, 131.
must be an assertion of fact, not opinion, 132-137.
what is an assertion of fact, 132.
commendatory expressions privileged, 133.
caveat emptor, 130, n. 1.
statement of value ordinarily opinion and privileged, 133.
treated as fact when made as by expert and unprivileged,
134.
statements of price paid by third persons for shares, fact,
unprivileged, 135.
statements of price paid by corporation for property, fact, un-
privileged, 135.
expressions of hope and commendation in prospectus, privi-
leged, 135.
ambiguous statements, when unprivileged, 136.
of law, purely, privileged (but see note 2), 138.
of mingled law and fact, not privileged, 138.
of law of foreign country, fact, unprivileged, 138.
must be of material fact, 139.
when doubtful as to whether opinion or fact, jury to de-
termine, 139.
must be fraudulent, 143.
when negligent, not ordinarily actionable, 143.
unless a duty exists to be careful, 143.
must be made knowingly, without belief in its truth or reck-
lessly, 143.
motive of one fraudulently misrepresenting, immaterial, 143.
false statements made as upon knowledge, deemed fraudu-
lent, 144.
INDEX. 293
References are to Sections.
MISREPRESENTATIONS BY PROMOTERS — continued.
forgetfulness of truth no excuse, 144.
when honestly made, though without reasonable cause for
belief, not actionable. 145.
absence of reasonable cause for belief evidence of fraud,
145.
when honest, discovery of truth imposes duty to correct,
146.
concealing material facts implies fraudulent, 147.
prospectus, undertaking in, not to tell all material facts, 149.
passive concealment or non-disclosure not ordinarily action-
able, 150.
statement of portion of truth a false statement, when, 151.
omissions in prospectus not actionable unless they make
what stated false, 149.
when non-disclosure of particular facts made fraudulent mis-
representations, 148.
fraudulent misrepresentation ground for bill in equity, 150.
false inferences made plausible by partial statements of
truth, 151.
as ground for action by purchasers of shares against promoter,
ordinarily none from statements in prospectus, 140.
different rule, when, 141, 156.
liability of corporation for, when made before incorporation,
ordinarily none, 171.
subscribers' right to rescind subscription for shares, 173.
statements in prospectus not severable from application
for shares, 173.
(See also SUBSCRIBERS FOR SHARES.)
liability of co-promoters for, 157.
will support indictment for conspiracy when, 156.
MOTIVE,
of one making fraudulent misrepresentations immaterial, 143.
NON-DISCLOSURE BY PROMOTERS,
corporation's liability therefor to subscribers. (See SUBSCRIBERS
FOR SHARES.)
non-liability of corporation when prior to organization, 173.
but prospectus not severable from application for shares, 173.
non-disclosure of profits, gifts, or commissions as ground for
action by corporation for accounting or damages, 42-48.
for rescission by corporation. (See RESCISSION.)
for action by subscriber against promoters for accounting or
damages, 123-129.
under English Companies Acts, 154.
non-disclosure of material facts as ground for action of deceit by
subscribers against promoters, 148-152.
294 INDEX.
References are to Sections.
NON-DISCLOSURE BY PROMOTERS — continued.
suit in equity by subscribers against corporation, 150-152.
(See ACCOUNTABILITY, ACTION, COMMISSION, CONCEAL-
MENT, DISCLOSURE, DUTIES OP PROMOTERS, PROFIT,
PROSPECTUS, SUBSCRIBERS FOR SHARES.)
OPINION,
assertions of, by promoters ordinarily not actionable. 132, 137.
OPTION TO BUY PROPERTY, (See ACCOUNTABILITY.)
acquisition with intent to sell property to projected corporation
evidence merely of promotership, 19.
when held by promoters, whether corporation entitled to benefit
of, 54, 56, 57.
circumstances under which corporation entitled to benefit of,
55.
when held by person confederating with promoters, 58, 59.
PARTNERSHIP,
co-promoters not prima facie partners, 233.
promoters and shareholders of de facto corporation, no partner-
ship liability, 253.
of association supposed to be corporation, but not even de
facto such, as to partnership liability, 265.
PRIVILEGED STATEMENTS. (See MISREPRESENTATIONS.)
PROFIT, (See ACCOUNTABILITY.)
what is distinguished from benefit, 60.
circumstances under which promoters may retain profit, 32.
promoter not to make secret profit on sale of property to corpora-
tion, 31, 32.
must be accounted for by promoter when property has market
price, 61.
but not if sale to corporation is properly approved by di-
rectors, 61.
as to accountability for, when property sold has not market price,
62.
net profit only to be accounted for, 79.
remedies when corporation makes payment in its stock, 83.
interest, 82.
burden of proof, 104.
promoters, although majority shareholders, cannot retain secret
profit, 117.
PROJECTOR,
not necessarily a promoter, 17.
PROMISE,
to be a director may make one a promoter, 18.
INDEX. 295
References are to Sections.
PROMOTER,
explanation of term, 1.
term not applicable to one acting as agent only, 2, 3.
one who is an agent may be a promoter also, 5, 6.
tests to ascertain who are promoters, 7, 8, 9.
question of fact whether one is a promoter, 9-15.
mere intent or agreement to promote does not make one a pro-
moter, 16.
absolute purchase of property with view to resale to projected
corporation as evidence of promotership, 17, 18.
conditional purchase of property with view to resale to corpora-
tion as evidence of promotership, 19.
promotership not limited to period anterior to organization of
corporation, 20.
fiduciary relation of promoter to corporation, 21.
existence of such relation established by authorities, 22.
in position analogous to that of trustee, 32.
duties of promoter to the corporation, 24-37.
promoters may or may not be in fiduciary relation to subscribers
for shares, 123, 130.
promoters not prima facie partners, 233.
not prima facie each other's agents, 233.
accountability to corporation for profit obtained as vendors
to corporation, 42-62.
for gifts and commissions, 63-78.
survival of cause of action against, 89.
liability to corporation in damages for breach of duty or
fraud, 90-92.
breach of duty or fraud by entitling corporation to rescind
contract, 93-104.
wrongs by, to corporation, shareholders' bills to redress,
105-122.
liability to account to shareholders for profits, gifts, and com-
missions, 123-126.
in damages when in fiduciary position toward share-
holders, 127-129.
when not in fiduciary position toward shareholders,
130-161.
liability to subscribers for shares when corporation proves
abortive, 162-169.
misrepresentation by, as ground for action for damages by
subscribers for shares, against corporation, 170-172.
as ground for rescission of subscription for shares or as
defence to suits thereon by corporation, 173-193.
contracts made by, in name and for benefit of projected cor-
poration. (See CONTRACTS.)
rights and liabilities of, under such contracts. (See CON-
TRACTS.)
296 INDEX.
References are to Sections.
PROMOTER — continued.
rights and liabilities under contracts made by promoters
claiming to be incorporated. (See CONTRACTS.)
contracts between promoters, 245-247.
right of promoters to enforce payment from corporation for
services or expenses incident to its formation, 218-224.
(See OTHER TITLES.)
PROMOTION MONEY,
explanation of term, 63.
promoters must account for, 64-74.
in hands of vendor to corporation under secret agreement with
promoter to be accounted for, 75.
devices to evade rule as to, will be set aside, 49, 50, 73.
PROSPECTUS,
issuing of, by promoter does not create fiduciary relation with sub-
scriber for shares, 130.
no undertaking in, to set out all material facts, 149.
must state agreements of promoters by Statute in England, 154.
otherwise generally in United States, 153.
misrepresentations in, not ordinarily actionable by purchasers of
shares, 140.
different rule when, 141, 156.
ordinarily promoter not liable from allowing his name to appear
in, if he does not act in undertaking, 235.
but may be liable under some circumstances, 236.
PURCHASE BY PROMOTER, (See ACCOUNTABILITY.)
benefit of, may belong to corporation, 28.
when made by promoter acting as such, 42, 43.
when promoter held option before he became promoter, 54-57.
when made without sale to corporation in view, 44.
when made by promoter before he became such, 46-48.
none unless promoter is bound by declarations or offers, 51-
53, 55.
what offer entitles corporation to benefit of, 55.
made with intent to sell to corporation, evidence of promotership,
merely, 17, 18.
PURCHASERS OF SHARES,
rights against promoters for misrepresentations in prospectus,
generally none, 140.
different rule, when, 141, 142.
rights against promoters for misrepresentations made to create
fictitious share values, 142.
RATIFICATION,
by corporation is irrevocable if intelligently made, 100.
election to ratify may be express or implied, 100.
INDEX. 297
References are to Sections.
RATIFICATION — continued.
distinguished from acceptance or adoption, 214.
used meaning acceptance or adoption, 212, 213.
RELATION,
between corporation and promoter is fiduciary, 21.
consequences of, 23.
similar to that of trustee and cestui que trust, 21.
between promoter and shareholder not ordinarily fiduciary, 130.
but may be fiduciary, 123-129.
RELEASE,
of one of several co-promoters who are jointly liable, releases all,
241.
REPRESENTATION. (See MISREPRESENTATION.)
RESCISSION,
by corporation of contract with promoter,
elective remedy, 93.
for breach of duty by promoter to corporation, 94-97.
right barred by laches, 101.
must not be partial, 103.
allowed unless promoter has disclosed material facts, 94-97.
consideration to be returned unless worthless, 102.
equivalent of consideration to be returned in what cases, 102.
return of value of consideration in money ordinarily in-
sufficient, 103.
burden of proof, 104.
by corporation of contracts with parties other than promoters for
collusion, 99.
by minority shareholders when majority have practised fraud,
110-112.
when majority have not practised fraud, 113, 114.
in absence of any fraud, 115.
of subscription for shares for misrepresentations or non-disclosure
of promoters, 173-184.
several subscribers may join as plaintiffs, 174.
what proof necessary, 187.
laches bar suit, 188.
waiver may be shown, 189.
burden of proof to show laches or waiver on corporation, 190.
without suit, 193.
effect of insolvency of corporation on suit for, 191, 192.
SALE OF PROPERTY BY PROMOTERS TO CORPORATION,
if promoters have interest, must disclose it, 26.
promoters must see that corporation acts through competent and
disinterested directors, 26.
but not when full disclosure made to shareholders, 27.
298 INDEX.
References are to Sections.
SALE OF PROPERTY BY PROMOTERS TO CORPORA-
TION — continued.
when necessary to disclose anterior price paid by them, 28-30.
mere declaration of interest, without stating nature and amount,
not enough when made to directors only, 33, 34.
but such declaration sufficient if made to the shareholders, 35.
right of corporation to claim benefit of promoter's purchase. (See
BENEFIT.)
to recover secret profit of promoters. (See OPTION, PROFIT.)
to rescind purchase on ground of breach of duty or fraud of
promoters. (See RESCISSION.)
right of shareholders to recover to their own use secret profits of
promoters, 123-125.
SHARES OF STOCK,
remedies when profit or commission recoverable from promoter is
in form of shares of corporation's capital stock, 83.
SHAREHOLDERS,
right to an accounting from promoters, 123-125.
joinder of plaintiffs, 126.
action for damages against promoters when in fiduciary relation,
127-129.
when relation not fiduciary. (See SUBSCRIBERS FOR SHARES.)
action against promoter to recover deposits on shares when cor-
poration proves abortive. (See ABORTIVE CORPORATION.)
remedies against corporation when led to become shareholders by
misrepresentations of promoters, (See SUBSCRIBERS FOR
SHARES.
enforcing corporate rights and redressing corporate wrongs as
against promoters. (See SHAREHOLDERS' BILL. )
not liable for corporate debts, if corporation is a de facto one, 253.
rights and liabilities when shareholders in association supposed to
be a corporation, but which has no corporate existence even de
facto, 263-265.
SHAREHOLDERS' BILL,
as general rule, suit can be brought only by corporation, 105.
exceptions to rule, 106.
proof necessary to establish disability of corporation to sue, 107.
transactions on account of which shareholders may or may not
bring suit, 108.
exposition of rule on subject by Lords Justices James and Mellish,
109.
right of minority shareholders to sue to rescind transaction void-
able for fraud, when majority are the wrong-doers, 110-112.
right of minority, where majority are not the wrong-doers, to sue
to rescind contracts voidable for fraud, 113, 114
right of minority to sue to rescind a voidable transaction where
there is no fraud, 115.
INDEX. 299
References are to Sections.
SHAREHOLDERS' BILL — continued.
right of miuority to sue for recovery of secret profits obtained by
promoters, 116.
majority not allowed to retain profits wrongfully obtained at ex-
pense of minority, 117.
right of minority to sue for recovery of promoter's profits on sale
to corporation at fraudulently excessive price, 118.
shareholder whose shares have been voted on in favor of a trans-
action cannot maintain suit based upon it, 119.
rule in federal courts, 120.
shareholders' suit may be barred by laches, 121.
form of shareholders' suit. Necessary parties, 122.
SUBSCRIBERS FOR SHARES, (See SHAREHOLDERS.)
nature of contract with corporation, 211.
estoppel to deny legal incorporation, 262.
action against promoters when corporation proves abortive to
recover payments made in advance. (See ABORTIVE CORPORA-
TION.)
not ordinarily in fiduciary relation with promoters, 130.
action against promoters for an accounting or damages, when in
fiduciary relation, 123-129.
action for damages against promoters for misrepresentation when not
in fiduciary relation,
when action will lie, 131.
misrepresentation must be assertion of fact, 132.
mere commendatory expressions privileged, 133.
representations as to value in exceptional circumstances not
privileged, 134.
representation as to price paid by third persons for shares, or
as to cost of company's property, not privileged, 135.
commendatory expressions in prospectuses, 136.
expressions of opinion, although untrue, not actionable, 137.
representations as to the law, 138.
representation must be of a material fact, 139.
promoters, as a rule, not liable to purchasers of shares for
misrepresentations in prospectuses addressed by them to
prospective subscribers for shares, 140.
but connection between promoters issuing prospectus and
persons purchasing shares in reliance upon it may be
shown, 141, 142.
representation must be fraudulent as well as false, facts to be
proved to establish fraud, 143.
false representation made as of one's own knowledge deemed
fraudulent, 144.
absence of reasonable grounds for belief in representation
evidence that it is fraudulent, 145.
effect of subsequent discovery by one who has made repre-
sentation that it is untrue, 146.
300 INDEX.
References are to Sections.
SUBSCRIBERS FOR SHARES — continued.
fraud may be inferred from concealment as distinguished
from non-disclosure of material facts, 147.
circumstances under which non-disclosure of facts may make
facts stated false, 148.
omission of facts from prospectus not ground for action of
deceit, unless it makes facts stated false, 149, 150.
statement of portior of truth, with suggestions and infer-
ences rendered credible only by suppression of other por-
tions of truth, 151.
rules as to misrepresentation and non-disclosure not the same
in actions ex-deliclo as in suits for equitable relief, 152.
no legislation in this country requiring promoters' agreements
to be disclosed in prospectuses, 153.
English statute on subject, 154.
right of subscriber to rely on representations addressed to
him, 155.
liability of promoters on sale of shares issued to them at
discount, or in payment for property at over-valuation, 156.
liability of promoters for misrepresentations made by co-
promoters, 157.
conflicting views as to measure of damages, 158.
rule in Massachusetts and other jurisdictions, 159.
rule in New Jersey, 160.
rule laid down in England and by Supreme Court of United
States, 161.
action for damages against corporation for promoter's misrepresenta-
tions or non-disclosure,
action of deceit will lie against a corporation, 170.
corporation ordinarily not liable in damages for frauds by
promoters prior to its formation, 171.
effect of insolvency of corporation on right of suit by sub-
scriber to recover damages, 172.
rescission of subscription, or defence to suits thereon by corporation,
responsibility of corporation for misrepresentation or non-
disclosure by promoters before corporation formed, 173.
subscribers' remedies against corporation for fraudulent mis-
representation by promoters, 174.
remedy when misled by non-disclosure of facts by promoters,
175.
dicta of Vice->Chancellor Kindersley, 176.
dicta of Lord Chelmsford, 177
standard of duty as to disclosure required by dicta quoted ;
whether legal or moral duty, 178, 179.
duty to disclose material facts not a legal duty when omission
does not make facts stated false, 180.
absence of direct decisions on this point, reasons for and
against requirement of disclosure, 181.
INDEX. 301
References are to Sections.
SUBSCRIBERS FOR SHARES — continued.
contracts to take shares governed by maxim caveat emptor,
182.
views of Brett, J., expressed in Gover's Case, 183.
relief obtainable in equity, and in some jurisdictions at law,
against innocent misrepresentation, 184.
no relief at law where distinction in procedure between
action at law and suit in equity adhered to, 185.
principle on which equity rescinds or refuses to enforce con-
tract induced by innocent misrepresentation, 186.
proof necessary to obtain rescission of contract of subscrip-
tion on ground of innocent misrepresentation, 187.
laches as a bar to rescission of contract of subscription, 188.
waiver of right to avoid subscription on ground of misrepre-
sentation, 189.
burden of proof on question of laches or waiver, 190.
rule in England as to effect of corporate insolvency on right
to rescind contract of subscription, 191.
tendency of decisions in this country, 192.
repudiation of contract of subscription without suit for
rescission effective, although corporate insolvency proceed-
ings subsequently begun, 193.
SUBSCRIPTION FOR SHARES,
nature of contract, 211.
liability of corporation for expenses of procuring, 223.
corporation not ordinarily liable, 223.
doctrine of the " burden with the benefit " criticised, 224.
(See also SUBSCRIBERS FOR SHARES.)
SURVIVAL of action by corporation against promoter for an account-
ing, 89.
SWELLING PRICE. (See PROMOTION MONEY.)
TRUSTEE,
rule as to secret profits by, 31.
analogy of promoter to trustee, 32.
ULTRA VIRES ACTS,
transactions ultra vires the corporation not validated as to subse-
quent shareholders by assent of all the shareholders for the
time being, 41.
ground for shareholders' bills, 108, 109.
cannot be accepted or adopted by corporation, 217.
expenses ultra vires the corporation, promoters not allowed
for, 80.
302 INDEX.
References are to Sections.
VENDOR TO CORPORATION,
may be a promoter and liable as such, 8.
accountable to corporation for secret promotion money, if in his
hands, 75.
agent of, may be a promoter, 4, 5.
WAIVER,
burden on corporation to show in suit by subscriber to rescind
subscription, 190.
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