CHAPTER V.

OF PROMOTION EXPENSES.

Section 81. Introductory.

82. Promoter's right to reimbursement for expenses.

83. What expenses allowed.

84. Compensation for services.

85. Compensation of fraudulent promoters.

86. Compensation for serivces in obtaining subscriptions.

87. Amount of compensation by whom fixed.

88. Compensation of persons employed by promoters.

§ 81. Introductory.

Questions relating to the payment of the expenses of an abortive attempt to organize a corporation will be considered in a subsequent chapter.1 This chapter is devoted to a consideration of the expenses of a successful promotion.

§ 82. The promoter's right to reimbursement for expenses.

Ordinary fairness seems to require that the promoter should be reimbursed, out of the funds of the corporation, for the proper and legitimate expenses of the promotion. While the promoter's right to reimbursement for expenses seems to be recognized by the great weight of authority in this country,2 the matter is in England not free from doubt.3

1. See post, Chapter XIX.

2. Federal.-Dickerman v. Northern Trust Co., 176 U. S 181, 205206, 20 Sup. Ct. 311, 44 L. Ed. 423. Iowa.-Caffee V. Berkley, 141 Iowa 344, 347, 118 N. W. 267, 268. Maine.-Mason v. Carrothers, 105 Me. 392, 410, 74 Atl. 1030, 1037-1038.

Massachusetts.-Hayward v. Lee

son, 176 Mass. 310, 322, 57 N. E. 656, 49 L. R. A. 725; and see Salem Mill Dam Corporation v. Ropes, 6 Pick. 23, 42.

Michigan.-Cuba Colony Co. V. Kirby, 149 Mich. 453, 458, 112 N. W. 1133, 1135.

The promoter is not, in any jurisdiction, entitled to reimbursement for moneys advanced, or expenses incurred, by him if he either represented to his associates, or allowed them to believe, that no allowance for promotion expenses would be asked,* or if the expenses were incurred without expectation of reimbursement.5

The promoters are entitled to reimbursement only for legitimate expenses. They are not entitled to reimbursement for moneys expended by them in bribing public officials, or in "rigging the market," 7 or in any other improper manner.

8

Emma Silver Mining Co. v. Grant was an action to compel the defendant Grant, the promoter of the plaintiff corporation, to account for secret profits unlawfully retained by him. Grant claimed that he was entitled to credit for the moneys that he had disbursed for the benefit of the company. It appeared that he had paid a sum of money to the persons by whom the directors. were introduced, had furnished shares to the directors and paid large sums in various ways to brokers for sustaining the market, paid £10,000 to a firm of brokers for waiving an option, and paid considerable sums to persons connected with the press for laudatory statements respecting the company and the mine which it was to take over. It was claimed that these payments were immoral and improper and that they ought not be allowed. The court held that the amount of Grant's profit was not affected by the fact that some of the payments made by him were not commendable, that the payments were made in good faith at a time when he believed that the money was his own, and that the profit for which he should be made to account was the net profit of the transaction, whether or not the method in which the transaction was carried on received the approval of the court. The court would, apparently, have arrived at a different result had the question arisen in a suit brought by the promoter to recover the amount of these expenses, instead of in an action by the company to recover the promoter's unlawful profits. The decision should not, in any event, be followed.9

It is probable that extraordinary and unusual expenses of a promotion would not be allowed unless the subscribers had knowledge thereof. The subscribers are bound to know that a corporation cannot be organized without expense, the nature and extent of which expense depends largely upon the character and scope of the corporate scheme. It is therefore no hardship upon

8. L. R. 11 Ch. Div. 918, 939-940. 9. See Lydney & Wigpool Iron Ore Co. v. Bird, L. R. 33 Ch. Div. 85, 95,

24 Am. & Eng. Corp. Cas. 23; In re Faure Electric Accumulator Co., L R. 40 Ch. Div. 141, 156.

the subscribers to compel them, through the corporation, to bear their share of the cost of the promotion. If, however, there are unusual circumstances which necessitate unusual expenditures which the subscribers cannot be expected to anticipate, the facts should be disclosed, as the desirability of the shares is necessarily lessened if an unusual portion of the capital is devoted to preliminary expenses.10

§ 84. Compensation for services.

The promoter of a corporation not only performs the labor of organizing the corporation, but assumes all the risks incidental to the promotion. He frequently enters upon contracts which subject him to heavy personal liability in case the corporation, after its organization, refuses to assume responsibility therefor.11 If the promotion is unsuccessful and the corporation proves abortive, the promoter must personally bear the expenses, and cannot, in the absence of express agreement, hold the subscribers liable for any part thereof.12 While it is quite proper that a promoter should not be allowed to reap any secret profit from his dealings with the corporation,18 it is only reasonable that after the corporation has been organized and has obtained the full benefit of his labors, he should receive from it not only reimbursement for his expenses, but compensation for his services as well. It is, however, held, in England and in the earlier American decisions, that no compensation can be allowed the promoter for services rendered prior to the creation of the corporation, for the reason that the plaintiff could not have been employed by the corporation before it achieved legal existence, and that no contract can be implied as of a time when the corporation was incapable of making one.14 It is true that the promoter's services

10. In re Ennis & West Clare Ry. Co., L. R. 15 Ir. 180, the promoters' claim for reimbursement for interest on moneys borrowed by them was disallowed.

11. See ante, § 77, et seq.

12. See post, §§ 316, 319, 321.
13. See post, chap, VI.

14. Connecticut.-N. Y. & N. H. R. R. Co. v. Ketchum, 27 Conn. 170.

are not rendered pursuant to any contract made on behalf of the corporation, and it cannot be said that the corporation, by