promotion, and there is no objection to the taking of promoters' profits in whatever amount, provided that the facts in regard to such profits are fully disclosed.1 The promoters' profits become unlawful only when they, either through oversight, or because of a fear that knowledge thereof might prevent the successful consummation of their plans, or for any other reason, fail to disclose the profits which they are deriving from the promotion.2

§ 90. Basis of the rule against secret profits.

While a promoter is neither a trustee nor an agent of the corporation which he promotes, and has, in theory of law, no power to act for nor in any way to represent it, he does in fact mold the corporation and control it while in process of formation. He stands, because of this control, in a fiduciary relation to the cor

1. Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 122, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. Cas. 647; Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 501, 71 Atl. 153; Arnold v. Searing, 78 N. J. Eq. 146, 158, 78 Atl. 762, 767; Spaulding v. North Milwaukee Town Site Co., 106 Wis. 481, 489-492, 81 N. W. 1064, 1066-1068; Edwards v. Johnston, Wyo. 152 Pac. 273; Whaley Bridge Calico Printing Co. v. Green, L. R. 5 Q. B. D. 109, 112, 28 W. R. 351.

45, 97 Pac. 10, 18 L. R. A. N. S. 1106, 1122, and cases cited.

Connecticut.-Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 121-122, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. Cas. 647.

Massachusetts.-Hayward v. Leeson, 176 Mass. 310, 318, 57 N. E. 656, 49 L. R. A. 725, and cases cited. Missouri.-Exter v. Sawyer, 146 Mo. 302, 47 S. W. 951.

New Jersey.-Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 501, 71 Atl. 153; Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. 219, 230, 27 Atl. 1094, 44 Am. & Eng. Corp. Cas. 686; Groel v. United Electric Co. of N. J., 70 N. J. Eq. 616, 622, 61 Atl. 1061; Loudenslager v. Woodbury Heights Land Co., 58 N. J. Eq. 556, 559-60, 43 Atl. 671; Arnold v. Searing, 78 N. J. Eq. 146, 78 Atl. 762.

New York.-Dorris v. French, 4

poration, and will not, without a full disclosure, be permitted to derive any personal profit from the promotion.3

The Supreme Court of Arkansas in a recent case said, "While the promoters of a corporation are not its agents, they assume a relation of trust and confidence towards those whom they invite to join them in the contemplated enterprise by becoming members of the corporation. Such relation requires the same good faith on their part which the law exacts of directors of corporations

and all other fiduciaries.' Like directors and other officers of corporations, they can make no profit out of such relation except openly and with the consent of those to whom they are so related. If they take advantage of their position, and make a secret profit out of their purchases for the corporation or corporators, the profit is the property of the proposed corporation when organized, and they may be compelled to account for it in any proper proceeding."

It has been said that "the doctrine of promoter's liability is not the creature of statute; it is 'judge-made' law, in the sense that courts of equity everywhere, recognizing the obligations arising from the fiduciary relation, have applied to it the same principles of equity that obtain in all cases of trust." 5

Some authorities base the rule against promoters' secret profits upon the similarity of the relation between the promoters and those whom they bring into the transaction, to a partnership relation. It should, however, be noted that the principle of the law of partnership here referred to, is itself founded upon the doctrines of the law of agency."

6

It has been said that those who buy shares from the treasury of the corporation have the right to assume, in the absence of knowledge to the contrary, that all other subscribers are paying the same price for their shares. It is, however, inadvisable to make

8

5. Chancellor Pitney (now Associate Justice of the United States Supreme Court) in Bigelow v. Old Dominion Copper Co., 74 N. J. Eq. 457, 506, 71 Atl. 153.

6. Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 121, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. Cas. 647; Wills v. Nehalem Coal Co., 52 Or. 70, 81, 96 Pac. 528, 532; Densmore Oil Co. v. Densmore, 64 Pa. 43, 50.

7. Bentley v. Craven, 18 Beav. 75.

8. Yeiser v. U. S. Board & Paper Co., 107 Fed. Rep. 340, 344, 46 C. C. A. 567, 52 L. R. A. 724; Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 403, 107 N. W. 629, 632, 119 Am. St. R. 564, (citing Helliwell on Stock & Stockholders, § 146); Shawnee Comm. & Sav. Bk. Co. v. Miller, 24 Ohio C. C. 198, 211; Wills v. Nehalem Coal Co., 52 Or. 70, 85, 96 Pac. 528, 534. See also cases cited under note 10.

A subscriber is, of course, entitled

this statement the basis of the rule against promoters' secret profits. The rule against secret profits is settled beyond question, but the right of each subscriber to assume that all are going in on the same basis is not conclusively established. To say that the promoters can in no event secure to themselves any secret advantage is a very different thing from saying that they cannot offer a special inducement to some subscriber whose co-operation is deemed of particular importance. Some authorities indicate that such special inducements are entirely proper. Other cases support a rule that all are presumed to come in on the same basis, and that no secret profit, or advantage over the others, may be given to any subscriber.10

9

It may, of course, be a material consideration that the special inducement is given at the personal expense of the promoters, and not at the expense of the corporation.

§ 91. Manner of taking profit immaterial.

A promoter's secret profit is unlawful because of the fiduciary relation in which he stands to the corporation. It is the fact of

to assume that all shareholders stand on the same basis as to their future relations to the company. In re Anglo Greek Steam Co., L. R. 2 Eq. 1, 9-10, 35 Beav. 399, 410-411.

9. Willock v. Dilworth, 204 Pa. St. 492, 54 Atl. 278; Cranney v. McAllister, 35 Utah 550, 101 Pac. 985; Milwaukee Cold Storage Co. v. Dexter, 99 Wis. 214, 74 N. W. 976, 40 L. R. A. 837; Thames Navigation Co. v. Reid, 9 Ont. 754, reversed on another ground, 13 Ont. App. 303.

See Morgan v. Struthers, 131 U. S. 246, 33 L. Ed. 132, 9 Sup. Ct. 726, and Meyer v. Blair, 109 N. Y. 600, 17 N. E. 228, 4 Am. St. R. 500.

10. Lomita Land & Water Co. v.

Robinson, 154 Cal. 36, 50, 97 Pac. 10, 18 L. R. A. N. S. 1106, 1130; Koster v. Pain, 41 N. Y. App. Div. 443, 58 N. Y. Supp. 865; Clark & Marshall on Private Corporations, § 467c. See cases cited under note 8. See also ante, § 9.

The matter is in England partially controlled by statute: Companies (Consolidation) Act of 1908. (Stat. 8 Edw. VII), § 89.

One joining with others in the signing of a subscription agreement, cannot vary his obligations by proving some collateral understanding, but this is a different matter. See ante, 70, and post, §§ 219, 263.

obtaining the secret profit, not the manner in which it is obtained, that constitutes the wrong. No evasion, however ingenious or skillful, can make the secret profit lawful.11 Many devices, some of them palpable, others ingenious, have been resorted to from time to time. All of them have, upon discovery, been condemned.12

§ 92. Taking shares as compensation.

The issue by the promoters to themselves, without the consent of the stockholders or directors, of a substantial part of the share