capital of the corporation as compensation for promoters' services, is obviously improper.13 § 93. Taking commission or other compensation on sale to the corporation. The acceptance by promoters of commissions from persons selling property to the corporation has frequently been condemned.14 An agreement by such vendors to pay the promoters missing a petition which unquestionably proceeded upon a gross fraud. 13. Hughes v. Cadena DeCobre Min. Co., 13 Ariz. 52, 108 Pac. 231; Hayward v. Leeson, 176 Mass. 310, 57 N. E. 656, 49 L. R. A. 725; McAllister v. American Hospital Ass'n, 62 Or. 530, 125 Pac. 286. As to whether shares may ever be lawfully issued in payment for promoters' services, see ante, § 87n. The taking of shares without consideration is obviously unlawful, Simon v. Weaver, 143 Wis. 330, 127 N. W. 950, and cases supra. 14. California.-Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 50, et seq., 97 Pac. 10, 18 L. R. A. N. S. 1106, 1130, et seq. Massachusetts.-Emery rott, 107 Mass. 95. V. Par United Kingdom and Colonies.— Bagnall v. Carlton, L. R. 6 Ch. Div. 371; Emma Silver Mining Co. v. Grant, L. R. 11 Ch. Div. 918; Lydney & Wigpool Iron Ore Co. v. Bird, L. R. 33 Ch. Div. 85, 24 Am. & Eng. Corp. Cas. 23, reversing, L. R. 31 Ch. Div. 328, 12 Am. & Eng. Corp. Cas. 6; Beck v. Kantorowicz, 3 K. & J. 230; McKay's Case, L. R. 2 Ch. Div. 1; In re Hereford & South Wales Waggon & Engineering Co., L. R. 2 Ch. Div. 621, 35 L. T. N. S. 40; Atwool v. Merryweather, L. R. 5 Eq. 464n, 37 L. J. Ch. N. S. 35. And see note to Yale Gas Stove Co. v. Wilcox, 25 L. R. A. 92, also note to Lomita Land & Water Co. v. Robinson, 18 L. R. A. N. S. 1115. Compare Richard Hanlon Millinery Co. v. Mississippi Valley Trust Co., 251 Mo. 553, 591, 158 S. W. 359, 368, where the court refused, on the ground that the moneys received by the promoter had never been in the possession of the corporation, to compel him to account therefor. whatever sum above a certain fixed price may be received for the property from the corporation is likewise unlawful.15 Any arrangement by which the promoters secretly receive a part of the purchase price paid by the corporation is objectionable.16 The fact that the promoter had, before he conceived the idea of organizing the corporation, been employed as agent to sell the obtaining subscriptions was not improper. It has been held that a commission paid by a vendor to a promoter cannot be recovered by the corporation if it was agreed between the corporation and the vendor that the latter should pay all promotion expenses. Re Sale Hotel & Botanical Gardens, Ltd., 78 L. T. N. S. 368, reversing, 77 L. T. N. S. 681; and see Arkwright v. Newbold, L. R. 17 Ch. Div. 301. (Cf. Re Eskern Slate, etc., Co., Ltd., 37 L. T. N. S. 222). The correctness of these decisions may well be doubted. It seems on principle that the corporation is entitled to know the promoter's interest in the transaction. The language of the court in Central Land Co. v. Obenchain, 92 Va. 130, 142, 22 S. E. 876, 880, seems to intend that the promoter's commission would be lawful if the agreement for the payment thereof were entered into before the promoter entered upon his fiduciary relation to the corporation. This, if intended, is unsound in principle and contrary to the weight of authority. cases cited infra, note 17. See It has been held that if the subscribers are informed that the promoter is to be paid a commission, the fact that the amount of the commission is not disclosed does not make the promoter liable for a secret profit. Advance Realty Co. v. Nichols, 126 Minn. 267, 148 N. W. 65, compare post, §§ 114, 115. 15. Tegarden Bros. v. Big Star Zinc Co., 71 Ark. 277, 72 S. W. 989; First Avenue Land Co. v. Hildebrand, 103 Wis. 530, 79 N. W. 753. 16. Federal.-Chandler v. Bacon, 30 Fed. Rep. 538. Connecticut.-Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. Cas. 647. Massachusetts.-Emery rott, 107 Mass. 95. V. Par Missouri.-St. Louis & Utah S. M. Co. v. Jackson, 5 Central L. J. 317. New York.-See Koster v. Pain, 41 App. Div. 443, 58 Supp. 865; Campbell v. Cypress Hills Cemetery, 41 N. Y. 34. Oregon.-Johnson V. Sheridan Lumber Co., 51 Or. 35, 40, 93 Pac. 470, 472. United Kingdom and Colonies.Hichens v. Congreve, 4 Russ. 562, 574; Bland's Case, 1893, 2 Ch. Div. 612; Scottish Pacific Coast Min. Co., Ltd., v. Falkner, Bell & Co., Sess. Cas., 15 Rettie 290. See also cases cited in preceding notes. property in question, does not legalize the payment of a commission upon the sale to the corporation, nor relieve him from accountability therefor.17 § 94. Accepting gift of money, qualifying shares, or other thing of value. Promoters have frequently been compelled to account to the corporation for moneys or shares gratuitously given them by one selling property to the corporation or otherwise interested in the organization thereof,18 for shares given them as their qualification for the office of director,19 for qualifying shares sold to them for 17. Koster v. Pain, 41 N. Y. App. Div. 443, 58 Supp. 865; Lydney & Wigpool Iron Ore. Co. v. Bird, L. R. 33 Ch. Div. 85, 94-95, 24 Am. & Eng. Corp. Cas. 23, reversing, L. R. 31 Ch. Div. 328, 12 Am. & Eng. Corp. Cas. 6; Whaley Bridge Calico Printing Co. v. Green, L. R. 5 Q. B. Div. 109, 112, 28 W. R. 351; Bagnall v. Carlton, L. R. 6 Ch. Div. 371, 407. Cf. Central Land Co. v. Obenchain, 92 Va. 130, 142, 22 S. E. 876, 880. Cf. also American Shipbuilding Co. v. Commonwealth S. S. Co., 215 Fed. Rep. 296, 299, 131 C. C. A. 596. 18. McKay's Case, L. R. 2 Ch. Div. 1, 5; Hay's Case, L. R. 10 Ch. App. 593, 602, 603, 604-605. See also In re Anglo Greek Steam Co., L. R. 2 Eq. 1, 35 Beav. 399; Eden v. Ridsdales Ry. Lamp & Lighting Co., L. R. 23 Q. B. D. 368. Compare Curran v. Oppenheimer, 164 N. Y. App. Div. 746, 150 Supp. 369, where the broker on the sale divided his commission with two of the promoters. 19. Pearson's Case, L. R. 5 Ch. Div. 336, aff'g, L. R. 4 Ch. Div. 222; Hay's Case, L. R. 10 Ch. App. 593, (overruling Orgill's Case, 21 L. T. N. S. 221); Carling's Case, L. R. 1 Ch. Div. 115; In re Carriage Co-operative Supply Association, L. R. 27 Ch. Div. 322; De Ruvigne's Case, L. R. 5 Ch. Div. 306; Ormerod's Case, 37 L. T. N. S. 244, 25 W. R. 765; Derry v. Peek, L. R. 14 App. Cas. 337, 3456; In re Englefield Colliery Co., L. R. 8 Ch. Div. 388; In re Disderi & Co., L. R. 11 Eq. 242. Note to Yale Gas Stove Co. v. Wilcox, 25 L. R. A. 101-102. See Re Eskern Slate & Slab Quarries Co., Ltd., 37 L. T. N. S. 222, where a clause of the articles of association purporting to legalize the transaction was held invalid. Cf. Miller's Case, L. R. 5 Ch. Div. 70, aff'g, L. R. 3 Ch. Div. 661. The directors were in Re Carriage Co-operative Supply Association, L. R. 27 Ch. Div. 322, held both jointly and severally liable for the value of such shares. If the director actually pays for his own shares, but a sum equal to the purchase price is deposited in a nominal consideration 20 or at less than their fair market value,2 21 and for moneys or other considerations beyond the established directors' fees paid them in consideration of their acting as directors of the company.22 It was held in Re London & Southwestern Canal Co., Ltd.,23 that the fact that the qualifying shares were not given to the director as an absolute gift, but to be held by him as trustee for the transferor, was no defense to the demand of the corporation for the value thereof. An agreement by the vendor of property, that he will, whenever requested, repurchase at cost the shares sold to the promoter to qualify him as director, is improper, and the promoter may be compelled to account to the corporation for all benefits received thereunder. 24 the director's bank account by the vendor to the corporation, the director is liable to the corporation for the moneys so placed to his credit, but his shares cannot be treated as unpaid, unless he knew that the moneys were deposited for the purpose of reimbursing him for the payment made for his shares. Eastwick's Case, 45 L. J. Ch. N. S. 225, distinguishing Hay's Case, L. R. 10 Ch. App. 593, 44 L. J. Ch. N. S. 721. 20. Mitcalfe's Case, L. R. 13 Ch.. Div. 169. 21. Weston's Case, L. R. 10 Ch. Div. 579. 22. Bagnall v. Carlton, L. R. 6 Ch. Div. 371, 388-389; Nant-Y-Glo & Blaina Iron Works Co. v. Grave, L. R. 12 Ch. Div. 738, 744, et seq.; Carling's Case, L. R. 1 Ch. Div. 115; Ormerod's Case, 37 L. T. N. S. 244, 25 W. R. 765; see In re Postage Stamp Automatic Delivery Co., 1892, 3 Ch. Div. 566; Re Sale Hotel & Botanical Gardens, Ltd., 78 L. T. N. S. 368; In re The Brighton Brewery Cf. dictum in Tyrrell v. Bank of The directors are liable to the corporation for any gifts received from the promoters. Madrid Bank v. Pelly, L. R. 7 Eq. 442. 23. 1911, 1 Ch. Div. 346, 80 L. J. Ch. N. S. 234. 24. Archer's Case, 1892, 1 Ch. Div. 322, cited in Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 122–124, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. The promoter must in all these cases account to the corporation for his profits, not because he has taken anything from the corporation, for the fact that the corporation has lost nothing by the transaction is immaterial,25 but because anything received by an agent beyond his agreed compensation must be accounted for to the principal.2 § 95. Profit made by purchase and resale to corporation. One method of obtaining secret profits, frequently resorted to by promoters, is the purchase for their individual account of Cas. 647, and in The Telegraph v. Loetscher, 127 Iowa 383, 388, 101 N. W. 773, 775, 4 Am. & Eng. Ann. Cas. 667; Reid on Corporate Finance, § 255. 25. Emma Silver Mining Co. v. Grant, L. R. 11 Ch. Div. 918, 938; Archer's Case, 1892, 1 Ch. Div. 322. 26. Koster v. Pain, 41 N. Y. App. Div. 443, 58 Supp. 865; McKay's Case, L. R. 2 Ch. Div. 1, 5; Emma Silver Mining Co. v. Grant, L. R. 11 Ch. Div. 918, 938; Bentley v. Craven, 18 Beav. 75, 78. But see Bagnall v. Carlton, L. R. 6 Ch. Div. 371. In that case the title to certain collieries and iron works was in Joseph Naylor, W. S. Naylor and another, as trustees under the will of James Bagnall, Richard Bagnall was the life tenant of the property. Richard Bagnall agreed to give to one Duignan, solicitor for the trustees, a commission of £1,500, if he found a purchaser for the property. Accordingly a corporation was organized to take over the property and the court held that Duignan and the trustees under the will of James Bagnall, and a number of other persons, were all It promoters of the corporation. appeared that the Naylors, trustees under the will of James Bagnall, had as a condition of their signing the agreement for the sale of the property, insisted upon the payment to them by Richard Bagnall, the life tenant, of two sums of £6,000 and an annuity of £500 each, for a term. In a suit to compel the various promoters to account for secret profits, it was held that the agreement just referred to was a personal engagement of Richard Bagnall, to be satisfied out of his own moneys, and that the corporation was not entitled to recover the payments made thereunder. The court also held that the company was not entitled to recover the £1,500 paid to Duignan by Richard Bagnall, as that sum never formed any part of the funds of the company, but was paid by Richard Bagnall in respect to a personal liability, and out of his own pocket. The case must, if it is to be approved, rest upon the particular facts. Cf. Richard Hanlon Millinery Co. v. Mississippi Trust Co., 251 Mo. 553, 591, 158 S. W. 359, 368. |