property which the corporation is organized to acquire, and the subsequent resale thereof to the corporation at an advance.27 Sometimes title to the property is actually taken by the promoters, and by them conveyed to the corporation. Sometimes the promoters merely contract for the purchase of the property, or take an option thereon, and, after arranging a resale to the corporation at an increased price, cause the title to pass from the original vendors directly to the corporation. The substance of the transaction is in either case the same, and the profit unlawful.28 If the purchase is made by the promoters at a time when they have entered upon their fiduciary relation to the corporation, it is their duty to make the purchase for the corporation upon the best terms obtainable, and if, in disregard of their duty, they purchase for their individual account what they ought to purchase for the corporation, any profit obtained upon a subsequent resale to the corporation is, unless fully disclosed, wrongfully taken.29

V.

27. Federal.-Dickerman Northern Trust Co., 176 U. S. 181, 20 Sup. Ct. 311, 44 L. Ed. 423; Yeiser v. U. S. Board & Paper Co., 107 Fed. Rep. 340, 46 C. C. A. 567, 52 L. R. A. 724.

California.-Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 97 Pac. 10, 18 L. R. A. N. S. 1106.

Iowa.-Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 107 N. W. 629, 119 Am. St. Rep. 564; Caffee v. Berkley, 141 Iowa 344, 118 N. W. 267, and cases cited.

Missouri.-Exter v. Sawyer, 146 Mo. 302, 47 S. W. 951.

New Jersey.-Arnold v. Searing, 78 N. J. Eq. 146, 78 Atl. 762; Loudenslager v. Woodbury Heights Land Co., 58 N. J. Eq. 556, 43 Atl. 671; See v. Heppenheimer, 69 N. J. Eq. 36, 61 Atl. 843.

New York.-Crowe v. Malba Land

Co., 76 Misc. 676, 135 Supp. 454; Dorris v. French, 4 Hun 292, and cases cited in foot note, p. 296.

Oregon.-Wills v. Nehalem Coal Co., 52 Or. 70, 96 Pac. 528.

Pennsylvania.-Densmore Oil Co. v. Densmore, 64 Pa. 43, 50; Simons v. Vulcan Oil & Min. Co., 61 Pa. 202, 218, 100 Am. Dec. 628.

Wisconsin.-Pietsch v. Milbrath, 123 Wis. 647, 101 N. W. 388, 102 N. W. 342, 68 L. R. A. 945, 107 Am. St. Rep. 1017.

United Kingdom and Colonies.Minister of Rys. & Canals v. Quebec So. Ry. Co., 12 Exch. Rep. of Can. 11.

28. In re Hess Man'f'g Co., 23 Can. S. C. 644, 659.

29. Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 321, 74 N. E. 653, 108 Am. St. Rep. 479; Simons v. Vulcan Oil & Min. Co., 61

An entirely different situation arises if the property sold to the corporation was acquired by the promoters before they entered upon any fiduciary relation to the corporation. They are in such case bound to disclose their interest in the property, but its cost to them is wholly immaterial, and while the transaction may, because of a failure to disclose the promoters' interest, be unlawful, the promoters have not, properly speaking, taken any "secret profit." 30

An ingenious method of gaining a secret profit was tried in Gluckstein v. Barnes.31 In that case a mortgage upon a place of entertainment known as "Olympia," and some debenture bonds of the company which then owned the property, were purchased at a discount by the promoters. The property was then sold at public auction and bought in by the promoters at £140,000, that price being sufficient to pay the face value of the mortgage and debenture bonds. The property was sold to the new company for £180,000, the promoters disclosing that they were retaining as their profit, the difference between the £140,000 paid at the public sale and the £180,000 paid by the corporation. The promoters did not, however, disclose the fact of their prior purchase at a discount of the mortgage and debenture bonds, which purchase had netted them an additional profit of £20,000. The court held that the corporation was entitled to the benefit of the purchase of the mortgage and debenture bonds, and that the promoters must account to it for the £20,000 profit gained thereby.

§ 96. Secret collateral agreements.

A secret agreement whereby a proposed contractor with a cor

Pa. 202, 217, (quoting from Lindley on Partnership, 497); In re Cape Breton Co., L. R. 29 Ch. Div. 795, 803-804, affirmed, sub nom. Bentinck v. Fenn, L. R. 12 App. Cas. 652; In

re Ambrose Lake Tin & Copper Mining Co., L. R. 14 Ch. Div. 390, 398. 30. See post, § 101.

31. 1900 App. Cas. 240, affirming, In re Olympia, Ltd., 1898, 2 Ch. Div.

poration in process of formation, promises to pay a commission to the promoter, is unlawful.32

A secret collateral agreement with a contractor who has obligated himself to pay the expenses of the corporate organization, that the promoters will, in consideration of the payment to them of a certain fixed sum, assume the burden of organizing the company is improper, and any profits accruing to the promoters therefrom must be accounted for to the corporation. 33

The failure of the promoters to disclose to the subscribers that the corporation is, under an agreement with one of the promoters, obligated to pay to such promoter a royalty upon a certain patented device to be manufactured and sold by the company, renders the royalty agreement unenforceable and subject to cancellation.34

§ 97. Profits made in sustaining the market.

Emma Silver Mining Co. v. Grant 35 was an action to compel the defendant to account for a secret commission obtained by him. The defendant had, in order to sustain the market, dealt in the shares of the plaintiff corporation. The net result of his dealing in these shares was a small profit. The court upon his accounting charged the defendant with this profit. The defendant had in that case claimed, and been allowed as an off-set upon his accounting, sums of money paid to various brokers for sustaining the market, and that no doubt was the reason why he was charged with the profits derived from these transactions. If a promoter, in order to sustain the price of the company's shares, should on his own

32. Twycross v. Grant, L. R. 2 C. P. D. 469; see also London Trust Co. v. Mackenzie, 62 L. J. Ch. N. S. 870; In re Anglo Greek Steam Co., L. R. 2 Eq. 1, 8-9, 35 Beav. 399, 409410.

33. Mann v. Edinburgh Northern Tramways Co., 1893, App. Cas. 69,

Sess. Cas. 20 Rettie, 7, 9 Times Law Rep. 102, 68 L. T. N. S. 96, affirming, Sess. Cas. 18 Rettie, 1140.

34. Fred Macey Co. v. Macey, 143 Mich. 138, 106 N. W. 722, 5 L. R. A. N. S. 1036.

35. L. R. 11 Ch. Div. 918, 941, 940.

responsibility, with his own money, and at his own risk, buy and sell such shares in the market, the profits, if any, derived from such transactions would belong to the promoter and he could not be called upon to account therefor. A different situation would arise if the promoter had represented that he was trading for the corporation, or had attempted to hold the corporation responsible for his losses, or had made use of the funds of the corporation in his operations.

§ 98. Other collateral profits.

A curious situation arose in Re Sunlight Incandescent Gas Light Co., Ltd.36 Pending the organization of a company formed to purchase a certain invention, a litigation arose between the vendor corporation and a syndicate formed to test the invention to be purchased by the new company. The syndicate having succeeded in the first stage of the litigation, and the vendor company having threatened an appeal, it was arranged to secure the syndicate against the threatened appeal by insuring the result at Lloyd's. Two of the directors of the syndicate underwrote a part of the risk. Thereafter the vendor corporation abandoned the appeal. It was claimed by the liquidator that the syndicate was entitled to recover from the two directors who underwrote a part of the risk, as profits made in the conduct of the company's affairs, the premiums paid to them for the insurance. The court, without attempting to declare any general rule, declined to hold the directors liable for these moneys, largely because of the fact that most of the shareholders did not want the money and would have returned it to the directors. The court said, however, that a full and detailed disclosure of the transaction should have been made.

§ 99. Profits of business carried on with existing concern pending incorporation.

In Albion Steel & Wire Co. v. Martin,37 the plaintiff corpora

36. 16 Times Law Rep. 535.

37. L. R. 1 Ch. Div. 580.

tion was organized to take over the business of Fox & Bear as of September 1, 1872. The defendant, a steel converter and iron merchant doing a large business with Fox & Bear, agreed to become a director of the new company, but pending the incorporation, and after September 1, 1872, and likewise after the incorporation of the company on October 31, 1872, continued to transact business with Fox & Bear in the same manner as theretofore. The defendant admitted his liability to account for the profits derived from the contracts made with Fox & Bear after the incorporation. He contended, however, that he was entitled to retain his profits on all contracts made before the incorporation. This contention was sustained. The defendant was apparently not one of the promoters of the plaintiff corporation, but, had he been, that circumstance would not have affected the result.

§ 100. Absence of dishonest intent, or of injury to the corporation, immaterial.

If the promoter takes his profit without a proper disclosure, he will be compelled to account therefor, though no fraud or injustice was intended,38 and though he honestly believes that the profits so taken by him do not exceed the reasonable value of his services as promoter.39

The promoter is not relieved from liability for his secret profits by the fact that the property sold to the corporation was actually worth the price that it was made to pay therefor,40 nor because

38. Chandler v. Bacon, 30 Fed. Rep. 538, 540; Torrey v. Toledo Portland Cement Co., 158 Mich. 348, 122 N. W. 614; Dorris v. French, 4 Hun (N. Y.) 292, 297; Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 1256-1257, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65; Nant-Y-Glo & Blaina Ironworks Co. v. Grave, L. R. 12 Ch. Div. 738, 746.

39. Hayward v. Leeson, 176 Mass. 310, 318-319, 57 N. E. 656, 49 L. R. A. 725.

40. Federal.-Yeiser V. U. S. Board & Paper Co., 107 Fed. Rep. 340, 348-349, 46 C. C. A. 567, 52 L. R. A. 724; Chandler v. Bacon, 30 Fed. Rep. 538, 540.

Alabama.-Moore v. Warrior Coal & Land Co., 178 Ala. 234, 59 So. 219, Am. & Eng. Ann. Cas., 1915 B. 173.