himself that the property he sells to the corporation, is, at the time of its sale, reasonably worth the price which he obtains from the corporation therefor.54 In Jenkins v. Bradley,55 the promoters in good faith, and without concealment, conveyed to the corporation by quit claim deeds, certain property the title to which was afterwards found to be in part defective. They were treated by the court as having paid the shares issued to them in payment for the property, only the sum represented by the value of the property to which they had transferred good title, and made to pay in cash the balance of the price at which they received the shares. This decision was upon 54. New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73, 97, 25 W. R. 436, affirmed, L. R. 3 App. Cas. 1218, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65; In re Hess Manufacturing Co., 23 Can. S. C. 644, 657-658, 667-668; Lagunas Nitrate Co. v. Lagunas Syndicate, 1899, 2 Ch. Div. 392, 410-411. And see Weber v. Nichols, 75 N. J. Eq. 117, 75 Atl. 997. See also Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 314, 84 Atl. 10, holding that value added by the combination of the control of rival plants cannot be considered "property" within the meaning of the New Jersey Corporation Laws, citing See V. Heppenheimer, 69 N. J. Eq. 36, 42, 61 Atl. 843. It should be noted that while the cost of the property to the promoters does not directly concern the corporation, or affect the validity of the transaction, the fact that the property was purchased by the promoters a short time before at a price very much smaller than the price charged to the corporation, has a very material bearing upon the question of the good faith of the promoters, and upon the question whether the property was actually worth the price at which it was transferred to the corporation. Wills v. Nehalem Coal Co., 52 Or. 70, 79-80, 96 Pac. 528, 532; Downey v. Finucane, 205 N. Y. 251, 98 N. E. 391, 40 L. R. A. N. S. 307; Chamberlayne on the Modern Law of Evidence, §§ 2159 and 2175c. Such discrepancy in price is of course open to explanation. See Milwaukee Cold Storage Co. V. Dexter, 99 Wis. 214, 227-228, 74 N. W. 976, 40 L. R. A. 837, 841; Bentinck v. Fenn, L. R. 12 App. Cas. 652, 659-660, affirming, In re Cape Breton Co., L. R. 29 Ch. Div. 795, affirming, L. R. 26 Ch. Div. 221. 55. 104 Wis. 540, 80 N. W. 1025. The court held further that the promoters could not, by surrendering to the corporation the shares received in payment for the interest to which they did not have good title, relieve themselves from further liability. put upon the ground that while a purchaser, in the absence of warranty, ordinarily assumes all risks as to the title of real property, yet when the grantors occupy a fiduciary relation to the grantee, and the parties have acted in ignorance of, or under a mistake as to, their antecedent legal rights, a court of equity may grant relief. § 103. Necessity of determining whether promoter acquired property before, or after, he entered upon the relation of promoter to the corporation. A sale by the promoter to the corporation without a disclosure of his interest is, as has been shown in preceding sections, unlawful, whether the promoter acquired the property before or after he entered upon the relation of promoter to the corporation. When, however, it is said that the promoter in the one case takes a secret profit, and in the other unlawfully sells his property to the corporation, the distinction is by no means one of words. The extent of the disclosure to be made to the corporation,56 the remedies to be pursued by it,57 and the measure of damages when money relief is sought,58 all depend upon the question whether the promoter made his purchase at a time when he was already subject to the fiduciary relation, or whether he acquired the property before he became a promoter. If the promoters acquired their property before they entered upon the fiduciary relation of promoters to the corporation, it is quite immaterial whether they acquired the property just before they entered upon that relation, or whether they had owned it for thirty years.59 The substantial rights of the parties may, therefore, depend upon the determination of the precise moment at which the promoters became such, and the precise moment at which they acquired the property under consideration. The circum 56. See post, § 115. 57. See post, § 161. 58. See post, § 264. 59. In re Hess Mfg. Co., 23 Can. Sup. Ct. 644, 657, and see Gover's Case, L. R. 1 Ch. Div. 182, 192. stances which determine the commencement of the relation of promoter to the corporation have already been considered.60 § 104. What is deemed acquisition of property. When it has in any particular case been determined at what moment the relation of promoter to the corporation had its inception, there remains for determination the question whether the promoter became the owner of the property sold to the corporation, before or after that moment. It is not, in order that he may be considered to have become the owner of the property before he entered upon the relation of promoter to the corporation, necessary that he should before that time have actually acquired the legal title. The complete equitable title is, of course, sufficient, and the promoter will be considered to have owned the property before he became a promoter, if he, when he entered upon that relation, held an enforceable contract for its purchase.61 The mere holding of an option upon the property does not, however, entitle the promoter to be considered the owner thereof.62 The promoter 60. See ante, §§ 15-18. 61. California.-Burbank v. Dennis, 101 Cal. 90, 35 Pac. 444. New Jersey.-Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. 78, 88, 35 Atl. 436, affirmed, 56 N. J. Eq. 411, 41 Atl. 1115, but modified, 58 N. J. Eq. 556, 43 Atl. 671. Pennsylvania.-McElhenny's Appeal, 61 Pa. 188, 195. Wisconsin-Milwaukee Cold Storage Co. v. Dexter, 99 Wis. 214, 227, 74 N. W. 976, 40 L. R. A. 837, 841. United Kingdom and Colonies.Ladywell Mining Co. v. Brookes, L. R. 35 Ch. Div. 400, 409, 17 Am. & Eng. Corp. Cas. 22; Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 1234-1235, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65, affirming, New Sombrero That the promoters never did take title, but caused the deeds to run from the original vendor directly to the corporation, is immaterial. McElhenny's Appeal, 61 Pa. 188. An unenforceable contract subsequently performed may be sufficient. See Omnium Electric Palaces, Ltd., v. Baines, 1914, 1 Ch. Div. 332, 82 L. J. Ch. N. S. 519, 109 L. T. N. S. 206. 62. Federal.-Yeiser V. United States Board & Paper Co., 107 Fed. Rep. 340, 345, 347, 46 C. C. A. 567, 52 L. R. A. 724. has, whether he holds a contract or an option for the purchase of the property, an equal right and power to acquire the legal title. The distinction between the two cases lies in the fact that the promoter is in the one case bound in any event to complete his purchase, while he may in the other complete the purchase if the corporation is formed, or allow the option to lapse if the promotion proves abortive. He assumes when he makes a contract, a personal responsibility for the completion of the purchase, and becomes in practical effect the owner of the property. He is when he takes an option, free to abandon the venture at any time.63 If the option were itself a thing of substantial value, and the California.-Burbank v. Dennis, 101 Cal. 90, 98, 35 Pac. 444; Lomita Indiana.-Parker v. Boyle, 178 Iowa.-Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa, 396, 398, 107 N. W. 629, 630, 119 Am. St. R. 564. Missouri.-Exter v. Sawyer, 146 Mo. 302, 321, 47 S. W. 951, 956. New Jersey.-Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. 78, 87-88, 35 Atl. 436, affirmed, 56 N. J. Eq. 411, 41 Atl. 1115, but modified, 58 N. J. Eq. 556, 43 Atl. 671. New York.-Midwood Park Co. v. Baker, 128 Supp. 954, affirmed, 144 App. Div. 939, 129 Supp. 1135, affirmed, 207 N. Y. 675, 100 N. E. 1130. 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. See note to Lomita Land & Water Co. v. Robinson, 18 L. R. A. N. S. The contrary might appear from the language of the court in Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 202, 89 N. E. 193, 40 L. R. A. N. S. 314, but an examination of the earlier decision in the same case (188 Mass. 315, 317, 321, 74 N. E. 653, 108 Am. St. Rep. 479), there relied on, shows that title to the property had been acquired by the promoters before the corporation was organized. Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 87 Supp. 369, contains nothing to the contrary. The decision in that case rested upon the ground that the promoters had made a complete disclosure of their position. See, however, Richardson v. Graham, 45 W. Va. 134, 30 S. E. 92, also Mississippi Lumber Co. v. Joice, 176 Ill. App. 110, 118. 63. See Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. 78, 88, 35 Atl. 436, affirmed, 56 N. J. Eq. 411, 41 Atl. 1115, but modified, 58 N. J. Eq. 556, 43 Atl. 671. corporation purchased and paid the promoter, not for the property, but for his option thereon, the option might be considered property which the promoter had a right to sell to the corporation regardless of its cost to him.64 § 105. Property acquired by gift. In Yale Gas Stove Co. v. Wilcox,65 one Foley, being the owner of certain patents which he desired to dispose of, offered to sell them to the defendant Wilcox for the sum of $2500. Wilcox proposed that the patents be sold to a company to be organized for the purpose and that the proceeds of the sale be divided between Foley and Wilcox. An agreement was thereupon prepared by which Wilcox agreed to organize a company to purchase the patents for the sum of $3,000 in cash and $5,000 in shares, and Foley agreed with Wilcox, that, upon the execution of the covenants therein described Foley should assign to Wilcox a half interest in the letters patent and one-half of the cash and shares to be received from the corporation in payment therefor. The scheme was carried out, the corporation organized, and the patents transferred, without disclosing Wilcox's interest. The court held that the original arrangement between Wilcox and Foley did not contemplate the acquisition by Wilcox of any interest in the patents, but merely the organization of the corporation, the sale to it of the patents, and a division of the proceeds of the sale, and that the written contract was entered into only for the purpose of carrying out this plan. The court refused to treat Wilcox as having become the owner of an interest in the patents before he entered upon the promotion of the corporation. If the promoter, before the promotion is undertaken, becomes 64. See the possible suggestion in Maxwell v. McWilliams, 145 Ill. App. 155, 168-169; Chambers v. Mittnacht, 23 S. D. 449, 122 N. W. 434; Richardson v. Graham, 45 W. Va. 134, 140, 30 S. E. 92. 65. 64 Conn. 101, 121-122, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. Cas. 647. |