the actual owner of property which the corporation is organized to purchase, it is obviously immaterial whether he acquires such property by gift or purchase. If the owner of property, before the promotion, makes a bona fide gift of an undivided interest therein to the person who subsequently promotes the corporation, the validity of the gift must be recognized and the promoter treated as the actual owner of the undivided interest.66 Where, however, the gift is made only upon condition of the organization of the corporation and the purchase of the property by it, the transaction is a mere cloak for the payment of a secret profit, and the courts, looking through the color of the transaction, refuse to consider the promoter as having acquired an interest in the property before he undertook the promotion of the company.

67

§ 106. Promoter's rights under contract afterward modified. In Plaquemines Tropical Fruit Co. v. Buck,68 the defendant Buck, having procured from one White a contract for the purchase of certain lands in Louisiana, proceeded to organize a corporation to take over the lands. White refused to carry out his contract and Buck commenced suit for specific performance. The suit was compromised by an agreement under which the original contract was amended to cover additional lands, to increase the purchase price from $25,000 to $27,000, and to reserve to White the right to cut willows for one year. The court was of the opinion that Buck had originally purchased the property for the corporation, but held that, assuming the contrary, the modifications of the original contract constituted a new contract; that this was entered into by Buck as agent of the company and that he could

66. Highway Advertising Co. v. Ellis, 7 Ont. L. R. 504, 511. See post, § 115.

67. Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. R. 159, 47 Am. & Eng. Corp. Cas. 647; Bland's Case, 1893, 2 Ch. D. 612; Tyrrell v. Bank of Lon

don, 10 H. L. Cas. 26, 51-53, 11 Eng. Rep. 934.

Cf. Warren-Ehret Co. v. Franklinville Ice Mfg. Co., 198 Pa. 412, 48 Atl. 1119.

68. 52 N. J. Eq. 219, 239, 27 Atl. 1094, 44 Am. & Eng. Corp. Cas. 686.

not take any profit upon the sale to the corporation. The decision was correct upon the particular facts. The corporation had, before the modified contract between Buck and White was entered into, already agreed to purchase the property. The contract was modified, not only as to the lands to be conveyed and the price to be paid therefor, but also by inserting the reservation of the right to cut willows. There was no evidence as to the value of this right, but it unquestionably placed an additional burden upon the land. When Buck consented to a modification of the original contract which rendered it impossible for him to sell the property to the corporation upon the terms previously agreed upon, he acted as agent for the corporation and was unquestionably bound to look solely to its interests, and he could not make the modified contract for his own account and sell the property to the corporation at an advance.

It seems clear on principle that a promoter who had, before he entered upon the fiduciary relation, made a contract for the purchase of the property which he has agreed to sell to the corporation, may modify his contract for the purchase of the property without thereby in any way affecting his rights as against the corporation, provided that he can and does carry out his contract with the corporation in exact accordance with its terms.

§ 107. Expired options.

It was held in Gillett v. Dodge 69 that the promoter might, after an option held by the company had expired, purchase for himself the property covered thereby and, having done so, could not be compelled to convey it to the corporation. The transaction under consideration was in all respects fair and above board, and the decision undoubtedly correct. A different question would have arisen had the promoter, after acquiring the property, sold it to the corporation upon terms that would, unknown to his associates, have yielded him a profit. The court would in such case un69. 50 Or. 552, 89 Pac. 741.

doubtedly have held that he acquired the property after he had entered upon the relation of promoter to the corporation, and, unless the promotion had, when he made his purchase, been for the time being completely abandoned, have compelled him to account to the corporation for any profits made on the resale.

§ 108. Promoter who acquired property before the commencement of relation sometimes treated as though he had acquired it thereafter.

Although the promoter makes a contract to purchase, or even pays for the property sold to the corporation, before he enters upon the relation of promoter to the corporation, he will be subjected to the same liabilities as though he had made the purchase after he assumed that relation, if he represents that he acted for the corporation in making the purchase, or that he is turning in the property at its cost to him, or if concealing his interest he leads the company to believe that it is purchasing the property from his vendor.70

70. California.—Burbank v. Dennis, 101 Cal. 90, 35 Pac. 444.

Illinois.-Lyon v. Worcester, 49 Ill. App. 639.

Missouri.-Wiano Land & Improvement Co. v. Webster, 75 Mo. App. 457.

New Jersey.-Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. 219, 235-237, 27 Atl. 1094, 44 Am. & Eng. Corp. Cas. 686.

New York.-Getty v. Devlin, 54 N. Y. 403, 70 N. Y. 504.

Oil & Min. Co., 61 Pa. 202, 100 Am.
Dec. 628.

Wisconsin.-Pittsburg Min. Co. v.
Spooner, 74 Wis. 307, 42 N. W. 259,
17 Am. St. Rep. 149, 24 Am. & Eng.
Corp. Cas. 1.

United Kingdom and Colonies.Foss v. Harbottle, 2 Hare 461, 489; Alexandra Oil & Dev. Co. v. Cook, 11 Ont. W. R. 1054.

And see post, §§ 162, 264.

If the purchase of the promoter is made on behalf of the corporation to be promoted, the latter is entitled to the full benefit thereof. See ante, § 16.

CHAPTER VII.

OF LAWFUL PROMOTER'S PROFITS.

Section 109. Introductory.

110. Disclosure to directors.

111. Disclosure to subscribers.

112. Nature of the disclosure.-Constructive notice.
113. Waiver of disclosure.

114. Facts that must be disclosed.

115. Necessity of disclosing price paid by promoter.

116. The same subject.-Effect of independent board of directors.

117. Misrepresentations as to cost of property.

118. Ratification of promoter's profits.

119. Ratification by majority stockholders, or by directors.

120. Profits where promoters themselves the sole subscribers.

121. The same subject.-Basis of the rule.

122. The same subject.-Dummy stockholders.

123. The same subject.-Effect of promoters' contract to sell shares.

124. Legality of promoters' profits where shares subsequently sold

by subscription.

125. Effect of subsequent issue not contemplated at time of

original transaction.

126. Effect of unsuccessful attempt to sell shares.

127. Effect of subsequent sale of shares donated to the treasury

by promoters.

128. The Old Dominion Copper Company litigations.

129. The same subject.-Subsequent decisions.

130. The same subject.-Discussion.

§ 109. Introductory.

Promoters' profits are not in themselves unlawful. It is not the taking of a profit, but the secrecy, that is the gist of the

wrong. Promoters' profits, in whatever amount, are quite proper if fairly disclosed.1

The Supreme Court of Massachusetts recently laid down four methods by which a promoter might, notwithstanding his fiduciary relation, render lawful and binding his personal transactions with the corporation. These methods the court stated as follows: "(a) He (the promoter) may provide an independent board of officers in no respect directly or indirectly under his control, and make full disclosure to the corporation through them; (b) He may make a full disclosure of all material facts to each original subscriber of shares in the corporation; (c) He may procure a ratification of the contract, after disclosing its circumstances by vote of the stockholders of the completely established corporation; (d) He may be himself the real subscriber of all of the shares of the capital stock contemplated as a part of the promotion scheme." 2

The Supreme Court of the United States, in another litigation arising out of the same transaction, extended the fourth method stated by the Supreme Court of Massachusetts, to all cases where

1. Federal.-Yeiser v. U. S. Board & Paper Co., 107 Fed. Rep. 340, 344, 46 C. C. A. 567, 52 L. R. A. 724.

Connecticut.-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.

Massachusetts.-Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 322, 74 N. E. 653, 108 Am. St. Rep. 479.

New Jersey.-Arnold v. Searing, 78 N. J. Eq. 146, 158, 78 Atl. 762, 767; Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 502, 71 Atl. 153.

Oregon.-Wills v. Nehalem Coal

Co., 52 Or. 70, 78-79, 96 Pac. 528, 531-532.

Wisconsin.-Spaulding v. North Milwaukee Town Site Co., 106 Wis. 481, 81 N. W. 1064.

Wyoming.-Edwards v. Johnston,
Wyo. -, 152 Pac. 273.

United Kingdom and Colonies.In re Olympia, Ltd., 1898, 2 Ch. Div. 153, 174, affirmed, sub nom. Gluckstein v. Barnes, 1900, App. Cas. 240; Lagunas Nitrate Co. v. Lagunas Syndicate, 1899, 2 Ch. Div. 392, 425, 426.

2. Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 178, 89 N. E. 193, 40 L. R. A. N. S. 314.