scribers, and all subsequent transferees of their shares, from complaining of the transaction,31 but the consent of less than the whole body of the subscribers does not bind the corporation.32

The disclosure to be effective must be made to all who have at the time acquired an interest in the shares of the company. This includes those who have by subscription, or otherwise, agreed to take shares from the company, though the stock certificates have not as yet been issued,33 and all who have contracted for the

31. Hughes v. Cadena DeCobre Min. Co., 13 Ariz. 52, 61, 64, 108 Pac. 231, 235; Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 325, 74 N. E. 653, 108 Am. St. Rep. 479, and see post, §§ 121, 127, 145, 145n, 185.

32. Federal.-Davis v. Las Ovas Co., 227 U. S. 80, 33 Sup. Ct. 197, 57 L. Ed. 426, affirming, Las Ovas Co. v. Davis, 35 App. Cas. Dist. of Col., 372.

Arizona.-Hughes v. Cadena DeCobre Min. Co., 13 Ariz. 52, 64, 108 Pac. 231, 234.

California.-Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 51, 97 Pac. 10, 18 L. R. A. N. S. 1106, 1132-1133.

Ind. 560, 99 N. E. 986.

Massachusetts.-Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 198, 89 N. E. 193, 40 L. R. A. N. S. 314; same v. same, 188 Mass. 315, 325, 74 N. E. 653, 108 Am. St. Rep. 479.

Missouri.-Exter v. Sawyer, 146 Mo. 302, 325-326, 47 S. W. 951, 957.

New Jersey.-Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 502, 506, 71 Atl. 153; Arnold

v. Searing, 73 N. J. Eq. 262, 265, 67 Atl. 831.

New York.-Colton Improvement Co. v. Richter, 26 Misc. 26, 30, 31, 55 Supp. 486; 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.

Oregon.-Wills v. Nehalem Coal Co., 52 Or. 70, 83-84, 96 Pac. 528, 533, quoting Clark and Marshall on Private Corporations, § 397.

United Kingdom and Colonies.Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 1245, 1280, 6 Eng. Rul. Cas. 777, 39 L. T. N S. 269, 27 W. R. 65, affirming, New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73, 113, 25 W. R. 436.

But see Urner v. Sollenberger, 89 Md. 316, 43 Atl. 810.

Mere dummy stockholders need, of course, not be considered. See post, § 122.

Disclosure to all but a very few subscribers indicates an absence of actual fraud. Federal Life Ins. Co. v. Griffin, 173 Ill. App. 5, 17.

33. Old Dominion Copper, etc., Co. v Bigelow, 203 Mass. 159, 198, 89 N. E. 193, 40 L. R. A. N. S. 314,

purchase of shares and thus become the equitable owners thereof.34

Some authorities seem to suggest that if the promoters enter into contracts for the sale of the shares of a corporation to be formed to acquire certain named properties and to be capitalized upon an agreed basis, and the corporation is organized as agreed and the shares delivered to the purchasers in exact accordance with the promoters' contract, the concealment from these purchasers of the promoters' profits gives rise to no action by the corporation.35 This, however, is an unsound doctrine which should not be followed. It is true that those who agreed to purchase stock from the promoters receive, in such case, just what they have contracted for, but the same argument would, if accepted, require the reversal of the entire rule against secret profits. If the promoters, before the transaction complained of, contract for the sale of shares of the corporation, the purchasers of these shares have from the date of their contract an interest in the corporation, and the promoters' profit is not made lawful by the assent of the original subscribers. The legality of the promoters' profits would not be affected by the fact that purchasers of shares whose interest was unknown to the promoters did not have notice of the transaction. The undisclosed purchaser is, in such case, bound by the knowledge and acquiescence of his vendor.

Disclosure of the promoters' profits must, in order to render the transaction lawful, be made not only to all existing stockholders, to all subscribers for shares, and to all who have, to the knowledge of the promoters acquired an equitable interest therein

and cases cited; Mackey Baking Co. v. Mackey, 19 Pa. Dist. Ct. 893.

34. See post, § 123.

35. See dictum in Arnold v. Searing, 73 N. J. Eq. 262, 265, 67 Atl. 831.

See also Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 87 Supp.

369. The court in the case last cited, however, pointed out (p. 397), that it could not assume that the agreement for the sale of the shares was entered into before the transaction between the promoters and the corporation had been consummated.

but also, according to many authorities, to all who are, as a part of the original scheme, to be brought in as subscribers for the company's shares.36 If disclosure is made to all those who have, at the time of the transaction, a legal or equitable interest in the shares of the corporation, and to all who are to be brought in as original subscribers, future purchasers from the promoters or from other subscribers need not be taken into account. They are bound by the knowledge of their vendors.37

A question may well arise as to whether those purchasing, from the treasury of the corporation, shares which had been immediately after their issue turned back to the corporation, are to be considered as original subscribers, or as purchasing indirectly from those to whom these shares were originally issued. The pur

36. Maine.-Mason v. Carrothers, 105 Me. 392, 399, 401-402, 74 Atl. 1030, 1033, 1034.

Massachusetts.-Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 322–327, 74 N. E. 653, 108 Am. St. Rep. 479; same v. same, 203 Mass. 159, 193, 89 N. E. 193, 40 L. R. A. N. S. 314; Hayward v. Leeson, 176 Mass. 310, 320, 57 N. E. 656, 49 L. R. A. 725.

Missouri.-Brooker, v. William H. Thompson Trust Co., 254 Mo. 125 158-159, 162 S. W. 187, 195.

New Jersey.-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, 83-84, 96 Pac. 528, 533, quoting from Clark & Marshall on Private Corporations, § 397.

United Kingdom and Colonies.New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73, 113, 25 W. R. 436, affirmed, sub nom.

Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65; In re Leeds & Hanley Theatres of Varieties, 1902, 2 Ch. Div. 809, 823, 824.

Contra Old Dominion Copper, etc., Co. v. Lewisohn, 210 U. S. 206, 215, 28 Sup. Ct. 634, 52 L. Ed. 1025, affirming, 148 Fed. Rep. 1020, 79 C. C. A. 534, 136 Fed. Rep. 915. These are presumably the cases referred to by Chancellor Pitney, in Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, at p. 502, 71 Atl. 153, at p. 172.

This question is discussed at length in subsequent sections of this chapter. See post, §§ 124-130.

37. Mason v. Carrothers, 105 Me. 392, 399, 74 Atl. 1030, 1033, 1036; Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 325, 74 N. E. 653, 108 Am. St. Rep. 479, and see post, §§ 121, 127, 145, 185.

chasers of these shares from the treasury of the corporation are in practical effect original subscribers and should be so considered. 38

§ 112. Nature of the disclosure.-Constructive notice.

A disclosure must, in order to render lawful a transaction in which the promoter has a personal interest, be a full, complete and direct statement of the material facts relating thereto. Reliance cannot be had upon inferences. "In considering this question we must," says Sir Nathaniel Lindley, "recollect that we are dealing with matters of daily business, and must have regard to the habits and practical necessities of ordinary business men. Refined equitable doctrines of constructive notice have little, if any, application to such matters as are now being dealt with. To inform a person of a fact is one thing; to give him the means of finding it out, if he will take trouble enough, is another thing. A promoter of a company, whose duty it is to disclose what profits he has made, does not perform that duty by making a statement not disclosing the facts, but containing something which, if followed up by further investigation, will enable the inquirer to ascertain that profits have been made and what they amounted to." 39

In Gluckstein v. Barnes,40 the promoters, after buying at a dis

38. Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 107 N. W. 629, 119 Am. St. R. 564. See also § 127, post.

39. In re Olympia, Ltd., 1898, 2 Ch. Div. 153, 166, affirmed, sub nom. Gluckstein v. Barnes, 1900, App. Cas. 240. Quoted in Mason v. Carrothers, 105 Me. 392, 403, 74 Atl. 1030, 1035, and in Arnold v. Searing, 78 N. J. Eq. 146, 160, 78 Atl. 762, 768.

See also Caffee V. Berkley, 141 Iowa 344, 349, 118 N. W. 267, 269; Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396,

408, 107 N. W. 629, 633-634, 119 Am. St. R. 564; Brewster v. Hatch, 122 N. Y. 349, 361, 25 N. E. 505, 33 N. Y. St. Rep. 527; Mackey Baking Co. v. Mackey, 19 Pa. Dist. Ct. 893; Aaron's Reefs v. Twiss, 1896, App. Cas. 273, 287; Lagunas Nitrate Co. v. Lagunas Syndicate, 1899, 2 Ch. Div. 392, 448, (dissenting opinion); New Brunswick & Canada Railway, etc., Co. v. Muggeridge, 1 Drewry & Smale 363, 372-373, 380-383; Dunne v. English, L. R. 18 Eq. 524, 535, and cases cited.

40. 1900 App. Cas. 240, 246-247, 249-252, affirming. In re Olympia,

66

count a mortgage upon the place of entertainment known as Olympia" and some debenture bonds of the company by which this property was then owned, purchased the Olympia property at public auction for the sum of £140,000, which price, being sufficient to pay the face value of all the obligations, yielded the promoters a profit of some £20,000 upon the mortgage and debenture bonds. The property was thereupon sold to the new corporation for £180,000. The prospectus disclosed the fact that the property had been purchased at auction for £140,000 and that the promoters were deriving a profit of some £40,000 upon the sale, and stated that "any other profits made by the syndicate from interim investments are excluded from the sale to the company." The contention that this reference to interim investments was a disclosure of the profit of £20,000 accruing to the promoters as a result of their purchase of the mortgage and debenture bonds was overruled in all courts.

In Brewster v. Hatch,11 it was claimed that a statement that the corporation was to be capitalized at $1,500,000, divided into shares of the par value of $10 each, to be issued in payment for certain mines, that only a portion of the shares were offered for sale at $4 per share, and that the stock was to be fully paid up and non-assessable, was a distinct notice to the plaintiffs of how the corporation was to be set on foot, and that they and the defendant promoters were dealing solely as vendors and vendees. The court, however, held that the inference contended for by the defendants could not justly be drawn from such meager disclosures.

In Arnold v. Searing,2 it was claimed that any one could calculate from the data given in the circular distributed, that after the subscriptions had been satisfied there would be left $400,000

Ltd., 1898, 2 Ch. Div. 153, 166-167,

172-173, 178, 180.

41. 122 N. Y. 349, 361, 25 N. E. 505, 33 St. Rep. 527.

42. 78 N. J. Eq. 146, 160, 78 Atl. 768. Compare Hutchinson v. Simpson, note 43.