in bonds and $3,000,000 in stock which must have been understood to belong to the promoters. The court said that while it was true that such a calculation would have shown this result, there was nothing to indicate that this surplus was intended as promotion fees, or that the defendant promoters had any interest therein.

What might appear to be an altogether too meager disclosure was held sufficient in Hutchinson v. Simpson. 43 In that case a paper was circulated by Moore & Schley under the terms of which the signers agreed to buy from Moore & Schley, the number of shares set opposite their names, of the stock of a company with a capital of $30,000,000, of which $15,000,00 was preferred, and $15,000,000 was common stock. The paper stated that it was expected that "of the capital aforesaid all but two and one-half millions of preferred and one and one-quarter million dollars of common stock to be reserved in the treasury for further corporate uses, will be issued in acquiring certain malt properties on which you (Moore & Schley) and your associates control options (or other value as you may determine in lieu of any thereof that may not be acquired) and for working capital and that a part of the stock so to be issued, to wit: nine million dollars of preferred and four and one-half million dollars of common heretofore underwritten, will be sold upon the terms above stated." It appeared that Moore & Schley had immediately prior to the organization of the company procured options on twenty-five malting plants, and caused such options to be taken in the name of one Eicks, their employee. $9,000,000 par value of preferred and $4,500,000 of common stock were sold, under the agreement referred to, for the sum of $9,000,000. An additional $3,000,000 of preferred and $1,500,000 of common stock were issued, and paid for by the conveyance of certain malting plants. The $9,000,000 paid by the signers of the agreement with Moore & Schley provided all the money

43. 92 N. Y. App. Div. 382, 392,

397-398, 406-407, 87 Supp. 369. Cf. Arnold v. Searing, note 42.

necessary to purchase the balance of the plants and to provide the required working capital. Eicks thereupon entered into a contract with the corporation to transfer to it all the aforesaid malting plants, and to furnish it with a working capital of $2,070,000 in consideration of the issue to him of $12,500,000 of preferred and $13,740,000 of common stock, and such contract having been consummated and the shares issued to Eicks, he transferred $9,000,000 of preferred and $4,500,000 of common stock to the signers of the agreement with Moore & Schley, $3,000,000 of preferred and $1,500,000 of common stock to the owners of malting plants, and caused $500,000 of preferred and $7,740,000 of common stock to be transferred to the defendants Moore & Schley and their associates. The majority of the court held that the agreement above set forth sufficiently disclosed the transaction to the signers.

While inferences to be drawn from facts disclosed will not readily be charged to the subscribers, the subscribers are ordinarily chargeable with knowledge of the contents of the articles of association and of the by-laws of the corporation,15 and with notice of all matters that are spread upon the corporate records.16

44

44. Oil City Land & Imp. Co. v. Porter, 99 Ky. 254, 260, 35 S. W. 643, 18 Ky. L. R. 151.

West End Real Estate Co. v. Claiborne, 97 Va. 734, 34 S. E. 900.

West End Real Estate Co. v. Nash, 51 W. Va. 341, 41 S. E. 182.

In re Anglo Greek Steam Co., L. R. 2 Eq. 1, 7, 35 Beav. 399, 407; Oakes v. Turquand, L. R. 2 H. L. 325, 351-352, and cases cited; New Brunswick & Canada Ry. Co. v. Conybeare, 9 H. L. Cas. 711, 734; Ex parte Williams, L. R. 2 Eq. 216, 218; In re Gold Co., L. R. 11 Ch. Div. 701, 719, 48 L. J. Ch. 281; Ex parte Briggs, L. R. 1 Eq. 483.

And see post, §§ 253, 257.

45. West End Real Estate Co. v. Claiborne, 97 Va. 734, 750, 34 S. E. 900, 906, and cases cited, and see post, § 257.

46. Stewart v. St. Louis F. S. & W. R. Co., 41 Fed. Rep. 736, 739; St. Louis F. S. & W. R. Co. v. Tiernan, 37 Kan. 606, 633, 15 Pac. 544, 560; Mason v. Carrothers, 105 Me. 392, 403, 74 Atl. 1030, 1035; Pietsch v. Milbrath, 123 Wis. 647, 658, 101 N. W. 388, 392, 102 N. W. 342, 68 L. R. A. 945, 107 Am. St. Rep. 1017.

As to charging existing stockholders with notice of what transpires at stockholders' meetings, see

If, however, the promoters are guilty of any active misrepresentations, they will not, according to the better rule, be heard to say that the party deceived might by an examination of the corporate records, or of other instruments, have ascertained the truth.47

The subscribers are not chargeable with constructive notice of the contents of recorded deeds under which the promoters acquired title to the property afterwards sold to the corporation.48

The mere reference in the prospectus to a contract is not notice to the subscribers of the matters which could be ascertained by an examination thereof,49 but it has been said that if the prospectus notifies the subscribers of a place where the contract or a copy thereof may be examined, they are chargeable with knowledge of the matters therein set forth.50

§ 113. Waiver of disclosure.

The promoter may, no doubt, legalize his transactions with the corporation by obtaining from the subscribers an express waiver

Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 1250-1252, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65.

As to charging stockholders with knowledge of their proxies, see Federal Life Ins. Co. v. Griffin, 173 Ill. App. 5, 17; Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 319, 84 Atl. 10; Lawrence's Case, L. R. 2 Ch. App. 412, 423; Virginia Land Co. v. Haupt, 90 Va. 533, 19 S. E. 168, 44 Am. St. R. 939, and see post, § 260.

47. See post, § 253.

48. Caffee v. Berkley, 141 Iowa 344, 118 N. W. 267.

49. In re Olympia, 1898, 2 Ch. Div. 153, 179-180, (aff'd, sub nom. Gluckstein v. Barnes, 1900 App. Cas. 240), citing Aaron's Reefs v. Twiss,

1896, App. Cas. 273, 287.

But see Brooker v. William H. Thompson Trust Co., 254 Mo. 125, 160-161, 162 S. W. 187, 196; Hallows v. Fernie, L. R. 3 Ch. App. 467, 477, and compare Moore v. Burke, 4 F. & F. 258, 287, and see post, § 253.

50. New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73, 111, 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; Smith v. Chadwick, L. R. 20 Ch. Div. 27, 57, 46 L. T. N. S. 702, aff'd, L. R. 9 App. Cas. 187, 5 Am. & Eng. Corp. Cas. 23. But see Re Sale Hotel & Botanical Gardens, Ltd., 77 L. T. N. S. 681, reversed, on other grounds, 78 L. T. N. S. 368.

of the disclosure of the details thereof,51 but the courts will not permit the promoter, by means of such waiver, to perpetrate a fraud upon the corporation or its subscribers. 52

§ 114. Facts that must be disclosed.

Promoters desiring to sell to the corporation property in which they have an interest are, under well settled principles of law, bound to fairly disclose such interest.53 The identity of the real

promoters should also be disclosed, and not concealed by means of dummies.54 It is not sufficient to state, in general terms, that some of the promoters are interested in the transaction, but the particular promoters that are so interested should be made known.55

Whether the precise nature and extent of the interest of the promoters must be disclosed is a question not free from doubt.56 If the promoters acquired the property which they are selling to the corporation before they became its promoters, the extent of their profits does not concern the corporation.57 The important fact is that they have an interest adverse to the corporation, and it may be sufficient for them to make known that fact without stating the extent of their interest in the transaction.58 If, however, the promoters acquired their interest in the property after they had entered upon the relation of promoters to the corporation, when it had become their duty to act for the corporation, the profits gained by reason of such interest belong primarily to the corporation and are not rendered lawful unless there be disclosed, not only the existence of the adverse interest of the promoters, but the precise nature of that interest and the extent

65, that if the fact that a commission was to be received by the promoters was disclosed, it is not material that the amount of such commission was not disclosed.

54. In re Darby, 1911, 1 K. B. 95, 101, 102, 80 L. J. K. B. Div. 180. And see Ex parte Preston, 37 L. J. Ch. N. S. 618, 19 L. T. N. S. 138. And see ante, § 87n and post, § 216. 55. Spaulding v. North Milwaukee Town Site Co., 106 Wis. 481, 493, 494, 81 N. W. 1064, 1068; New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73, 112, 119-120, 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.

56. Whether the disclosure is made, on the one hand to the directors, or on the other to the subscribers, may have some bearing on this question. Liquidators of the Imperial Mercantile Credit Assoc. v. Coleman, L. R. 6 H. L. 189, 206.

57. See § 115.

58. See Tilleny v. Wolverton, 54 Minn. 75, 55 N. W. 822; U. S. Steel Corporation v. Hodge, 64 N. J. Eq. 807, 816, 54 Atl. 1, 60 L. R. A. 742. See also Beatty v. Guggenheim Exploration Co., N. Y. Law Journal, June 25, 1913, reversed, 167 N. Y. App. Div. 864, 153 Supp. 757.