petent for any of them to purchase property for the purposes of such a company, and then sell it at an advance without a full disclosure of the facts. They must account to the company for the profit, because it legitimately is theirs. It is a familiar principle of the law of partnership, that one partner cannot buy and sell to the partnership at a profit; nor if a partnership is in contemplation merely, can he purchase with a view to a future sale, without accounting for the profit. Within the scope of the partnership business, each associate is the general agent of the others, and he cannot divest himself of that character without their knowledge and consent." § 116. The same subject.-Effect of independent board of di 71 rectors. It seems to be laid down in Old Dominion Copper, etc., Co. v. Bigelow, that the promoters selling their own property to the corporation must, unless the corporation is represented by an independent board of directors, disclose the price at which they themselves acquired the property, though they acquired the property before they became promoters. "Being the absolute owners of it, the defendant and Lewisohn (the promoters), could do with that property as they pleased. If they chose to sell it to a stranger they could make the sale at arm's length, they could ask any price they pleased, and were under no legal obligation to state what it had cost them. On the other hand, if they elected to make a sale of it to one standing to them in a fiduciary relation, they were under an obligation to make a full disclosure to the beneficiary of all the facts known to them material to the property and the purchase, or see to it that the fiduciary had adequate independent advice. That is an obligation resting upon 71. 188 Mass. 315, 322, (see also 827-328), 74 N. E. 653, 108 Am. St. Rep. 479, quoted in Mason v. Car rothers, 105 Me. 392, 74 Atl. 1030. Cf. Liquidators of the Imperial Mercantile Credit Assoc. v. Coleman, L. R. 6 H. L. 189, 206. every fiduciary who makes a sale of his own property to his beneficiary, no matter whether it is a case of trustee and cestui que trust, guardian and ward, solicitor and client, or promoter of a corporation and the corporation itself. There is no pretense that in the transaction in question the plaintiff corporation was represented by an independent board.” It is not probable that this limitation upon the rule that a promoter selling his own property to the corporation need not disclose its cost to him, will be generally followed. § 117. Misrepresentations as to cost of property. Although promoters who acquired property before they be came promoters may, under the well established rules referred to in the preceding sections, subsequently sell such property to the corporation without disclosing its cost to them, they are guilty of fraud if they misstate such cost,72 or if they falsely profess that they acted for the corporation in making the original purchase when they did in fact acquire the property at a lesser figure and are deriving a profit from the resale." 78 § 118. Ratification of promoter's profits. The Supreme Court of Massachusetts, as set forth in the first section of this chapter, stated as the third method of legalizing a transaction between the promoter and the corporation that "he (the promoter) may procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the 72. Gluckstein v. Barnes, 1900, App. Cas. 240, affirming, In re Olympia, Ltd., 1898, 2 Ch. Div. 153; Kent v. Freehold Land & Brickmaking Co., L. R. 4 Eq. 588, 17 L. T. N. S. 77, reversed on another ground, L. R. 3 Ch. App. 493. See post, §§ 162, 214, 214n, 231. 73. Burbank v. Dennis, 101 Cal. 90, 35 Pac. 444; Getty v. Devlin, 54 N. Y. 403, 70 N. Y. 504; Simons v. Vulcan Oil & Mining Co., 61 Pa. 202, 217-218, 220, 100 Am. Dec. 628; Pittsburg Mining Co. v. Spooner, 74 Wis. 307, 42 N. W. 259, 17 Am. St. Rep. 149, 24 Am. & Eng. Corp. Cas. 1; Foss v. Harbottle, 2 Hare 461, 489. completely established corporation." There can be no question that in the absence of intervening rights of creditors a transaction between the corporation and the promoter may, after the corporation is fully organized and its stock issued, be effectually ratified by the unanimous vote of the entire body of stockholders acting with full knowledge of all the facts.74 The authorities are not in accord as to whether the unanimous ratification of the stockholders is effective though obtained at a time when the further issue of original shares to other subscribers is in contemplation.75 § 119. Ratification by majority stockholders, or by board of directors. Whether a ratification of the promoter's transaction with the corporation may be effectuated by anything less than the unanimous vote of the entire body of stockholders-that is by a majority vote of the stockholders, or by the board of directorsis a question upon which the authorities render but little assist ance. 74. Federal.-Stewart v. St. Louis Ft. S. & W. R. Co., 41 Fed. Rep. 736, 738. Illinois.-Federal Life Insurance Co. v. Griffin, 173 Ill. App. 5, 19. Indiana.-Parker v. Boyle, 178 Ind. 560, 99 N. E. 986. Dominion Massachusetts.-Old New Jersey.-Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 506, 71 Atl. 153. New York.-Heckscher v. Edenborn, 131 App. Div. 253, 257, 115 Supp. 673, followed, 137 App. Div. 899, 122 Supp. 1131, reversed, 203 N. Y. 210, 96 N. E. 441. It is held in Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 317-318, 84 Atl. 10, that the ratification by the stockholders does not make lawful, shares issued to the promoters without consideration, in violation of the statute providing that nothing but money or property necessary for its business shall be considered as payment for stock. 75. See Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 196, 197, 89 N. E. 193, 40 L. R. A. N. S. 314; same v. same, 188 Mass. 315, 74 N. E. 653, 108 Am. St. Rep. 479, Cf. Old Dominion Copper, etc., Co. v. Lewisohn, 210 U. S. 206, 28 Sup. Ct. 634, 52 L. Ed. 1025, affirming, 148 Fed. Rep. 1020, 79 C. C. A. 534, 136 Fed. Rep. 915. See post, §§ 124130. It has already been stated that if the acquiescence of the subscribers is relied upon for the legalization of the promoter's transaction with the corporation, the consent of each subscriber must be shown.76 If the promoter could by a majority vote of the stockholders of the fully organized corporation obtain a complete ratification of his transaction with the corporation, he could in effect legalize his transaction by the consent of less than the whole body of the subscribers, and so nullify the rule in regard to unanimous consent. There need, therefore, be little hesitation in saying that the promoter can be completely exonerated by the stockholders, only by the unanimous ratification of the entire body. The promoter's transaction with the corporation is, as stated in a preceding section," lawful if the transaction is approved by an independent board of directors. As a body has ordinarily power to ratify what it can in the first instance authorize, it might be inferred that the transaction of the promoters with the corporation could be completely ratified and the promoter exonerated from all liability by a resolution of the board of directors. An acceptance of this doctrine, would, however, lead to the absurd result that a transaction which could not be ratified by a majority vote of the stockholders, could be ratified by the directors whom this majority elects.78 The difficulty may be resolved by a consideration of the difference between the situation at the time that the promoters offer their property to the corporation, and the situation which exists 76. See ante, § 111, et seq. 77. See ante, § 110, et seq. 78. It may be thought that the same absurdity arises when the rule is laid down that the promoters' profits are lawful if consented to at the outset by an independent board of directors, but are not made lawful by the consent of the majority of the subscribers. The answer is that the consent of the subscribers is asked at a time when they have not really assumed toward each other the relation of fellow stockholders, and when they are as yet in no position to act for each other. The consent of the directors is only effective after they are duly qualified and properly represent the corporation. when a ratification of their transaction is sought. When the promoters offer to sell to the corporation, they are in a position to bargain with it, to fix a price at which they will sell and to refuse to deal on other terms. An independent board of directors may then decide whether the proposition submitted is acceptable. If the transaction is not approved by an independent board of directors at the time, and the promoters do not seek protection by vote of the directors until after the transaction has been consummated, the corporation has an election to rescind the transaction and recover the purchase price, to retain the property and bring suit for damages, or, in some cases, to compel an accounting for secret profits.79 The promoters are in such case in no position to bargain. There is no consideration for the exoneration of the promoters, and the directors have no power to give away any rights of the corporation.80 The board of directors has power to determine for the corporation whether or not its purchase shall be rescinded,81 but any action by the board of directors attempting to surrender the right of the corporation to maintain against the promoters a suit for damages or for an accounting for profits, would, unless made as a part of a compromise, and based upon some valuable consideration, be beyond the authority of the directors and of no effect. The question of ratification by a majority of the stockholders also necessitates a consideration of the difference between the situation which exists at the time of the original transaction, and the situation which exists when a subsequent ratification is asked. Each subscriber is, when he comes into the corporation, entitled to know what he is buying and, with full knowledge of the promoters' 79. See post, chapter IX. 80. See Simons v. Vulcan Oil & Min. Co., 61 Pa. 202, 221, 100 Am. Dec. 628. Cited in Pittsburg Mining Co. v. Spooner, 74 Wis. 307, 321, 42 N. W. 259, 262, 17 Am. St. Rep. 149, 24 Am. & Eng. Corp. Cas. 1; Burbank v. Dennis, 101 Cal. 90, 101, 35 Pac. 444, 448. 81. See Lagunas Nitrate Co. v. Lagunas Syndicate, 1899, 2 Ch. Div. 392, 464. |