no one to complain, for all the original subscribers are parties to, and have full knowledge of, the transaction. All subsequent holders receive their shares directly or indirectly from the promoters, stand in their shoes, and are bound by their acquiescence.90 It is also said that the consent of the holders of the entire capital stock binds the corporation.91 The theory that the transaction amounts to a mere change in the form of property is not always a satisfactory explanation of the rule that the corporation cannot complain of the promoters' profits if all the shares are first issued to the promoters and by them resold to the public. If different properties were conveyed New York.-Seymour v. Spring Forest Cemetery Association, 144 N. Y. 333, 340, 39 N. E. 365, 26 L. R. A. 859; Barr v. N. Y. L. E. & W. R. R. Co., 125 N. Y. 263, 272–273, 26 N. E. 145, 34 St. Rep. 743; Parsons v. Hayes, 50 N. Y. Super. 29, 14 Abb. N. C. 419, 434. United Kingdom and Colonies.In re Ambrose Lake Tin & Copper Mining Co., L. R. 14 Ch. Div. 390, 395, 399; Salomon v. Salomon, 1897, App. Cas. 22, 33 57, 75 L. T. N. S. 426, reversing, Broderip v. Salomon, 1895, 2 Ch. Div. 323; In re British Seamless Paper Box Co., L. R. 17 Ch. Div. 467, 477-478; Attorney General for Canada v. Standard Trust Co. of N. Y., 1911, App. Cas. 498, 504. 90. Mason v. Carrothers, 105 Me. 392, 399, 405-407, 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. Parsons v. Hayes, 50 N. Y. Super. 29, 39-40, 14 Abb. N. C. 419, 433435; Langdon v. Fogg, 14 Abb. N. Copper, etc., Co. v. Bigelow, 188 New Jersey.-Arnold v. Searing. 73 N. J. Eq. 262, 265, 67 Atl. 831; Breslin v. Fries-Breslin Co., 70 N. J. Law 274, 281-282, 58 Atl. 313, 316. New York.-Parsons v. Hayes, 50 N. Y. Super. 29, 40, 14 Abb. N. C. 419, 434; Barr v. N. Y. L. E. & W. R. R. Co., 125 N. Y. 263, 273, 26 N. E. 145, 34 St. Rep. 743. Pennsylvania.-Penn. Tack Works v. Sowers, 2 Walk. 416. United Kingdom and Colonies.Salomon V. Salomon, 1897, App. Cas. 22, 33, 36-37, 57, 75 L. T. N. S. 426, reversing, Broderip v. Salomon, 1895, 2 Ch. Div. 323. to the corporation by each of several promoters, each promoter taking an agreed portion of the shares in payment, or if one of the promoters received his shares for services, or for cash, or without consideration, or if the promoters for any reason agreed that the shares of the company were not to be issued to them in the exact proportion of their respective interests in the properties conveyed, there would be something more than a mere change in the form of the investment, but no cause of complaint would result to the corporation provided that the entire share capital were divided among the promoters.92 It is best to base the rule that there is no fraud upon the corporation where the promoters themselves take the entire share capital, upon the knowledge and acquiescence of all the subscribers to the shares. It may also be said that where the promoters are themselves the sole subscribers there is no fiduciary relation.93 The rule that there is no cause of complaint in the corporation if the promoters buy property and resell it to the corporation at a profit, where the promoters themselves take the entire issue of stock and then sell the shares to innocent purchasers, while not difficult to sustain from a theoretical standpoint, rests upon no substantial practical ground of distinction from the rule that the promoters cannot lawfully take a profit from their dealings with the corporation without a full disclosure to all subsequent subscribers for the corporate shares. The rule that the profit is lawful in the one case but unlawful in the other, makes the legal liability, as well as the honesty of the promoters, depend upon the form of the transaction rather than its substance, and has led the courts into a hopeless labyrinth of confusion.94 92. See Brooker v. William H. Thompson Trust Co., 254 Mo. 125, 162 S. W. 187. 93. Tompkins v. Sperry, Jones & Co., 96 Md. 560, 583, 54 Atl. 254, 258; Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 398, 87 Supp. 369; Blum v. Whitney, 185 N. Y. 232, 242, 77 N. E. 1159, reargument denied, 185 N. Y. 620, 78 N. E. 1099. 94. For the views of the author, see post, § 130. § 122. The same subject.-Dummy stockholders. The rule that the promoters cannot be liable because of their transactions with the corporation if the promoters themselves comprise all the subscribers or if all the subscribers are fully cognizant of the facts, has obviously no application if there is a single bona fide shareholder of the company who is neither a party to the transaction nor chargeable with knowledge thereof. A failure to disclose the transaction to nominal stockholders who hold their shares as dummies for the promoters, or for others fully aware of the facts, is of no moment.95 § 123. The same subject.-Effect of permoters' contract to sell shares. A question of some interest, but one which there is little difficulty in deciding on principle, arises in regard to the effect upon the transaction, of the circumstance that the vendor promoters had, before transferring their property to the corporation and receiving its shares in payment, already formed a syndicate to purchase the shares, or entered into contracts for the sale thereof to innocent outside parties. The actual buyers and sellers of the property are in such case not the same. There is not an assent of all the stockholders and a secret profit or interest of the promoters constitutes a fraud upon the corporation.96 95. M'Cracken v. Robison, 57 Fed. Rep. 375, 377, 6 C. C. A. 400, 14 U. S. App. 602; Old Dominion Copper, etc., Co. v. Lewisohn, 136 Fed. Rep. 915, 148 Fed. Rep. 1020, 79 C. C. A. 534, 210 U. S. 206, 28 Sup. Ct. 634, 52 L. Ed. 1025; Stratton's Independence, Ltd., v. Dines, 135 Fed. Rep. 449, 68 C. C. A. 161, affirming, 126 Fed. Rep. 968, petition for writ of certiorari denied, 197 U. S. 623, 25 Sup. Ct. 800, 49 L. Ed. 911. Mason v. Carrothers, 105 Me. 392, 399, 74 Atl. 1030, 1033; Camden Land Co. v. Lewis, 101 Me. 78, 88, 63 Atl. 523, 527. Schlesinger v. Fisk, 60 N. Y. Misc. 442, 113 Supp. 578. In re Ambrose Lake Tin & Copper Mining Co., L. R. 14 Ch. Div. 390, 399. 96. There is little authority on this question. In addition to the cases discussed in the text, see California-Calaveras Mining Co. V. Walls, Cal., 149 Pac. 595, the salient facts of which are set forth in § 127, infra. The court said at In Arnold v. Searing,97 the defendants, having procured options to purchase the entire capital stock of the Passaic Rolling Mill Company at a cost of $1,400,000, became promoters of the Passaic Steel Company, to which they sold the assets of the Rolling Mill Company at $1,900,000. The money which was used to pay for the stock of the Rolling Mill Company was raised by means of a syndicate, which subscribed the sum of $1,900,000, the members of the syndicate ultimately receiving the shares of the new company for the money so subscribed. The court said, "The principle that a corporation cannot complain of a transaction to page 602 that the stock, while nominally issued to the promoter, was in reality acquired by him to a large extent for the benefit of his associates as intended stockholders. The court seems to lay greater stress upon the fact that some of the stock issued to the promoter was to be returned to the corporation as treasury stock to be sold to future stockholders, than upon the fact that a large part of the stock had, in practical effect, already been sold to the innocent associates of the promoter. See also Brewster v. Hatch, 122 N. Y. 349, 25 N. E. 505, 33 St. Rep. 527, where the point under discussion was not raised, and the plaintiffs elected on the trial to recover their personal damages instead of pressing their suit on behalf of the corporation. See also Davis v. Las Ovas Co., 227 U. S. 80, 33 Sup. Ct. 197, 57 L. Ed. 426. See also Bigelow v. Old Dominion Copper Mining, etc., Co., 74 N. J. Eq. 457, 502, 71 Atl. 153, which cannot, however, be presumed to add anything to what was decided in Arnold v. Searing (discussed in the text) which it cites. Fred Macey Co. v. Macey, 143 Mich. 138, 152-153, 106 N. W. 722, 727, 5 L. R. A. N. S. 1036, may have some bearing on the question, but in that case the purchasers had reason to believe that they were obtaining their shares by subscription directly from the company. Hitchcock v. Hustace, 14 Hawaii 232, may be authority for the rule that the promoters stand in a fiduciary relation if they have before the consummation of the transaction contracted to sell some of their shares. In Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 87 Supp. 369, there was, as pointed out by the court nothing to indicate that the agreement for the sale of shares had been signed by any of the parties before the contract for the transfer of the malting plants and the issue of the entire capital in payment therefor, was made. (See opinion, pp. 396-397). 97. 73 N. J. Eq. 262, 265-266, 67 Atl. 831. See also Arnold v. Searing, 78 N. J. Eq. 146, 159, 78 Atl. 762, 767. which all of its stockholders assent, necessarily embodies the idea. that the assent is upon the part of the real parties in interest. One who in fact, though not in form, occupies the position of a non-assenting stockholder should not on any theory of unanimous consent be barred the assertion of his rights as such. The real relation of the complainants to the new corporation at the time of the merger is, in my judgment, dependent upon an accurate conception of the syndicate agreement already briefly referred to. If that agreement was, in effect, a mere engagement upon the part of the defendants to sell to the syndicate members certain stock of a proposed corporation to be capitalized in a defined manner, any injuries sustained by the syndicate members by reason of misrepresentations upon the part of the defendants touching the cost or value of the assets which the proposed corporation was to own, might well be urged as injuries purely personal to the persons to whom the false representations were made, as distinguished from injuries to the collective rights of stockholders, and that such false representations could not be made the basis of a suit of this nature. But the syndicate transaction, as defined by the bill, embodied other essential elements. The money supplied by the syndicate contributors was not money for the purchase of stock from defendants, but was the money with which the assets of the old company were to be acquired by the new. It was the money which was, in effect, to form the capital of the new company with which it was to acquire the assets of the old. Defendants were not selling to the syndicate members anything which they owned or were to own. The so-called syndicate were merely an aggregation of persons whom defendants induced to supply these funds for the purpose named. The 'syndicate shares' referred to by the bill, as sold by defendants to the several syndicate members, simply represented the proportionate parts which the several syndicate members were to own in the aggregate amount of stock and bonds of the new company, capitalized on the basis proposed, which was to go to the syndicate mem |