the concealment of such price would, in any event, under the circumstances, have constituted no fraud upon the corporation.* The matter complained of was that the promoters, having stated to the members of the syndicate that the corporation should be capitalized at $2,500,000 and that $2,000,000 of its shares should be issued for the property, capitalized the corporation at $3,750,000, issued $3,250,000 for the properties, and retained for themselves shares of the par value of $1,250,000. The ground of complaint, if there was any, was that this $1,250,000 of additional shares should have been distributed among the members of the syndicate pro rata. The fraud, if there was any, was a fraud the members of the syndicate individually, and not upon the corporation.

upon

§ 124. Legality of promoters' profits where shares are subsequently sold by subscription.

A distinction between a transaction in which a promoter conveys his property to the corporation taking the entire share capital in payment and then proceeds to sell shares to the public, and a transaction in which a promoter, at a time when no one else has acquired an interest in the corporation, transfers his property to it taking in payment a part of its share capital and then causes additional shares to be issued by the corporation to original subscribers, was, until the recent decision of the Federal courts in the litigations arising out of the organization of the Old Dominion Copper Company, recognized by an almost unbroken line of authorities. The distinction rested upon the theory that

the acquiescence of all existing shareholders is not binding upon the corporation if the bringing in of further shareholders is contemplated. If the promoters themselves take all the shares of the corporation their participation in the transaction binds the subsequent transferees of their shares and the corporation itself, but, it was held that if the promoters take only a part of

the share capital, allowing further shares to be issued to other subscribers, the acquiescence of the promoters binds neither the future subscribers nor the corporation. The merits of this very technical distinction are discussed in a subsequent section."

§ 125. Effect of subsequent issue not contemplated at time of original transaction.

It has been held that when the promoters themselves receive in payment for their property the entire issue of shares then contemplated, a change of plan and the subsequent issue of further shares to other subscribers, does not affect the original transaction or render the promoters' profits unlawful.

The British Seamless Paper Box Co. was organized with a capital of £50,000, of which £32,000 was issued to the promoters for patent rights and cash. The transaction was closed on the 15th of April, 1875. No prospectus was issued by the company, nor did the original members invite any other persons to take shares, and there was at the time no intention that any shares should be sold to other persons. It became necessary, a year or so later, to raise further capital, and a few additional shares were issued and sold for cash. Cotton, L. J. said, that "the directors of a company formed in the ordinary way, stand in a fiduciary relation not only to those who are members at the time, but to all who may come in afterwards. But here it is an established fact that when the company was formed, it was intended to be a private company, that is, it was intended to carry it on without calling in the public, or issuing any shares except to the then existing shareholders. Therefore the doctrine that directors may not make a profit for themselves is inapplicable, because all the members knew that they intended to make a profit. It is true that some new members were subsequently taken in. If, shortly after this transaction, a prospectus had been issued and the public had been invited to come in and take shares, no court

7. See post, § 130.

would have listened to directors who said that it was not intended to take in fresh members. But this was commenced and carried on entirely as a private company, and considerable time elapsed before they asked any one to join them."

998

§ 126. Effect of unsuccessful attempt to sell shares by subscription.

The Postage Stamp Automatic Delivery Co., having gone into voluntary liquidation, the liquidator brought suit to compel the defendant directors to account for certain shares given them by the vendor in consideration of their acting as directors. No persons other than the original parties, who had full knowledge, appear to have become interested as stockholders. A prospectus was issued, but the public did not take any shares. The court held, citing In re British Seamless Paper Box Co., that the issue of a prospectus making no mention of the agreement between the vendor and the directors, showed an intention to defraud future allottees, and that the defendants would have to account for their shares, apparently holding that where the issue of shares to future subscribers was contemplated the profits were fraudulent although no outside parties ever actually came in.10 The correctness of this decision may well be questioned.

8. In re British Seamless Paper Box Co., L. R. 17 Ch. Div. 467, 479, distinguished but approved in Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 326, 74 N. E. 653, 108 Am. St. Rep. 479; same v. same, 203 Mass. 159, 186, 190-191, 89 N. E. 193, 40 L. R. A. N. S. 314, also in London Trust Co. v. Mackenzie, 62 L. J. Ch. N. S. 870, 875. Compare also, Felix Hadley & Co., Ltd., v. Hadley, 77 L. T. N. S. 131. 'Where, as here, though the

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company is formed as a private company under the statute, the intention throughout is to bring in outside cash shareholders, the situation appears to me identical in essentials with one in which the company is an ordinary public company." Omnium Electric Palaces Lim. V. Baines, 1914, 1 Ch. Div. 332, 347348, 82 L. J. Ch. N. S. 519, 527, 109 L. T. N. S. 206.

9. See note 8, supra.

10. 1892, 3 Ch. Div. 566, 576.

§ 127. Effect of subsequent sale of shares donated to the treasury by the promoters.

A question which suggests itself, and upon which the decisions throw but little light, is that arising out of the not uncommon practise of the promoters returning to the treasury to be sold for the benefit of the company, some of the shares taken in payment for their properties. The question is whether the purchasers of these shares are to be considered as purchasing indirectly from the promoters, or as original subscribers for the company's shares; that is, whether the case falls within the rule that the promoters' transaction with the corporation cannot be questioned if they themselves take the entire issue of shares, or within the rule, no longer uniformly accepted, that the promoters' profits are unlawful if concealed from subscribers who are subsequently, but as a part of the original scheme, brought into the corporation.

11

In California-Calaveras Mining Co. v. Walls,11 one, Manson, knowing that certain mining property in California could be purchased for $120,000, sought the co-operation of certain persons in Chicago in the purchase thereof, representing to these persons that he had a verbal option for the purchase of the property at $250,000. Some of the Chicago parties wanted to visit the property, but Manson protested against their doing so, stating that if the owner learned that Eastern parties were trying to purchase the property she would raise the price. The Chicago parties thereupon agreed to co-operate with Manson in the purchase of the property, and it was determined that a corporation should be formed for that purpose, and that the Chicago parties would finance the corporation by purchasing, or causing to be purchased, so much of its stock as would be necessary to place funds in the treasury of the corporation to pay certain promissory notes to be issued by it. It was agreed that the corporation should have a capital stock of $2,500,000 divided into 500,000 shares of the par value of $5.00 each; that upon its organization,