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out by the Supreme Court of the United States, no substantial difference between a case where shares are subsequently issued by the corporation directly to the subscribers, and a case where all the shares are first issued to the promoters and by them sold to the public. If substantial justice is to be sought "it would seem desirable to get a rule that would cover both of the almost equally possible cases of what is deemed a wrong.' Nor is there any difficulty in supporting the decision of the Supreme Court of the United States from a technical standpoint, for it applies the fundamental doctrine that a corporation remains unchanged and unaffected in its identity by changes in its membership. theory of the rights of future allottees, upon which the decisions supporting the contrary doctrine must rest, is a fiction of law which lost all substantial value as soon as the courts adopted the rule that there can be no fraud upon the corporation if the promoters themselves take the entire capital stock of the corporation, and resell shares to innocent purchasers.55 Substantial rights should not be made to turn upon mere matters of form. If it is a fraud for promoters to make a profit out of the promotion without a disclosure to the directors or stockholders, it can make but little difference whether such profit is taken immediately before or immediately after the subscriptions are obtained,56 or whether the

see ante, § 124. The decision of the Supreme Court of the United States finds support in Garretson v. Pacific Crude Oil Co., 146 Cal. 184, 79 Pac. 838, also perhaps in Stewart v. St. Louis F. S. & W. R. Co., 41 Fed. Rep. 736, and in St. Louis F. S. & W. R. Co. v. Tiernan, 37 Kan. 606, 633, 15 Pac. 544. Also perhaps in Watkins v. Mills, 114 N. Y. App. Div. 903, 100 Supp. 1148. For the facts of this case, see ante, § 127, See also In re Darby, 1911, 1 K. B. 95, 103, 80 L. J. K. B. 180, where Phillimore, J., said that he was not

sure that the fact that it was in contemplation to issue additional shares was enough to upset the transaction.

For decisions subsequent to the Old Dominion Copper Co. cases, see § 129.

54. 210 U. S. 206, 215, 28 Sup. Ct. 634, 52 L. Ed. 1025.

55. See ante, § 120, et seq.

56. Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. 219, 232233, 27 Atl. 1094, 44 Am. & Eng. Corp. Cas. 686; Pittsburg Mining Co. v. Spooner, 74 Wis. 307, 322, 42

subsequent shareholders are brought in as original subscribers or as purchasers from the promoters. The only manner in which these apparently unsubstantial distinctions can be accounted for, is that the rule against promoters' profits, while just in theory, often works a great hardship in practice. It is true that where the venture is a small one, the shareholders few, and the transaction resembles a partnership under corporate guise, the subscribers may well believe that the promoters are making no profit and seeking no compensation for their services. In the case of large flotations it is generally a matter of common knowledge, or at least of necessary surmise, that the persons engaged in the promotion expect to receive, in return for their labor and risk, a liberal reward in the shape of substantial promoters' profits. If the subscribers are not aware of the profits to be made by the promoters, it is generally because they do not trouble to inquire, or, feeling that their inquiries might not be well received, accept their shares upon the strength of the reputation of the promoters, and the success of their previous enterprises, being quite willing that the promoters should take such personal profits as they see fit. Objection is made only after the enterprise has proved unsuccessful, and the subscribers are anxious to find some means of shifting their losses to the promoters. The promoters are then called upon to make proof of a sufficient disclosure, and this may, even though the subscribers actually had ample knowledge, often be impossible. It has been said that although it is the undoubted duty of the courts to relieve those deceived by false representations, their duty is equally clear to be careful that in their anxiety to correct fraud they do not enable persons who joined with others in speculations to convert their speculations into certainties at the ex

N. W. 259, 262, 17 Am. St. Rep. 149, 24 Am. & Eng. Corp. Cas. 1; In re British Seamless Paper Box Co., L. R. 17 Ch. Div. 467, 471; In re Olympia, Ltd., 1898, 2 Ch. Div. 153, 169,

170, affirmed, sub nom. Gluckstein v. Barnes, 1900 App. Cas. 240; In re Leeds & Hanley Theatres of Varieties, 1902, 2 Ch. Div. 809, 824.

pense of those with whom they joined.57 The promoters certainly should not be permitted secretly to profit by the promotion, but one cannot but fear that the liability of the promoters rests in many cases, not so much upon the absence of knowledge on the part of the subscribers, as upon the lack of legal proof in the hands of the promoters. It is impossible to frame any rule which will work justice in every case, but the liability of the promoters under the present law, whether the decision of the Supreme Court of the United States or that of the Supreme Court of Massachusetts be followed, rests upon the form of the transaction, rather than upon its substance. It is suggested that the courts should either have stood strictly by the original rule that the secret interest of the promoter renders the transaction unlawful unless a sufficient disclosure is proved, or else have reversed the rule that the burden of proof is on the promoter, and placed upon the subscriber the burden of showing to the satisfaction of the court that he had, in fact, no knowledge or notice sufficient to put him on inquiry as to the promoters' profits; or else the entire theory of the illegality of promoters' profits should be abandoned and the court or jury be permitted to decide in each case whether it can under all the circumstances fairly be inferred that the promoters have taken unfair advantage of their fiduciary position. Any rule is preferable to one which makes questions involving, not only a legal liability, but an imputation of dishonesty, turn upon mere matters of form, and anything is better than the pretence of standing by a definite rule of law which must, in order to avoid injustice, be continually evaded by indirection. It should be noted that the fault lies not with the decisions in the Old Dominon Cop

57. Jennings v. Broughton, 5 DeG. M. & G. 126, 140; Smith v. Chadwick, L. R. 20 Ch. Div. 27, 67, 46 L. T. N. S. 702, affirmed, L. R. 9 App. Cas. 187, 5 Am. & Eng. Corp.

Cas. 23; McKeown V. BoudardPeveril Gear Co., 65 L. J. Ch. N. S. 735; Bellairs v. Tucker, L. R. 13 Q. B. D. 562, 582; Karberg's Case, 1892, 3 Ch. Div. 1, 14, 66 L. T. N. S.

per Company cases, but that the difficulty, antedating those decisions by many years, arose when the now generally recognized but wholly unsubstantial exception was made with regard to a flotation in which the entire issue of shares is taken by the promoters and by them resold to the public.

CHAPTER VIII.

OF PROMOTERS' DEFENSES TO SUITS BY THE CORPORATION.

Section 131. Introductory.

132. Waiver of disclosure.

133. Defense that shares issued to promoter had no value.

134. Defense that promoter guaranteed obligations of the cor

poration.

135. Defense that profits of promoter were invested in notes of corporation.

136. Defense that profits were returned to co-promoter.

137. Defense that promoter surrendered securities to corporation. 138. Compromise between corporation and vendor no defense to promoter.

139. Defense that judgment sought would compel promoter to pay more than his share guilty promoters would be benefited by 140. Defense that other of damages.

recovery.

141. Defense that defrauded syndicate in turn defrauded cor

poration.

142. Defense that corporation was itself guilty of fraud.

143. Defense that moneys taken by promoter were acquired by

corporation in an unlawful manner.

144. Defense that plaintiff suing as minority stockholder acquired his shares in violation of statute.

145. Defense of participation, or acquiescence, of plaintiff stockholder, or his assignor.

146. Defense that subscribers had no knowledge of promoter's subscription and were not misled thereby.

147. Reorganization of corporation as defense.

148. Defense of assignment of company's claim against promoter.
149. Defense of ulterior purpose on part of plaintiff.

150. Defense of settlement with majority stockholders.
151. Statute of limitations.

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