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152. Laches.

153. Corporation not chargeable with laches until after knowledge.
154. What is unreasonable delay.

155. Persons whose knowledge may be charged to corporation.
156. Defense of laches as depending upon nature of relief asked.
157. Delay as defense to action at law upon a rescission.
158. Effect of judgment for, or against, co-promoter.
159. Defense of bankruptcy.

§ 131. Introductory.

Promoters sued because of their secret profits, or frauds upon the corporation, finding no satisfactory defense to the company's suit, often grasp in desperation at defenses that are palpably untenable. Any defense that has once been attempted may well be tried again, and it is thought useful, in this chapter, not only to discuss such defenses as have been sustained, and such as are fairly debatable, but to refer briefly to any claim of defense that has been deemed worthy of mention by a court.1

§ 132. Waiver of disclosure.

An express waiver by the subscribers of a disclosure of the facts is, if fairly obtained, a complete answer to a complaint that the promoters derived a secret profit from the promotion, or unlawfully concealed their personal interest in a transaction with the corporation.2 Where, however, the waiver clause is inserted in a prospectus, subscription contract or other instrument, as a part of the machinery for fraud, it affords no protection to those who contrived it.3

1. For a note on various defenses of promoters, see Lomita Land & Water Co v. Robinson, 18 L. R. A. N. S. 1132-1134.

See also §§ 100, 102, 113, 180, 184, 185, 245, 255, 258.

2. Heckscher v. Edenborn, 131 N. Y. App. Div. 253, 257, 264, 115

Supp. 673, followed, 137 N. Y. App. Div. 899, 122 Supp. 1131, reversed, 203 N. Y. 210, 96 N. E. 441, and cases cited in following note, and see ante, § 113, and post, 206.

3. Macleay v. Tait, 1906 App. Cas. 24, 27, 34, 75 L. J. Ch. N. S. 90; Pearson & Son, Ltd., v. Dublin Cor

In Bland's Case, Poole and Binns were the lessees of one quarry, the owners of another, and had obtained the right to a lease of a third known as Stone Dykes. Poole and Binns proposed to organize a company to work the three quarries. They called in one Ashworth and the appellant Bland to assist them. The lease of Stone Dykes was thereupon taken in the name of these four persons. An agreement was entered into between the parties mentioned on the one part, and a trustee for the intended company on the other, whereby it was agreed to sell the three quarries, or the vendors' interest therein, to the company for the sum of £6,600-payable part in cash and part in shares-to be divided among the four vendors in specified proportions. The articles of association named Ashworth and Bland as directors, referred to the agreement of sale, and provided that the same should not be "impeached on the ground that the directors of the company or any of them are interested therein as vendors or otherwise, or that they are the promoters of the company, nor shall they be accountable for the benefits secured to them, or which they or any of them may obtain under such agreement, and every member shall be deemed to have had notice of the terms of such agreement and to approve and sanction the same." The court held that the agreement was nothing but a scheme to enable Bland and Ashworth to obtain shares for their services in getting up the company, that the articles of agreement did not protect the transaction, as the company, while it knew that Bland and Ashworth were among the lessees of Stone Dykes, did not know that making them lessees was merely machinery to obtain for them payment for their services.

§ 133. Defense that shares issued to promoter had no value. It has been held that if the promoters issue to themselves, with

poration, 1907 App. Cas. 351, 365, and cases cited; Greenwood v. Leather Shod Wheel Co., 1900, 1 Ch.

Div. 421. And see ante, § 113, and post, § 206.

4. 1893, 2 Ch. Div. 612.

out consideration, shares of the company's stock, it is no defense to an action brought against them by the company for the cancellation of these shares and for an accounting, that the company at the time of the issue of the shares had as yet acquired no assets, and that the shares were, therefore, at that time of no value; for, it is said, the shares represent a right and interest in the management and profits of the corporation, as well as in its assets. If the promoters have unlawfully obtained the shares of the corporation, the fact that they gained nothing by the transaction is immaterial.

§ 134. Defense that the promoter guaranteed obligations of the corporation.

If the promoters are guilty of taking unlawful profits, the fact that they have guaranteed the notes or contract obligations of the company and devoted their time to the company's business, does not excuse them from liability. In Hinkley v. Sac Oil Pipe Line Co., the court, decided that 185,000 shares issued to the promoters had been issued gratuitously and under such circumstances as to constitute a fraud upon the corporation. The promoters had guaranteed the company's notes, had mutually agreed to carry out the proposed enterprise, and, after the company had been organized, devoted their time and expended their money for its benefit. The court held that these circumstances did not relieve the promoters from liability for the shares taken by them, as the notes were to be paid by the company in the first instance, and neither the promoters' guarantee, nor any other of the matters mentioned, constituted payment for the shares that they had taken.

5. Hughes V. Cadena DeCobre Mining Co., 13 Ariz. 52, 108 Pac. 231. And see post, §§ 165, 245.

6. Torrey v. Toledo Portland Ce

ment Co., 158 Mich. 348, 353, 122 N. W. 614.

7. 132 Iowa 396, 107 N. W. 629, 119 Am. St. R. 564.

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

It has been held that a promoter who, pursuant to an understanding with the directors, invests in the debenture bonds of the corporation the promotion moneys unlawfully paid to him, is not to be treated as having repaid these moneys, and is not under the English Companies Act entitled to a set-off against the claim of the liquidator.8

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

It is no defense to an action by the corporation for the recovery of an unlawful profit received by a promoter, that such promoter had theretofore returned the amount of his profit to his fellow promoter from whom he received it. In Lomita Land & Water Co. v. Robinson, Freeman, one of the promoters, received upon the promotion an unlawful profit amounting to $6500. Freeman retained $2600 for himself and paid $1300 each, to three of his fellow promoters. Cline, one of these three, when he learned of the subscribers' objection, returned his share of the profit to Freeman. The court said that while this fact should, in justice to Cline, be noted, it did not affect his liability to the company.

§ 137. Defense that promoter surrendered securities to the corporation.

In Arnold v. Searing,10 the defendant promoters had taken a large profit in the bonds and shares of the company, under circumstances which, the court held, rendered the transaction unlawful. Many months after the transaction had been completed the

8. In re Anglo-French Co-operative Society, L. R. 21 Ch. Div. 492. 9. 154 Cal. 36, 44-45, 97 Pac. 10, 18 L. R. A. N. S. 1106, 1122–1123.

10. 78 N. J. Eq. 146, 164, 78 Atl.

762, 769. No allowance for the shares surrendered by him could have been asked by the promoter as he had not been charged with the value thereof. See post, § 165.

company became involved in financial difficulties, and one of the promoters, together with other stockholders and bondholders, in order to save it from insolvency, surrendered to it a large amount of stocks and bonds. It was claimed on behalf of this promoter, who was held liable for the bonds received by him, that he should on any accounting to which he might be subjected, be credited with the amount of the bonds which he had so surrendered. The court held that the promoter was not entitled to credit for the bonds surrendered by him; that he should be called upon to account for the bonds which he had received as of the time that he received them; that if he afterwards saw fit to surrender the bonds or to employ them in some other manner for the advantage of the sinking company, he could not have credit therefor without the consent of the parties interested; that it was not claimed that the company had, at the time that the bonds were surrendered to it, released him from liability or accepted the bonds on account of his liability or done anything other than accept the bonds as a gift, and that there could be no set-off either legal or equitable.

§ 138. Compromise between corporation and vendor no defense to promoter.

If the claim against the promoter arises out of the acceptance by him of a commission from one selling property to the corporation, the fact that the corporation upon learning of such commission brought suit against the vendor for the rescission of its purchase, and received a large sum of money upon the settlement of such suit, is no defense to an action brought by the corporation against the promoter to recover the commission received by him.

In Bagnall v. Carlton,11 the plaintiff corporation, John Bagnall & Sons, Ltd., had purchased from the Estate of James Bagnall certain collieries and iron works at a price of £290,370. It was

11. L. R. 6 Ch. Div. 371, 399-400, 404.

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