§ 164. Remedies when promoter's profit is taken in money. When it has been determined that the promoter is, under the circumstances of a particular case, liable to account to the corporation for the amount of the profit gained by him upon a sale of property to the corporation, there is, if the profit is taken in money, little more to be said. The promoter will be compelled to account to the corporation for the difference between the net cost of the property to him, and the price at which he sold it to the corporation, deducting the cost of carrying the property and other legitimate expenses incurred in relation thereto. Some authorities also allow the promoter the expenses of the promotion and reasonable compensation for his services.20 The propriety of allowing a promoter who takes a secret profit, compensation for his services upon the promotion is, unless it clearly appears that he acted without dishonest intent, open to very serious question. § 165. Additional remedies when promoter's profit is taken in shares. There are, if the promoter's secret profit is taken in shares, a Water Co. v. Flash, 97 Cal. 610, 636, 32 Pac. 600, 607. Connecticut.-Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 121–122, 29 Atl. 303, 25 L. R. A. 90, 42 Am. St. Rep. 159, 47 Am. & Eng. Corp. Cas. 647. Massachusetts.-Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 321, 74 N. E. 653, 108 Am. St. Rep. 479. Michigan.-Cuba Colony Co. V. Kirby, 149 Mich. 453, 457, 112 N. W. 1133, 1135, and cases cited. New Jersey.-Arnold v. Searing, 78 N. J. Eq. 146, 162-163, 78 Atl. 762, 769, and cases cited. Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 321-322, 84 Atl. 10. New York.-Continental Securities Co. v. Belmont, 206 N. Y. 7, 99 N. E. 138, 51 L. R. A. N. S. 112, Am. & Eng. Ann. Cas., 1914 A. 777; Colton Improvement Co. v. Richter, 26 Misc. 26, 32, 55 Supp. 486. Oregon.-Wills v. Nehalem Coal Co., 52 Or. 70, 81, 96 Pac. 528, 532. United Kingdom and Colonies.Gluckstein v. Barnes, 1900, App. Cas. 240, 249, 254; Bentley V. Craven, 18 Beav. 75, 78; Lydney & Wigpool Iron Ore Co. v. Bird, L. R. 33 Ch. Div. 85, 94, 24 Am. & Eng. Corp. Cas. 23, and cases cited. 20. See authorities cited, ante, § 85, and see post, § 266. number of remedies open to the corporation. If the promoter has sold the shares he may be compelled to account to the corporation for the proceeds thereof.21 If the shares are still in the hands of the promoter,22 or of any person other than an innocent 21. Federal.-Chandler v. Bacon, 30 Fed. Rep. 538, 540. Illinois.-Mississippi Lumber Co. v. Joice, 176 Ill. App. 110, 122. Maine.-Camden Land Co. V. Lewis, 101 Me. 78, 95, 63 Atl. 523, 530. Massachusetts.-Hayward v. Leeson, 176 Mass. 310, 322, 57 N, E. 656, 49 L. R. A. 725. Washington.-Mangold v. Adrian Irr. Co., 60 Wash. 286, 111 Pac. 173. United Kingdom and Colonies.Carling's Case, L. R. 1 Ch. Div. 115, 126; Pearson's Case, L. R. 5 Ch. Div. 336, 341, affirming, L. R. 4 Ch. Div. 222; Ex parte Theys, L. R. 22 Ch. Div. 122, 126. If the corporation elects to sue for the proceeds of the sale of the recover intershares, it cannot est prior to the date of such sale. Mississippi Lumber Co. v. Joice, 176 Ill. App. 110, 122–3. 22. Federal.-Davis v. Las Ovas Co., 227 U. S. 80, 33 Sup. Ct. 197, 57 L. Ed. 426, affirming, Las Ovas Co. v. Davis, 35 App. Cas. Dist. of Col. 372; Yeiser v. United States Board & Paper Co., 107 Fed. Rep. 340, 344, 349, 46 C. C. A. 567, 52 L. R. A. 724; Chandler v. Bacon, 30 Fed. Rep. 538, 540; Dunlap v. Twin City Power Co., 226 Fed. Rep. 161, C. C. A.-. Alabama.-Moore v. Warrior Coal & Land Co., 178 Ala. 234, 59 So. 219, Am. & Eng. Ann. Cas. 1915 B. 173. Maine.-Camden Land Co. V. Lewis, 101 Me. 78, 95, 63 Atl. 523, 530. Massachusetts.-Hayward v. Leeson, 176 Mass. 310, 322, 57 N. E. 656, 49 L. R. A. 725. Michigan.-Cuba Colony Co. V. Kirby, 149 Mich. 453, 112 N. W. 1133. Minnesota.-Gere V. Dorr, 114 Minn. 240, 130 N. W. 1022. Missouri.-See Vogeler v. Punch, 205 Mo. 558, 574, 103 S. W. 1001. New Jersey.-Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. 219, 27 Atl. 1094, 44 Am. & Eng. Corp. Cas. 686, cited in Arnold v. Searing, 78 N. J. Eq. 146, 162, 78 Atl. 762, 768. Oregon.-Wills v. Nehalem Coal Co., 52 Or. 70, 81, 86, 96 Pac. 528, 533, 536. Pennsylvania.-Mackey Baking Co. v. Mackey, 19 Pa. Dist. Ct. 893. Virginia.-Richlands Oil Co. V. Morriss, 108 Va. 288, 61 S. E. 762. Washington.-Mangold v. Adrian Irr. Co., 60 Wash. 286, 111 Pac. 173. United Kingdom and Colonies.Pearson's Case, L. R. 5 Ch. Div. 336, 341, affirming, L. R. 4 Ch. Div. 222; Carling's Case, L. R. 1 Ch. Div. 115, 126; Eden v. Ridsdales Railway Lamp & Lighting Co., L. R. 23 Q. B. Div. 368, 371, 372; Nant-Y-Glo & Blaina Ironworks Co. v. Grave, L. R. 12 Ch. Div. 738, 747. In Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. 219, 240, holder for value,23 the corporation may obtain their surrender or cancellation 24 unless injury to the rights of creditors would result therefrom.25 The corporation may, if it so elects, instead of proceeding against the promoter for a surrender or cancellation of his shares, or for an accounting for the proceeds of the sale thereof, sue the promoter for the damages caused to it by the unlawful taking of the shares, that is for the sum which it lost by reason of being de 27 Atl. 1094, 44 Am. & Eng. Corp. Cas. 686, a temporary injunction was granted restraining the defendants pendente lite from disposing of, or voting their shares; cited in Arnold v. Searing, 78 N. J. Eq. 146, 162, 78 Atl. 762, 768. See also Gere v. Dorr, 114 Minn. 240, 130 N. W. 1022, and Wills v. Nehalem Coal Co., 52 Or. 70, 75, 96 Pac. 528, 530. As to the defendants' damages in case such injunction is held to have been unjustified, see Joyce on Injunctions, § 195. If the shares have been disposed of, the promoter may be compelled to replace them out of other shares of the company, then in his hands. Emery v. Parrott, 107 Mass. 95, 104. It is held, in one case, that the complaint must allege that the defendant is still in possession of the shares. Brehm v. Sperry, Jones & Co., 92 Md. 378, 407, 48 Atl. 368, 374. In Kennedy Drug Co. v. Keyes, 60 Wash. 337, 111 Pac. 175, the evidence showed that the defendant had without consideration appropriated to himself more than half the stock of the corporation, and having thus obtained control, was so mismanaging the company that insolvency was imminent. The Supreme Court affirmed an order appointing a receiver. 23. Paducah Land, Coal & Iron Co. v. Mulholland, 15 Ky. Law Rep. 22, 24 S. W. 624; Mason v. Carrothers, 105 Me. 392, 74 Atl. 1030; Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 323, 84 Atl. 10. It has been said in a somewhat different connection, that mere knowledge of the fact that the promoters sold their property to the corporation at an advance, is not of itself sufficient to put a third person on notice that the promoters had fraudulently represented to the subscribers that the corporation was obtaining the property at cost Cranston V. Bank of State of Georgia, 112 Ga. 617, 37 S. E. 875. 24. It is held in Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 323, 84 Atl. 10, that dividends paid more than six years prior to the commencement of the suit cannot be recovered. 25. Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 330, 84 Atl. 10. 26 prived of the power of allotting the shares to other persons.2 The measure of such damage would in the ordinary case be the value of the shares at the time of their taking, but if the shares were taken at a time when the corporation was not yet launched into being and the shares had as yet no value, the promoter may be charged with the value of the shares at some future date,27 and he may, according to some English authorities, be held for the highest value of the shares during the period that they were held by him.2 28 Shares unlawfully taken by the promoter cannot, as already intimated, be cancelled after they have come into the hands of an innocent holder, but if the shares have been pledged as security for a loan, the corporation may pay the amount of the loan, cancel the shares, and recover from the promoter the moneys paid by it to the pledgee.29 26. Federal.-Chandler v. Bacon, 30 Fed. Rep. 538, 540; Krohn v. Williamson, 62 Fed. Rep. 869, 877, affirmed, sub nom. Williamson v. Krohn, 66 Fed. Rep. 655, 13 C. C. A. 668, 31 U. S. App. 325. Massachusetts.-Hayward v. Leeson, 176 Mass. 310, 322, 57 N. E. 656, 49 L. R. A. 725. New York.-Hutchinson v. Simpson, 92 App. Div. 382, (dissenting opinion of Hatch, J., at p. 411), 87 Supp. 369. Oregon.-Wills v. Nehalem Coal Co., 52 Or. 70, 86, 96 Pac. 528, 534, quoting from note to Pittsburg Mining Co. v. Spooner, 17 Am. St. Rep. 149. United Kingdom and Colonies.Carling's Case, L. R. 1 Ch. Div. 115, 126; Nant-Y-Glo & Blaina Ironworks Co. v. Grave, L. R. 12 Ch. Div. 738, 747-748; Eden v. Ridsdales Railway Lamp & Lighting Co., L. R. 23 Q. B. Div. 368; Pearson's Case, L. R. 5 Ch. Div. 336, 341, affirming, L. R. 4 Ch. Div. 222; Ex parte Theys, L. R. 22 Ch. Div. 122, 126; De Ruvigne's Case, L. R. 5 Ch. Div. 306; London Trust Co. v. Mackenzie, 62 L. J. Ch. N. S. 870, 877; In re Fitzroy Bessemer Steel Co., Ltd., 50 L. T. N. S. 144. Reid on Corporate Finance, § 206. 27. Hayward v. Leeson, 176 Mass. 310, 322-323, 57 N. E. 656, 49 L. R. A. 725, and cases cited, East Tennessee Land Co. v. Leeson, 183 Mass. 37, 66 N. E. 427. 28. Eden v. Ridsdales Railway Lamp & Lighting Co., L. R. 23 Q. B. Div. 368, 372; Nant-Y-Glo & Blaina Ironworks Co. v. Grave, L. R. 12 Ch. Div. 738; McKay's Case, L. R. 2 Ch. Div. 1; Hirsche v. Sims, 1894 App. Cas. 654, 667. Cf. Shaw v. Holland, 1900, 2 Ch. Div. 305. 29. Cuba Colony Co. v. Kirby, 149 Mich. 453, 459, 112 N. W. 1133, 1135 It has sometimes been attempted to hold promoters, guilty of taking unlawful profits in the shares of the company, liable for the par value of the shares so taken. This would, though the shares were taken without consideration, not be justifiable, and the attempt has generally failed,30 unless the value of the shares is established at par by the allotment thereof at that figure, or by some other circumstance.31 The promoter may, in case of the insolvency of the corporation, be held liable for the face value of shares issued to him without consideration,32 but that is another 30. St. Louis Ft. S. & W. R. Co. v. Tiernan, 37 Kan, 606, 635, 15 Pac. 544, 560; Arnold v. Searing, 78 N. J. Eq. 146, 163, 78 Atl. 762, 769; Carling's Case, L. R. 1 Ch. Div. 115, 126-127; McKay's Case, L. R. 2 Ch. Div. 1, 6, 8, but see Tooker v. National Sugar Refining Co., 80 N. J. Eq. 305, 327, et seq., 84 Atl. 10. In Bland's Case, 1893, 2 Ch. Div. 612, the question of the value at which the shares should be charged to the promoter does not seem to have been raised. It is possible that the shares were actually worth par, or that some were subscribed for at that price. 31. Wills v. Nehalem Coal Co., 52 Or. 70, 78, 96 Pac. 528, 536; First Avenue Land Co. v. Hildebrand, 103 Wis. 530, 536-537, 79 N. W. 753; Jenkins v. Bradley, 104 Wis. 540, 80 N. W. 1025. McKay's Case, L. R. 2 Ch. Div. 1, 6, 8; Phosphate Sewage Co. v. Hartmont, L. R. 5 Ch. Div. 394, 442, 447, 46 L. J. Ch. 61; Pearson's Case, L. R. 5 Ch. Div. 336, 341, affirming, L. R. 4 Ch. Div. 222; In re London & South Western Canal, Ltd., 1911, 1 Ch. Div. 346, 80 L. J. Ch. N. S. 234. It has been said that as a matter of administrative assumption, it will be taken for granted, in the absence of all evidence, that the value of the stock, should the corporation be doing business, is par. Chamberlayne on The Modern Law of Evidence, § 2175e. The value of the shares is generally taken at the price at which the allotment is made, (see cases cited under notes 26 and 27, supra). but the company has sometimes been allowed the highest value at any time while the shares were held by the promoter. (See cases cited under note 28, supra). 32. Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 503, 71 Atl. 153; See v. Heppenheimer, 69 N. J. Eq. 36, 73, 78, 61 Atl. 843; same case on demurrer, 55 N. J. Eq. 240, 36 Atl. 966, affirmed, sub nom. Naumberg v. See, 56 N. J. Eq. 453, 41 Atl. 1116; Arnold v. Searing, 78 N. J. Eq. 146, 163, 78 Atl. 762, 769; McAllister V. American Hospital Ass'n, 62 Or. 530, 125 Pac. 286; In re Hess Manufacturing Co., 23 Can. S. C. 644, 659-660. |