manner interested in the enterprise. The agreements may determine, not only the general plan under which the corporation is to be organized, but the property to be acquired by it, the price, terms and conditions of its purchase, the nature of the business to be carried on, the manner in which it is to be conducted, the officers and managers by whom it is to be controlled, and the distribution to be made of the share capital. Questions as to the validity, interpretation and performance of such agreements necessarily arise. Agreements of this character are, of course, governed by the rules of law applicable to contracts generally. A few questions which have peculiar application to contracts for the promotion of corporations must, however, be briefly considered.1

§ 21. Validity of agreements to organize corporation to purchase specific property.

It has sometimes been urged that an agreement to promote a corporation which shall purchase some particular property, upon stated terms, is invalid as interfering with the free exercise of the judgment of the directors of the fully organized company. Agreements of this character are, however, while not binding upon

1. In re Worthington, 1914, 2 K. B. 299, 83 L. J. K. B. 885, 110 L. T. N. S. 599, one Worthington had made an agreement with Pathé Frères by which he undertook within seven days from the date thereof (November 30th, 1912) to organize an English corporation for the exclusive sale in the United Kingdom of the cinematograph machines and films of Pathé Frères, such company to have a capital of £105,000. consisting of 100,000 ordinary shares of £1. each and 100,000 participation shares of 1s. each. Worthington further undertook to procure subscriptions for 25,000 ordinary

shares at par within ten days from the date of the agreement, for a further 25,000 shares before March 31st, 1913, and for a further 45,000 shares on or before December 31st, 1913. Worthington died in February, 1913, and Pathés Frères filed a claim against his estate for damages suffered by reason of the failure of Worthington, his executors and administrators, to perform his contract. It was held that Worthington's contract was not of such a personal nature as to be terminated by his death, and that Pathé Frères were entitled to recover damages from his estate.

3

the corporation,2 held to be valid as between the parties, and enforceable against them. It has been said that such an agreement" is to be construed as relating to the formation of a corporation upon a lawful and honest basis, and it will not be assumed as matter of law that it was within the intention of the parties to organize a corporation, and have its stock issued in exchange for the property and rights of the plaintiff unless the directors or stockholders of the corporation should approve and ratify, after inquiry, the scheme as detailed in the contract." 4

It is perhaps difficult seriously to believe that parties who have entered into a formal agreement to organize a corporation to take over certain specified properties at an agreed price, actually intend that the matter of the consummation of their plan is to be left to the untrammelled discretion of the directors of the fully organized company. The promoters in almost every case in fact intend to take no chances with their board of directors, and to see to it that the personnel of the board shall be such that no repudiation of the preliminary contract need be feared. It must be conceded that agreements of this character generally do, in effect, fetter in advance the judgment of the directors, and, from a theoretical point of view, their validity might well be questioned.

Few corporations, however, are, or could be, organized without some preliminary understanding as to the property to be acquired, and the price and terms and conditions of the purchase, and where the transaction is an honest one, and there is no intention to defraud the subscribers, such agreements are properly held valid and enforceable between the parties.

§ 22. Unenforceable agreements.

A contract for the organization of a corporation is void and

2. Stowe v. Flagg, 72 Ill. 397; and see post, §§ 46, et seq.

3. King v. Barnes, 109 N. Y. 267, 16 N. E. 332; Lorillard v. Clyde, 86 N. Y. 384; Electric Fire Proofing

Co. v. Smith, 113 N. Y. App. Div. 615, 99 N. Y. Supp. 37; Marie v. Garrison, 83 N. Y. 14.

4. Electric Fire Proofing Co. v. Smith, 113 N. Y. App. Div. 615, 623, 99 N. Y. Supp. 37.

unenforceable if the purpose of the parties is, or the successful carrying out of their plan would necessarily result in, the perpetration of a fraud upon future subscribers or upon the public in general.5

The agreement is likewise void if it provides for the issue of shares in violation of the statute of the domicile of the contemplated corporation. If the promoter's agreement is in violation of the statutes of the state where one would naturally expect the cor

poration to be organized, the courts will not, in order to uphold the agreement, assume that the company was intended to be organized under the laws of some other state where the scheme set forth in the agreement would be found lawful. If a contract for the promotion of a corporation, valid when made, is rendered invalid by a statute enacted pending the consummation of the agreement, the parties may, and should, refuse to perform, and do not subject themselves to any liability by such refusal.8

It has been held that a contract for the organization of a corporation, embracing a provision for the conveyance of real property, is within the statute of frauds, and unenforceable unless in writing.9

§ 23. Validity of agreements for employment.

Of importance fully equal to the acquisition of the necessary properties, is the assurance of efficient management for the intended company. Agreements for the promotion of corporations therefore frequently embrace definite contracts for the employment of managers and other employees. The question of the validity of such contracts bears a close analogy to that of the validity of contracts for the purchase of property, and like objections have been made thereto.

7. Altenberg v. Grant, 85 Fed. Rep. 345, 29 C. C. A. 185, 54 U. S. App. 568. See also Garrett V. Kansas City Coal Mining Co., 113 Mo. 330, 20 S. W. 965, 35 Am. St. Rep. 713.

8. See Knox v. Childersburg Land Co., 86 Ala. 180, 5 So. 578.

9. McLennan V. Boutell, 117 Mich. 544, 76 N. W. 75. And see Rogers v. Penobscot Mining Co., 154 Fed. Rep. 606, 612, 83 C. C. A. 380. Cf. Marie v. Garrison, 13 Abb. N. C. (N. Y.) 210.

An oral agreement of the promoter that he and the corporation will furnish the vendor with moneys to perfect his title to the lands to be sold to the corporation, may be an original promise on the part of the promoter, and is not necessarily a promise to answer for the debt of the corporation and, as such, within the statute of frauds. The promoter's interest in the success of the scheme may furnish a sufficient consideration. Maxey v. Rideout, 173 Fed. Rep. 172.

In Magill v. Rendigs,1o the defendants argued that an agreement of a promoter that the corporation to be organized by him should employ the plaintiff, was contrary to public policy and void, and cases were cited holding that the personal engagement of a director that another should be employed by his corporation is unenforceable. These cases the court distinguished on the ground that a director occupies a position of trust to which his obligations under the contract might be antagonistic, saying that this was not so of promoters. Counsel argued that the defendants were to be stockholders or directors. The court answered that this was not necessarily so,-that while promoters frequently became directors and stockholders of the corporation after its organization, they in a great many instances become neither one nor the other, and that there is no objection in law to one who is not acting in a trust capacity agreeing with another to secure him employment with a third person.

There is no occasion for quarreling with the actual decision of this case, but the reasoning is unsatisfactory. It has been repeatedly held that a promoter, while he has in theory of law no power to act for, or obligate, the company he promotes, stands, nevertheless, by reason of his effective influence and control, in a fiduciary relation to it.11 Agreements of the character under discussion in Magill v. Rendigs should be sustained on the ground that it would often be impossible to organize a corporation if its proper management were not first assured, and that while such agreements are open to the theoretical objection that they pledge in advance the action of the directors, the recognition of their

10. 12 Ohio Dec. N. P. 558. See also Bracher v. Hat-Sweat. M'f'g Co., 49 Fed. Rep. 921. Cf. Marston v. Singapore Rattan Co., 163 Mass. 296, 39 N. E. 1113.

An agreement of one of the promoters to devote his whole time and attention to the business of the

corporation, no time being specified is, in New York, a mere hiring at will which either party may terminate at any time. Watson v. Gugino, 204 N. Y. 535, 98 N. E. 18, 39 L. R. A. N. S 1090, Am. & Eng. Ann. Cas., 1913 D. 215.

11. See ante, § 14.