tained by the corporation, or by a minority stockholder suing in its behalf.88

§ 197. Conflict of laws.

It has been held that the law by which the validity of the promoters' transaction with the corporation is to be determined is not the law of the state of the corporate organization, nor the law of the place where the directors' meeting authorizing the transaction was held, but the law of the place where the transaction was consummated by the delivery of the deeds and the payment of the purchase price.89

As the question of promoters' liability is one of general law, the Federal courts declare the law upon their own view and are not bound by the decisions of the state courts.90

extend to corporations, and that these should pursue their rights according to the laws of the state of their origin.

It is held in Moore v. Silver Valley Mining Co., 104 N. C. 534, 545546, 10 S. E. 679, 683, that an action involving the interpretation of the corporate charter and by-laws, the regularity and sufficiency of its proceedings, and the laws of the state of its domicile, should ordinarily be brought in such state.

88. Gere v. Dorr, 114 Minn. 240, 130 N. W. 1022.

89. Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 173174, (two judges dissenting, see pp. 222, 232), 89 N. E. 193, 40 L. R. A. N. S. 314; Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 507, 71 Atl. 153.

Insurance Press v. Montauk Wire Co., 83 N. Y. App. Div. 259, 82 Supp. 104, affirmed, 178 N. Y. 623, 70 N.

E. 1100, (see opinion on later appeal, 103 N. Y. App. Div. 472, 93 Supp. 134), is not to the contrary. The court in that case held that there was no liability for unlawful promoters' profits, and that the ground of complaint, if any, depended upon a violation of the statutes of West Virginia relating to the issue of shares without full payment.

90. Old Dominion Copper, etc., Co. v. Lewisohn, 210 U. S. 206, 28 Sup. Ct. 634, 52 L. Ed. 1025; same ▼. same, 195 Fed. Rep. 637, affirmed, 202 Fed. Rep. 178, 120 C. C. A. 392, petition for writ of certiorari denied, 229 U. S. 613, 33 Sup. Ct. 772, 57 L. Ed. 1352; Bigelow V. Old Dominion Copper, etc., Co., 225 U. S. 111, 32 Sup. Ct. 641, 56 L. Ed. 1009, Am. & Eng. Ann. Cas., 1913 E. 875; Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 175, 89 N. E. 193, 40 L. R. A. N. S. 314, and cases cited.

CHAPTER XI.

OF THE PROMOTER'S LIABILITY FOR FALSE REPRESENTATIONS.

Section 198. Introductory.

199. False representations in prospectus.

200. The same subject.-Who entitled to sue thereon.

201. False certificates.

202. Indirect misrepresentations.

203. Liability to brokers.

204. Liability of promoter for representations of his agents.

205. Reliance upon false statements.

206. The same subject.-Agreement not to rely on representations.

207. Knowledge of falsity of representations.

208. Intent to deceive.

209. Innocent misrepresentation as ground for rescission.

210. Fraud by concealment.

211. The same subject.-The English Companies Act.

212. Materiality of representations.

213. Materiality of concealment of mortgage.

214. Materiality of representations as to promoter's profits.

215. Materiality of representations as to promoter's interest.
216. Materiality of representations as to identity or position of
persons selling property to corporation.

217. Materiality of representations in regard to directors.
218. Materiality of representations in regard to subscriptions.
219. The same subject.-Sham subscriptions.

220. Materiality of representations as to identity of subscribers.
221. Materiality of representations as to price paid for shares.
222. Materiality of representation that stock sold is treasury stock.
223. Misstatements as to value of shares.

224. Materiality of representations as to legal status of company

or shares.

225. Representations as to future action.

Section 226. Falsity of representations.

227. Interpretation of prospectus.

228. Interpretation of prospectus in light of particular com

plainant.

229. Interpretation of prospectus in light of its preliminary char

acter.

230. Interpretation of ambiguous statements in prospectus.

231. Interpretation of particular statements.

232. Secret profits of promoter as fraud upon subscribers.

233. Secret profits of promoter as fraud upon subsequent purchasers of shares.

234. Misrepresentations giving rise to action by corporation.

§ 198. Introductory.

A source of even more frequent litigation than the taking of unlawful promoters' profits, are misrepresentations made by the promoters upon the sale of the company's shares. Both liabilities may arise out of the same or closely related facts, in that false representations are often made with regard to, and with the purpose of concealing, the promoter's profits.1 The same considerations may determine whether the statement in question was on the one hand a sufficient disclosure of the promoter's profits and a fair statement of the facts, or, on the other, an insufficient disclosure of the promoter's profits and a misleading statement of the facts. The liabilities are, however, quite distinct. The rule against secret profits arises out of the fiduciary relation of the promoter to

1. Illustrative cases are, Cortes Co. v. Thannhauser, 45 Fed. Rep. 730; Ex-Mission Land & Water Co. v. Flash, 97 Cal. 610, 32 Pac. 600; Burbank v. Dennis, 101 Cal. 90, 35 Pac. 444; Stoney Creek Woolen Co. v. Smalley, 111 Mich. 321, 69 N. W. 722; Shawnee Commercial & Savings Bank Co. v. Miller, 24 Ohio C. C. 198; Simons v. Vulcan Oil & Min

ing Co., 61 Pa. 202, 100 Am. Dec. 628; Pittsburg Min. Co. v. Spooner, 74 Wis. 307, 42 N. W. 259, 17 Am. St. Rep. 149, 24 Am. & Eng. Corp. Cas. 1; Fountain Spring Park Co. v. Roberts, 92 Wis. 345, 66 N. W. 399, 53 Am. St. Rep. 917; Gluckstein v. Barnes, 1900 App. Cas. 240, affirming, In re Olympia, Ltd., 1898, 2 Ch. Div. 153, and see post, §§ 214, 232

the corporation, and a violation thereof is primarily an injury to the corporation. The promoter's liability for false representations is a liability for fraud and deceit, and the injury is in general an injury to the subscribers in their individual capacity.

§ 199. False representations in prospectus.

The false representations of the promoter are frequently made in a prospectus issued to procure subscribers for the company's shares. To hold any promoter liable for the statements made in such prospectus, it must be shown that it was issued by him, or with his knowledge and privity.2

The English Companies Act provides that every promoter who is a party to the preparation of the prospectus, or of the portion thereof containing the untrue statement, shall be liable to pay compensation to all persons who subscribe on the faith thereof, and

2. Wiser v. Lawler, 189 U. S. 260, 264, et seq., 47 L. Ed. 802, 23 S. C. 624.

Morgan v. Skiddy, 62 N. Y. 319; Downey v. Finucane, 205 N. Y. 251, 259, 98 N. E. 391, 40 L. R. A. N. S. 307, affirming, 146 N. Y. App. Div. 209, 130 Supp. 988; Rives v. Bartlett, 156 N. Y. App. Div. 552, 141 Supp. 561, reversed on another ground, 215 N. Y. 33, 109 N. E. 83.

Simons v. Vulcan Oil & Mining Co., 61 Pa. 202, 218-219, 100 Am. Dec. 628.

Peek v. Gurney, L. R. 6 H. L. 377, 392; Bellairs v. Tucker, L. R. 13 Q. B. D. 562, 571-572; Smith v. Chadwick, L. R. 20 Ch. Div. 27, 7071, 46 L. T. N. S. 702, affirmed, L. R. 9 App. Cas. 187, 5 Am. & Eng. Corp. Cas. 23; In re Leeds & Hanley Theatres of Varieties, 1902, 2 Ch. Div. 809, 823-824, 832; Peek v.

Derry, L. R. 37 Ch. Div. 541, 568– 569, 579, 586, reversed on another point, sub nom. Derry v. Peek, L. R. 14 App. Cas. 337; Angus v. Clifford, 1891, 2 Ch. Div. 449; Clarke v. Dickson, 6 C. B. N. S. 453; Knox v. Hayman, 67 L. T. N. S. 137; Glasier v. Rolls, L. R. 42 Ch. Div. 436; Ship v. Crosskill, L. R. 10 Eq. 73.

It is said in Rives v. Bartlett, 156 N. Y. App. Div. 552, 557-558, 141 Supp. 561, (reversed, 215 N. Y. 33, 109 N. E. 83), that "directors, who organize a corporation * knowing that attempts are being made to induce the public to subscribe to the corporation or to purchase its securities, have imposed upon them a duty that is not discharged by wilfully shutting their eyes to the acts of other officers or agents of the company as to methods used to procure money from the public."

that every director shall be responsible for the prospectus unless he proves that it was issued without his knowledge or consent, and that on becoming aware of its issue he forthwith gave reasonable public notice that it was issued without his knowledge or consent.3

§ 200. The same subject.—Who entitled to sue thereon.

A subscriber suing because of a misrepresentation contained in a prospectus, need not show that the prospectus was intended to deceive him personally. If he made his subscription in reliance upon the prospectus, he has a right of action against such persons, as with knowledge of its falsity and with intent to deceive, put the prospectus in circulation. The representations are deemed made to every person within the class intended to be influenced thereby, and no relation or privity between the parties need be shown other than that created by the wrongful and fraudulent act of issuing or circulating the false prospectus.*

The right to maintain an action because of misrepresentations in a prospectus, is ordinarily confined to the subscribers for the

3. English Companies Act of 1908, (Stat. 8 Edw. VII., Ch. 69), § 84, taken from Directors Liability Act of 1890, (Stat. 53 and 54 Vict., Ch. 64). See also Chapter 216, Ontario Revised Statutes of 1897; Drincqbier v. Wood, 1899, 1 Ch. Div. 393; Hoole v. Speak, 1904, 2 Ch. Div. 732.

4. Morgan v. Skiddy, 62 N. Y. 319, 325-326; Newbery v. Garland, 31 Barb. (N. Y.) 121, 129–131; Cazeaux v. Mali, 25 Barb. (N. Y.) 578, 583; Cross v. Sackett, 2 Bosw. (N. Y.) 617, 6 Abb. Pr. 247, 16 How. Pr. 62; Fenn v. Curtis, 23 Hun (N. Y.) 384, 390; Greene v. Mercantile Trust Co., 60 N. Y. Misc. 189, 111 Supp. 802, affirmed, 128 N. Y.

App. Div. 914, 112 Supp. 1131; Eaton, Cole & Burnham Co. v. Avery, 83 N. Y. 31, 33–34, 38 Am. St. Rep. 389, and cases cited; LehmanCharley v. Bartlett, 135 N. Y. App. Div. 674, 683-684, 120 Supp. 501, affirmed, 202 N. Y. 524, 95 N. E. 1125; Cox v. National Coal & Oil Investment Co., 61 W. Va. 291, 307308, 56 S. E. 494, 501.

Clarke v. Dickson, 6 C. B. N. S. 453; Scott v. Dixon, 29 L. J. Exch. N. S. 62; Peek v. Gurney, L. R. 6 H. L. 377, 397; Davidson v. Tulloch, 3 Macq. 783, 791, 2 L. T. N. S. 97; Jury v. Stoker, L. R. 9 Ir. 385, 397, et seq.; Gerhard v. Bates, 2 E. & B. 476.

See cases cited, 14 Am. & Eng. Encyc., (2nd ed.), 151.