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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.
§ 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. Altenbergv. 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, 10 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.
5. Singapo E. 1113.
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.
An agreement of one of the promoters to devote his whole time and attention to the business of the
validity is a matter of practical necessity. It should be noted that the objection, that contracts of the nature discussed in this and the preceding sections are contrary to public policy and invalid because they assume to promise in advance the action of the directors, could with equal force be made to any contract which the promoters assume to make for the intended company. Such contracts, while of no binding effect upon the corporation, have been repeatedly held to be enforceable against the individual promoters.12 The difference between a promise of corporate action made by a promoter and a similar agreement made by a director, is that the preliminary agreement of the promoter is often a matter of necessity, while in the case of an existing corporation the board of directors can and should exercise its judgment in the first instance, and there is no necessity or excuse for, and a very practical objection to, an individual director personally guaranteeing in advance the favorable action of his board.
§ 24. Invalid agreements for employment.
Agreements for employment intending to leave the employee free from the control of the directors of the projected corporation, and not subject to discharge for proper cause, are void and unenforceable.18
In Flaherty v. Cary,14 the plaintiff sued upon an agreement with the defendants under which the latter agreed to organize a mortgage insurance company which should employ the plaintiff as sole general agent, and bound themselves not to allow any person to become a stockholder, trustee, director or incorporator of the company, who did not agree that the plaintiff should be made such sole general agent. The Appellate Division said that the contract was void as against public policy. .“ It was an attempt on the part of the plaintiff to use the corporation laws for his special benefit and advantage. The law requires that subscriptions to the original issue of capital stock shall be paid for in money or property, and the directors are authorized to open subscription books and receive subscriptions for such stock (Stock Corp. Law (Laws of 1890, chap. 564], Sec. 41, as amd. by Laws of 1892, chap. 688), but plaintiff, by his agreement, seeks to engraft additional conditions. The agreement contemplated, precluding any person from becoming a stockholder who would not agree in advance, in addition to paying cash for his stock, that plaintiff should be employed during the entire corporate existence subject to the termination of the contract on six months' notice, and that he should receive for his services nearly one-third of the gross receipts of the company, not only while he continued in its employ, but a like percentage thereafter of the premiums on policies then in force and on policies in renewal thereof. He was a comparative stranger in New York, having come here from Canada within two years. The directors were to have no option
12. See post, $ 77.
13. See Hampton v. Buchanan, 51 Wash. 155, 98 Pac. 374.
14. 62 N. Y. App. Div. 116, 70 Supp. 951, affirmed without opinion, 174 N. Y. 550, 67 N. E. 1082.
services might be of no value to the corporation. He was to have exclusive charge of soliciting and securing business for the company. It is difficult to see how the directors could perform their statutory duty of managing and controlling the affairs of the corporation in the interests of the stockholders, its policy holders and other creditors, if they were to be thus limited and restricted by this contract.” 15
The actual decision of this case was no doubt correct. The public at large has, however, no inherent right to subscribe for the shares of any company, and the promoters may undoubtedly lawfully agree among themselves that only such persons shall be
15. The court cites Fisher V. Bush, 35 Hun (N. Y.) 641; Brown v. Britton, 41 N. Y. App. Div. 57, 58 Supp. 353; Dickson v. Kittson, 75 Minn. 168, 77 N. W. 820; Jackson V. Ex'rs. of McLean, 100
Mo. 130, 13 S. W. 393; West v. Camden, 135 U. S. 507; 10 S. C. 838, 34 L. Ed. 254; Fennessy v. Ross, 5 N. Y. App. Div. 342, 39 Supp. 323; Cook on Corporations (4th ed.), $ 622.
allowed to come in as may accord with their views as to the conduct of the business of, and the persons to be employed by, the company. Having that power, there is no reason why they may not agree with an intended employee that only such stockholders shall be admitted as will consent to his employment upon the agreed terms. The promoters take the risk of being able to secure subscribers upon that basis.
§ 25. Validity of agreements for election of officers.
Agreements that certain persons shall hold office in the company raise a somewhat different question, and their validity may well depend upon the period of time over which the tenure of the office is to extend. If the agreement embraces only the period for which officers are elected, and pledges only the action of the organization meeting of the directors, the validity of the agreement should, it seems, be controlled by the same considerations which govern the questions discussed in the preceding sections.
The validity of an agreement for a more lengthy retention of office, pledging the action of both the organization and subsequent meetings of the directors, is open to very grave doubt. Such an agreement was sustained in Kantzler v. Bensinger, 16 largely because all of the stockholders were parties thereto. In the absence of that circumstance an agreement attempting to promise permanent tenure of office would probably be invalid and unenforceable even between the parties.17
16. 214 Ill. 589, 73 N. E. 874, reversing, Bensinger v. Kantzler, 112 Ill. App. 293. To the same effect is Drucklieb v. Sam H. Harris, 209 N. Y, 211, 102 N. E. 599.
Such agreements are binding only on the parties, and not on the corporation. Drucklieb v. Sam H. Harris, 209 N. Y. 211, 102 N. E. 599.
As to whether the corporation, or its receiver, can claim the benefit of
an agreement between the promoters, to subordinate the payment of their salaries to the payment of certain specified dividends, see Mills v. Hendershot, 70 N. J. Eq. 258, 62 Atl. 542.
17. West v. Camden, 135 U. S. 507, 10 Sup. Ct. 838, 34 L, Ed. 254.
Cases involving the validity of agreements to elect certain officers, entered into by directors or stock