The fact that the secret profits of the promoter may give rise to an action by the corporation is not material. The remedies which are open to the corporation in such case do not make the subscribers whole. Their complaint is that they accepted their shares upon the assumption that the promoter was going into the company upon the same basis as themselves, and that had they known that the promoter was going in on a preferential basis they would not have subscribed for the shares. A recovery by the corporation affects the subscribers' action for fraud only in so far as, by increasing the value of the shares, it reduces the damages of those subscribers who still hold their shares at that time.86 The right of a subscriber to rescind his subscription because of the promoter's secret profits is considered in a subsequent chapter. 87 § 233. Secret profits of promoter as fraud upon subsequent purchasers of shares. A question somewhat different from that considered in the preceeding section arises when promoters, instead of selling the shares of the corporation to original subscribers, cause all the shares 96 Pac. 528, 531; Franey v. Warner, 96 Wis. 222, 235, 71 N. W. 81, 85, followed in Hebgen v. Koeffler, 97 Wis. 313, 320, 72 N. W. 745, 747748; Components Tube Co. v. Naylor, 1900, 2 Ir. R. 1, 30-31. See note by Freeman, J., to Pittsburg Mining Co. v. Spooner, 17 Am. St. Rep. 149, at pages 167 & 168, quoted in part in Wills v. Nehalem Coal Co., 52 Or. 70, 85-86, 96 Pac. 528, 534. Cf. Arkwright v. Newbold, L. R. 17 Ch. D. 301, also McAleer v. McMurray, 6 Phila. 244; Beatty v. Neelon, 13 Can. S. C. 1, 19 Am. & Eng. Corp. Cas. 236, and perhaps Caldwell v. Boyd, 57 Pa. 321. The question is in England largely controlled by statute, (Stat. 8, Edw. VII, Ch. 69, § 81). In re South of England Natural Gas & Petroleum Co., Ltd., 1911, 1 Ch. Div. 573, 80 L. J. Ch. N. S. 358. And see ante, § 211. It is held in Priest v. White, 89 Mo. 609, 1 S. W. 361, that a creditor cannot, because of the promoter's fraud upon the corporation, maintain an action against the promoter for fraudulently inducing the credit. As to fraudulent concealment generally, see ante, §§ 210-211. 86. See post, § 249. 87. See post, § 239. of the corporation to be issued to themselves, and then resell these shares to the public. It is well settled that the secret profits of the promoters do not in such case give rise to any action by the corporation,88 but the promoters are, in case of fraud in the sale of the shares, liable directly to the purchasers.89 A question upon which the authorities throw but little light is that as to whether a failure to disclose the promoters' profits to these purchasers constitutes an actionable fraud.90 It would be absurd to say that because a man was one of the promoters of a corporation, he occupies a fiduciary relation to every person to whom he subsequently sells shares. The obligation of the promoter to disclose to his vendee the profit gained by him upon the promotion depends upon the facts of the particular case. In Foster v. Seymour,91 the court said that every purchaser from the promoters would stand upon the circumstances of his purchase, and would have a cause of action if the original transaction in connection with the special facts of his purchase should operate as a fraud upon him. In Brewster v. Hatch,92 the promoters having acquired a certain mining property for $242,000, conveyed it to their corporation, taking its entire capital stock consisting of 150,000 shares of a par value of $10 each, in payment therefor, and then pro 88. See ante, § 120, et seq. 89. Old Dominion Copper, etc., Co. v. Lewisohn, 210 U. S. 206, 28 Sup. Ct. 634, 52 L. Ed. 1025, affirming, 148 Fed. Rep. 1020, 79 C. C. A. 534; Tompkins v. Sperry, Jones & Co., 96 Md. 560, 581, 583, 54 Atl. 254, 258; Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 417, 420, 87 Supp. 369, (dissenting opinion); In re Ambrose Lake Tin & Copper Mining Co., L. R. 14 Ch. Div. 390, 397. 90. Caldwell v. Boyd, 57 Pa. 321, seems to hold that there is no cause of action in the vendees. See also Brooker v. William H. Thompson Trust Co., 254 Mo. 125, 162, 162 S. W. 187, 196, but see perhaps dictum in Wills v. Nehalem Coal Co., 52 Or. 70, 76-77, 96 Pac. 528, 531. 91. 23 Fed. Rep. 65. Quoted in Blum v. Whitney, 185 N. Y. 232, 245, 77 N. E. 1159. See also Inland Nursery & Floral Co. v. Rice, 57 Wash. 67, 106 Pac. 499. 92. 122 N. Y. 349, 25 N. E. 505, 33 St. Rep. 527. ceeded to sell some of these shares to the public at $4 a share. The purchasers sued the promoters for damages. The court said that if the plaintiffs were simply the vendees of the defendants the action could not be maintained, but if the defendants stood in a fiduciary relation to the plaintiffs the liability existed, and that "the plaintiffs were led to believe, and had the right to believe, from the documents and from the circumstances that the defendants were acting in the interests of all of the investors, and that they knew that the plaintiffs so believed. These defendants were the promoters of the corporation and occupied, before its organization, a position of trust and confidence towards those whom they induced to invest in the enterprise. It is conceded and found by the court that the defendants did not disclose the amount which they were to pay for the mines, or the fact that they did not intend to exercise their options, unless sufficient funds were furnished by others to pay for the property and all of the expenses of organizing the corporation, leaving for distribution among themselves a majority of the stock. It is clear, we think, that if the defendants had avowed their purpose, the plaintiffs would not have taken an interest in the enterprise, and that they are liable for the damages sustained by the plaintiffs who were induced to invest in shares to be issued." In Re Ambrose Lake Tin & Copper Mining Co.,93 the court, after stating that no action could be maintained on behalf of the company, based upon a transaction in which the vendors transferred their property to the corporation at a gross overvaluation taking the entire capital stock in payment, said: "If anybody who had shares in the new company has sold those shares to anybody of the outside public upon the faith of those documents which are contained in these articles of association or memorandum,—if they have sold their shares on the faith of that simulated agreement for the purchase of the mine being a true one, it seems to 93. L. R. 14 Ch. Div. 390, 397. See also Langdon v. Fogg, 18 Fed. me they have obtained the money from those purchasers by fraud. To shew that, it must be shewn that a vendor of shares in the company did sell to the purchasers shares in the company, and that the persons who bought the shares, purchased them on the faith of this agreement, and the representations made in it. If that should ever be proved, that would give a remedy to any person who has so been deceived against the person who made these representations to him, that is, against the individual." In Tompkins v. Sperry Jones & Co.,94 the court said, "When Sperry & Jones offered any of the bonds, or stock issued to them by the company for barter or sale to other persons and thus as it were invited them to become interested in the enterprise they were bound as we have already said to practice no concealments towards those persons and to give them all desired information as to their own relation to the company." Some authorities seem to indicate that the purchaser of shares has a right to assume that the property purchased by the corporation was worth the par value of the stock issued in payment therefor, and that the concealment of the fact that this is not so, operates as a misrepresentation.95 This proposition is, however, open to serious question.96 The proper rule seems to be that the responsibility of the promoter to the vendee of his shares depends in each case upon the question whether the vendee was, under all the circumstances of the transaction, entitled to assume that the promoter was deriving no personal profit from the promotion. 94. 96 Md. 560, 583, see also 581, 54 Atl. 254, 258, see also 257-258. 95. Old Dominion Copper, etc., Co. v. Bigelow, 203 Mass. 159, 194195, 89 N. E. 193, 40 L. R. A. N. S. 314; Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 417, (dissenting opinion of Hatch, J.), see also p. 420, 87 Supp. 369. (Quoted in In surance Press v. Montauk Wire Co., 103 N. Y. App. Div. 472, 479, 93 Supp. 134); cf. Warner v. Benjamin, 89 Wis. 290, 62 N. W. 179. And see, as to bondholders, Manhattan Trust Co. v. Seattle Coal & Iron Co., 19 Wash. 493, 502-503, 53 Pac. 951, 955. 96. See ante, §§ 100, 110, 165. § 234. Misrepresentations giving rise to action by corporation. False representations made by the promoters in a prospectus or otherwise, generally relate to the sale of shares of the corporation, and the litigations which result therefrom are, in the main, suits by the subscribers for, or purchasers of, these shares. False representations of the promoters may, however, sometimes give rise to an action by the company in its corporate capacity. To sustain an action by the corporation it must appear that the representations were made with intent to induce some corporate action, that such action was induced thereby, and that damage to the corporation resulted therefrom.97 It is not necessary in order to give rise to an action by the corporation that the representations complained of should have been made to its officers or directors. If representations are made with the purpose of inducing persons to organize a corporation to take over certain property, or to enter upon particular engagements, and the persons deceived do, in reliance upon the representations made, organize the corporation and cause it to take the contemplated action, it may fairly be said that the representations were made with intent to deceive the corporation, that it was deceived thereby, and acted thereon to its damage. 97. See Flagler Engraving Co. v. Flagler, 19 Fed. Rep. 468; Hutchinson v. Simpson, 92 N. Y. App. Div. 382, 405, 87 Supp. 369; Patterson v. Franklin, 176 Pa. 612, 35 Atl. 205; Erlanger v. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 1264, 1274, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65; Overend & Gurney Co. v. Gibb, L. R. 5 H. L. 480. As to representations in regard to promoters' profits, see ante, § 198, 117, 108. In Economy Powder Co. V. Boyer, 2 Berks (Pa.) 131, it was held that a promoter who had induced other subscribers to come into the company by representing that he, the promoter, had paid the same price for his shares, was in an action by the corporation compelled to make that representation good by paying the difference between the price paid by him and the price paid by the other subscribers. 98. Cortes Co. v. Thannhauser, 45 Fed. Rep. 730, and see Dicker |