If the representations are made with the view to inducing the parties addressed to subscribe for shares in the corporation and so make possible the corporate action, the representations are likewise, in effect, made to induce corporate action, and if it acts thereon to its damage, and the other elements of fraud are present, there is a sufficient basis for a suit by the corporation.99 Whether the corporation would, in such case, have a cause of action even though it was represented by an independent board of directors which acted with full knowledge of the facts, is an academic question, as promoters attempting to commit a fraud upon the corporation do not, in practice, furnish the company with a competent, independent and fully informed directorate. The fact that the representations complained of were contained in a prospectus issued by the company after its formation and even after the contract for the purchase of the property misrepre sented was executed, would not necessarily save the promoters from liability to the corporation if they were responsible for the prospectus, and the subscriptions which made possible the consummation of the contract were induced thereby.1 Though a misrepresentation be of such character that it might be made the basis of a suit by the corporation, the persons de man v. Northern Trust Co., 176 U. Cf. Lebanon Steam Laundry v. Dyckman, 22 Ky. L. Rep. 348, 57 S. W. 227, where the purchase of the property by the promoter was induced by false representations, and it was held that an action by the corporation would not lie. It does not, however, appear from the report that a corporation was contemplated at the time of the pro moter's purchase. See also Swarthmore Lumber Co. v. Parks, 72 W. Va. 625, 79 S. E. 723; Ettar Realty Co. v. Cohen, 163 N. Y. App. Div. 409, 148 Supp. 625. 99. Lindsay Petroleum Co. V. Hurd, L. R. 5 P. C. 221; Hichens v. Congreve, 4 Russ. 562, and see California-Calaveras Mining Co. V. Walls, Cal. -, 149 Pac. 595. And see post, §§ 285-286, 291. 1. Lagunas Nitrate Co. v. Lagunas Syndicate, 1899, 2 Ch. Div. 392, 428, 431, 436; cf. Overend & Gurney Co. v. Gibb, L. R. 5 H. L. 480. ceived can nevertheless recover their individual damages from the guilty parties without making the corporation a party to the suit.2 2. Austin v. Murdock, 127 N. C. 454, 37 S. E. 478. In Sigafus v. Porter, 84 Fed. Rep. 430, 434, 28 C. C. A. 443, 51 U. S. App. 693, (reversed on another ground, 179 U. S. 116, 21 Sup. Ct. 34, 45 L. Ed. 113), the parties who purchased property with a view to its transfer to the corporation to be formed, were permitted to sue on behalf of themselves and their associates who had agreed to join in the purchase and take shares in the company to be formed. CHAPTER XII. OF THE PERSONAL REMEDIES OF STOCKHOLDERS. Section 235. Introductory. 236. Action for fraud and deceit. 237. Accounting for profits. 238. Rescission of subscription. 239. Rescission because of secret profit of promoter. 240. Restoration of status quo as condition of rescission. 241. Methods of effectuating rescission. 242. Joinder of actions. 243. Joinder of parties. § 235. Introductory. A promoter's fraud may, according to its nature, constitute an injury to the corporation, or an injury to the subscribers or purchasers of its shares, or an injury to the corporation and to the subscribers and purchasers as well. The remedies of the corporation, to be pursued by it or on its behalf, have already been considered.1 The means of redress open to the subscribers or the purchasers of the company's shares, for the wrongs done them in their individual capacity, are the subject of this chapter.2 § 236. Action for fraud and deceit. A person induced by the fraudulent representations of the promoters to subscribe for, or purchase, the shares of the company, may sue the promoters for damages in a common law action of fraud and deceit.3 1. See ante, Chapters IX & X. 2. On this subject generally, see note to Lomita Land & Water Co. v. Robinson, 18 L. R. A. N. S. 11251131. 3. Teachout v. Van Hoesen, 76 Iowa 113, 40 N. W. 96, 1 L. R. A. 664; Hess v. Draffen, 99 Mo. App. 580, 74 S. W. 440; Getty v. Devlin, 54 N. Y. 403, 415; Paddock V. Fletcher, 42 Vt. 389; Franey v. Warner, 96 Wis. 222, 235, 71 N. W. While a corporation is, according to the modern view, liable for the fraud of its agents, and cases may arise in which a corporation would be liable for fraud and deceit in the sale of its own shares, a corporation cannot very well be held liable in damages for the fraudulent representations of its promoters; for the promoters are not, as such, the agents of the corporation. To hold the corporation liable it would have to be shown that the parties making the representations complained of were authorized by the corporation to act on its behalf, or that the company in some way adopted the representations. While it has been held that a principal by accepting a contract procured by an unauthorized agent, 81, 85, see also dictum in New Sombrero Phosphate Co. V. Erlanger, L. R. 5 Ch. Div. 73, 121122, 25 W. R. 436. As to maintaining such action in equity, see Hill v. Lane, L. R. 11 Eq. 215; Peek v. Gurney, L. R. 6 H. L. 377, 390; Squiers v. Thompson, 73 N. Y. App. Div. 552, 76 Supp. 734, 11 Ann. Cas. 160, affirmed, without opinion, 172 N. Y. 652, 65 N. E. 1122. And see ante, § 193, 171n. It is not necessary to join the corporation as a party defendant, or to first request the corporation to take action. Austin v. Murdock, 127 N. C. 454, 37 S. E. 478. In Beatty v. Neelon, 13 Can. S. C. 1, 19 Am. & Eng. Corp. Cas. 236, where the parties agreed to combine their steamship lines and to organize a corporation to operate them, a false representation made by one of the parties in regard to certain mail contracts assigned to the company was held to give rise to no action in the other parties, the court saying that the injury was to the corporation. It should be noted that the purchasers of shares in the open market, as distinguished from the subscribers for the shares, are not ordinarily entitled to relief because of the false representations contained in a prospectus. See ante, § 200. 4. Hindman V. First National Bank, 98 Fed. Rep. 562, 39 C. C. A. 1, 48 L. R. A. 210; same v. same, 112 Fed. Rep. 931, 50 C. C. A. 623, 57 L. R. A. 108; Benedict v. Guardian Trust Co., 58 N. Y. App. Div. 302, 68 Supp. 1082, 91 N. Y. App. Div. 103, 86 Supp. 370, affirmed, 180 N. Y. 558, 73 N. E. 1120. Lindley on Companies, (6th ed.), p. 266; Cook on Corporations, (7th ed.), § 15-B, compare, however, § 157 of the same work. 5. See, however, Wilson v. Hundley, 96 Va. 96, 105, 30 S. E. 492, 495, 70 Am. St. Rep. 837; Houldsworth v. City of Glasgow Bank, L. R. 5 App. Cas. 317; New Brunswick & Canada Ry., etc., Co. v. Conybeare, 9 H. L. Cas. 711, 749; In re Addlestone Linoleum Co., L. R. 37 Ch. Div. 191. adopts the representations of such agent, and may, in a proper case be held liable for damages for fraud and deceit," the application of this principle to a corporation accepting subscriptions procured by its promoters, is a matter of some difficulty, at least where the representations were made before the corporation achieved legal existence. A rescission of the subscription is, when a judgment against the corporation is desired, generally the more satisfactory remedy, and for that reason, perhaps, relief in damages against the corporations is not generally sought. 7 § 237. Accounting for profits. A subscriber for the company's shares can, under certain circumstances, compel the promoters to account directly to him, instead of to the corporation, for the secret profits unlawfully taken by them. 8 In Krohn v. Williamson, the promoters of a bridge company, after its capital stock of $1,500,000 had been subscribed, made a contract for the construction of the proposed bridge, under an agreement that the contractor should receive $1,000,000 in bonds and $1,500,000 in stock, the subscribers assenting that the stock subscribed for by them should be so used by the corporation, and the contractor agreeing to return to the promoters and subscribers, $200,000 par value of such stock. Two of the promoters then entered into an agreement with the contractor to procure for the corporation title to the land necessary for the bridge approaches, 6. See Busch v. Wilcox, 82 Mich. 336, 47 N. W. 328, 21 Am. St. Rep. 563, affirming on rehearing, 82 Mich. 315, 46 N. W. 940; Spotten v. DeFreest, 140 N. Y. App. Div. 792, 125 Supp. 497; Green v. Des Garets, 210 N. Y. 79, 103 N. E. 964; Lowance v. Johnson, Va., 84 S. E. 937. W. 7. See Oldham v. Mt. Sterling Imp. Co., 103 Ky. 529, 45 S. W. 779, and see ante, § 50. As to the rescission of a subscription induced by the false representations of a promoter, see post, § 238. 8. 62 Fed. Rep. 869, affirmed, sub nom. Williamson v. Krohn, 66 Fed. Rep. 655, 13 C. C. A. 668, 31 U. S. App. 325. |