muneration for their services as promoters, to issue one-third of the capital stock to themselves as such remuneration, and then to invite the public to subscribe to the stock of the corporation, without disclosing that fact to the subscribers and without getting their consent to the payment of that remuneration. The persons to whom the promoters owe the duty which they owe by reason of their fiduciary relation are the persons who put their money into the enterprise at the invitation of the promoters, that is to say, future stockholders. It is to the future stockholders that the promoters must make the disclosure of the remuneration which is, or is to be, paid to them, and it is the consent of the future stockholders that must be obtained to make that payment valid; if the promoters undertake to make to themselves remuneration for their services as promoters without making a full disclosure of the fact to the future stockholders, their principals, and getting their consent, they are guilty of a fraud. Promoters can make the necessary disclosure of the remuneration they stipulate for by including in the prospectus a full statement thereof; and if such a statement is not made therein, they cannot honestly take any remuneration for promoters' services, unless it is voted by the stockholders after the capital stock has been taken by the public."

13

Where promoters are liable for secret profits, the fact that they take stock instead of cash is immaterial.14

3. Where the plaintiff is the corporation.

The corporation itself can generally sue to recover secret profits from a promoter where a stockholder could do so.15 In such a case it is no defense that the person committing the fraud is also a stockholder,16 although he will therefore share in the benefit of a recovery.

13 Hayward v. Leeson, 176 Mass. 319, 320, per Loring, J.

14 Hayward v. Leeson, 176 Mass. 310; Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. 219; See v. Untermeyer, 69 N. J. Eq. 36.

15 See supra, 2; also Hayward v. Leeson, 176 Mass. 310; East Tennessee Land Co. v. Leeson, 178 Mass. 206.

16 Old Dominion, etc., Co. v. Bigelow, 188 Mass. 319, 327; Hayward v.

17

A disclosure to the persons owning all the stock at the time of the transaction is not equivalent to a disclosure to the corporation, where there are subsequently other stockholders; but, if all the stock is issued to the promoters for property, and they all know the facts, and it is not contemplated that any stock shall be issued to third persons, except as they may acquire from the original holders, the third persons are bound by the acquiescence of their vendors, and the corporation is bound by the acquiescence of all the stockholders.18

Where a promoter makes a misrepresentation as to the price paid by him for property sold to the corporation, the latter may ordinarily keep the property, and recover from the vendor the difference between what he paid for it and what he said he paid.19 Or, the corporation may return the property, if it remains unchanged, and sue to recover the consideration.20

The same rule applies where promoters obtain stock of the corporation by fraud. In such a case, the corporation is entitled to follow the shares taken by the promoters or the proceeds thereof in the hands of the promoters, and to recover them specifically, or to recover damages for the loss thereof; allowing, however, to the promoters their legitimate expenses in organizing the corporation.21

Ordinarily, damages are assessed as of the time of the taking; but if the stock had no value at that time, because the

Leeson, 176 Mass. 310; New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, 118, 119.

17 Old Dominion, etc., Co. v. Bigelow, 188 Mass. 319, 328.

18 Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 325; Foster v. Seymour, 23 Fed. Rep. 65; McCracken v. Robison, 57 Fed. Rep. 375; Re Ambrose, etc., Mining Co., 14 Ch. D. 390; Re Postage Stamp Automatic Delivery Co., [1892] 3 Ch. 566. Cf. Old Dominion Copper Mining Co. v. Lewisohn, 136 Fed. Rep. 915.

19 Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 320, 328; Hayward v. Leeson, 176 Mass. 310, 324; Gluckstein v. Barnes, [1900] A. C. 240; Re Olympia, [1898] 2 Ch. 153. See Parker v. Nickerson, 137 Mass. 487, 491; Land Co. v. Lewis, 101 Me. 78.

20 Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 328; Hayward v. Leeson, 176 Mass. 310, 324; Gluckstein v. Barnes, [1900] A. C. 240; Land Co. v. Lewis, 101 Me. 78.

21 Hayward v. Leeson, 176 Mass. 310, 322.. Cf. See v. Untermeyer, 69 N. J. Eq. 36.

corporation was not then launched, the date is the first date when the value of the stock became fixed.22 Interest is allowed from such date.23

In any case, where the consideration is restored, the defendants are thereupon subrogated to the property.'

24

It seems that promoters are liable severally, in solido, as well as jointly; 25 and, after rescission, the corporation can recover against one of two promoters, although the title to the stock or property stood in the name of the other promoter, if he had an interest in the contract, he being dead, and his executors being foreign and not made parties.26

C. Liability of promoters for false representations.

One who is a promoter and is known to be such is in the position of a vendor of property. As to such a person, the rule is that representations commending property, its condition, value and the like, are to be received as mere opinions and with great allowance, and are not actionable unless containing specific material allegations of fact, or the purchaser has been induced to forbear inquiry.27

On the other hand, specific representations as to existing facts concerning the financial condition of a corporation, whereby one is induced to subscribe and pay for shares are actionable; 28 and such representations are not within the stat

22 Hayward v. Leeson, 176 Mass. 310; East Tennessee Land Co. v. Leeson,

183 Mass. 37.

23 East Tennessee Land Co. v. Leeson, 183 Mass. 37.

24 Old Dominion Copper,. etc., Co. v. Bigelow, 188 Mass. 315, 329.

25 Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315, 329. 26 Old Dominion Copper, etc., Co. v. Bigelow, 188 Mass. 315.

27 Lynch v. Murphy, 171 Mass. 307 (sale of stock).

Cf. Deming v. Darling, 148 Mass. 504; Nash v. Minnesota, etc., Trust Co., 159 Mass. 437; Nash v. Minnesota, etc., Trust Co., 163 Mass. 574; Converse v. Hood, 149 Mass. 471.

A contract made by an agent in soliciting subscriptions that the franchise of a corporation shall be enjoyed in a particular manner, for the benefit of a subscriber, will not be enforced. Converse v. Hood, 149 Mass.

471.

28 Walker v. Russell, 186 Mass. 69. Cf. Perry v. Hale, 143 Mass. 540.

ute of frauds, as the latter covers only representations resulting in the creation of a debt from the corporation to the plaintiff, 29

D. Liability and rights of promoters on contracts made before incorporation.

30

Where one was employed by a number of associates to organize a corporation, the promoters were held jointly liable to him; and as, in Massachusetts, the corporation cannot adopt the contract of promoters, it seems that parties contracting with promoters must look to them in every case.31 But promoters who fail to organize a corporation are not liable as partners; for they do not intend to assume any such relation.32

The rights of promoters as among themselves are governed by their express agreements if any,33 otherwise they are supposed to share expenses equally, and they have a right of contribution against each other.34 If a promoter has no authority to bind his associates by a given contract, he is liable personally, on general principles.35

Promoters are, in general, the proper parties to sue on contracts made with them.36

E. Liability of the corporation for contracts made by promoters.

A corporation has no existence until its organization, and therefore it is not liable upon a contract made by its promoters

29 Walker v. Russell, 186 Mass. 69. 246; Wells v. Prince, 15 Gray, 562. 30 Sproat v. Porter, 9 Mass. 300.

Mass. 105.

Cf. Medbury v. Watson, 6 Met. R. L., c. 74, § 4.

See also Brightman v. Bates, 175

31 See infra, under E. Cf. 1 Clark & Marshall, Corp., § 107.

32 First National Bank of Salem v. Almy, 117 Mass. 476; Fay v. Noble, 7 Cush. 188; Trowbridge v. Scudder, 11 Cush. 83; Ward v. Brigham, 127 Mass. 24. Cf. Perry v. Hale, 143 Mass. 540.

33 Marston v. Singapore Rattan Co., 163 Mass. 296. Cf. Babbitt v. Gibbs, 150 N. Y. 281; Ireland v. Globe, etc., Reduction Co., 20 R. I. 190. 341 Clark & Marshall, Corp., § 109.

35 Fay v. Noble, 7 Cush. 188, 194; Ward v. Brigham, 127 Mass. 24. 30 Abbott v. Hapgood, 158 Mass. 248.

or their agents, even though made in its name.37

Further,

"if a contract is made in the name and for the benefit of a projected corporation, the corporation after its organization cannot become a party to the contract even by adoption or ratification of it." 38

Nevertheless, if the corporation accepts the benefit of the contract, it may be liable in an action of quasi-contract for the value of the goods or services.39 If such acceptance is made by an officer or agent of the corporation he must have express or implied authority for so doing;40 and the mere transfer of certain goods to the corporation when formed, by the person to whom they were furnished, does not tend to connect the corporation with the original sale.11

It would seem that, on principle, if the other party has accepted performance by the corporation, the latter may enforce the contract.42

Of course the corporation, when organized, can enter into a contract previously prepared, in the same way as it can make any new contract; 43 and a contract made by promoters may in some cases amount to an offer addressed to the corporation,

37 Frost v. Belmont, 6 Allen, 152; Penn Match Co. v. Hapgood, 141 Mass. 145; Abbott v. Hapgood, 150 Mass. 248; Holyoke Envelope Co. v. United States Envelope Co., 182 Mass. 171; Koppel v. Massachusetts Brick Co., 192 Mass. 223.

38 Abbott v. Hapgood, 150 Mass. 248, 252, per Knowlton, J.; Pennell v. Lathrop, 191 Mass. 357, 360; Koppel v. Massachusetts Brick Co., 192 Mass. 223; Tuttle v. Tuttle Co., 101 Me. 287. This follows the English view. In many other states the corporation, by express resolution or act, may ratify or adopt a contract made by promoters. See Ireland v. Globe Milling Co., 20 R. I. 190; Oakes v. Cattarugus Water Co., 143 N. Y. 430; Tuttle v. Tuttle Co., 101 Me. 287.

39 Abbott v. Hapgood, 150 Mass. 248; Penn Match Co. v. Hapgood, 141 Mass. 145, 149; Robbins v. Railway Co., 100 Maine, 496. Cf. Holyoke Envelope Co. v. United States Envelope Co., 182 Mass. 171.

40 White v. Westport Cotton Mfg. Co., 1 Pick. 215.

41 Koppel v. Massachusetts Brick Co., 192 Mass. 223.

42 Penn Match Co. v. Hapgood, 141 Mass. 145, 149 (dictum). 43 Pennell v. Lothrop, 191 Mass. 357, 360; Holyoke Envelope Co. v. United States Envelope Co., 182 Mass. 171; Penn Match Co. v. Hapgood, 141 Mass. 145; Abbott v. Hapgood, 150 Mass. 248; Koppel v. Massachusetts Brick Co., 192 Mass. 223.