§13. Fiduciary Relation of Promoter to Prospective Corporation. Before the organization of a corporation the promoter of that corporation is regarded as a trustee for those who shall be entitled to act for it, and can be held to this fiduciary relation until the corporation has been in existence and engaged in business for a year, when responsibility for the relation ceases. Hence, when the corporation comes into existence the promoter must make a full and fair disclosure of all his acts as promoter, and he must include a disclosure in full of what he is to receive as compensation for bringing the company into existence.

§ 14. Responsibility of Fiduciary Relation and Recovery for Breach. The corporation which the promoter organizes is an artificial child of the promoter which is of age at birth. To give this child an independent being, the promoter is bound to give his corporation a board of directors which, in its dealings with him, will act for the corporation in its capacity of a separate and independent being whose interests may or may not be the interests of the promoter.* The promoter is bound in law not to take any secret or unfair advantage of the child. Hence he must make to the board of directors or to the stockholders or other governors, when his corporation is organized, a full and fair disclosure of his transactions previously performed for the corporation and his interest in each of them, much as the guardian of a child makes to the court when the child becomes of age. Money or property this father had received before the birth of the child. he must account for, as having been held in trust by him.

It has been held that a statement in a prospectus of the promoter's interest in the transactions is a sufficient disclosure. All facts necessary to determine the desirability of a property for

*If, however, the truth has already been disclosed to those who join with the promoter in the organization of the company, there is authority (Lagunas Nitrate Co. v. Lagunas Syndicate, L. J. Ch. 699, L. T. Rep. N. S. 334) for a modification of this principle to the effect that duty is not incumbent on the promoter to provide his corporation with an independent board of directors.

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purchase constitute a full and fair disclosure. Methods of violating the fiduciary relation include the purchase of property at one price and the sale of that property to the corporation at a higher price, the receiving by the promoter of a bonus or commission from a vendor for negotiating the sale of the vendor's property to the corporation, secretly retaining the difference in prices, or the bonus or commission. These are the most common violations of the fiduciary relation. The profits in such cases are held to belong to the corporation and can be recovered by suit against the promoter. When, however, the promoter of the corporation which takes the property was owner of the property before the fiduciary relation began, what he paid for it is, in the absence of fraudulent representations and provided the stock subscribers had opportunity to examine the property, not a matter for disclosure, since, in buying the property, he acted for himself. And, if a promoter, having an option on property, sells to his corporation at a profit, where, in the subscription papers or in other form of notice he says he has an option and will sell the property to the corporation for a certain price, and no representations were made as to the price he paid for the property, he does not have to account for the profits.

§ 15. Promoter's Fraudulent Representations or Concealment, and Liability Therefor. A promoter is not liable for representations made in good faith with an actual and honest belief in their truth unless he agrees to guarantee his representations. But if he makes unqualified assertions without knowing whether or not they are true, he is liable. If he fraudulently misrepresents or negatively conceals facts which it is his duty to disclose, one who suffers loss may recover from him. If subscriptions to stock are obtained by misrepresenting or concealing facts, subscribers may recover damages. If the misrepresentation is by way of a prospectus, damages may be recovered the same as if the misrepresentations were made by word of mouth. In English law, after shares of stock have been transferred from the original purchaser, damages cannot be recovered by the second purchaser for misrepresentations in a prospectus unless the second purchaser saw

the prospectus before he purchased the shares. American decisions hold that it is not necessary that misrepresentations should have been communicated directly to the person who was induced thereby to purchase shares; it is sufficient that the misrepresentations deceived any person who came to know of them. A promoter is likewise liable for negative concealments which have the same effect as misrepresentations. When a promoter conceals from a corporation that he is interested in a sale of property, and is the actual vendor of the property to the corporation, and realizes a profit from the sale, the corporation may have the sale rescinded and may recover the money paid for the property. It has been held that where a promoter is held to account for secret profits he is entitled to a set-off to the amount of expenses he has incurred in good faith in promoting the corporation,-for advertising, brokers, options, etc., but not for any sums he has dispensed fraudulently.

§ 16. Failure of Organization of the Corporation and Promoter's Liability. If a promoter fails in his attempt to organize a corporation he is liable to subscribers for stock for any sum of money received from them, unless he has used the money in forwarding the project with the knowledge and consent of the subscribers. If the subscribers have agreed with a promoter that they will share losses with him if the project fails, they cannot recover in full. If subscribers agree to the application the promoter makes of their money, they have no recourse, unless the project was a swindle and they did not have knowledge of this fact until after they had acquiesced in the application of the money.

§ 17. Corporation's Liability for Services Rendered by Promoter. It is a rule with many apparent exceptions that a corporation is not liable for a promoter's services or expenses incurred by him in bringing the corporation into existence unless the corporation's charter or a statute so provides. A promoter is reasonably safe, however, in rendering services and expending deposits received from stock subscriptions, for decisions practi

cally establish the principle that services or expenses which are necessary to the existence of a corporation and the benefits of which it must accept if it exists at all, must be paid for by the corporation. The logic of these decisions is not clear-cut and the contact of the decisions with established legal principles is faulty. In order that the corporation be bound for such services and expenses, it has been held that they must have been necessary, reasonable, and for the benefit of the future corporation, and must have been performed or incurred under a contract with the promoter and with the expectation that they be paid for or paid by the corporation itself, and not by the individual corporators. When all the corporators request services to be rendered, and no other persons are added to the list of corporators or stockholders thereafter, it has been held that the corporation is liable for the value of the services. Where other persons join the corporators after the request, whether they join as corporators or stockholders, the corporation is not liable.

§ 18. Promoter's Lack of Agency. A promoter is not agent for a corporation to be organized, because the principal is not in existence. He cannot affect the embryo corporation by his representations or assertions or by contracts made for it. But he prac tically becomes agent by adoption when, after the corporation comes into existence, it adopts contracts or agreements made in its behalf or accepts the benefits of such contracts or agreements, having knowledge of them and having had opportunity to decline them. Legally speaking, he does not, however, become agent in fact, for, in order to adopt the engagements made by the promoter in a manner other than accepting their benefits, such corporate action is necessary as when the corporation makes a contract in its own behalf. That is, the corporation enters into a new contract through its officers or governing body. It has also been held that an engagement made by a promoter which would not, in an organized company, necessarily be made by formal action of directors or trustees, but might be made by the president or manager, may be adopted without the formality of concurrence by the directors or trustees.

§ 19. Contracts Made With Promoter. So far as the future corporation is concerned, contracts or engagements made with a promoter have been held to amount only to a proposition for a contract with the corporation to be organized. So that when a subscription to capital stock has been given a promoter before the corporation is organized and there was an acceptance, and the corporation later comes into existence and accepts the subscription by issuing the subscriber's certificate, offering him an opportunity to vote his stock, or otherwise recognizing him as a subscriber, the subscriber is bound for payment. It has already been seen that a corporation may adopt a promoter's contracts and therefore become liable for them. But a promoter is himself liable for engagements contracted in the name of his corporation until it comes into actual existence and until it adopts them either impliedly by accepting the benefits under them, or by action of an officer or of the governing body. In case the corporation is not formed, the promoter is personally liable for all contracts he has made, and, if there are several promoters, each is liable for contracts he has made or in whose making he has concurred. If, however, a creditor waives his right against a promoter and agrees to look to the corporation to pay when it shall be formed, the promoter is not liable. When it has been arranged that the creditor shall look only to the promoter for pay, the corporation cannot be held liable on the contract. A partnership arrangement may be made among promoters, when each is liable and all are liable as are partners. In general, a corporation may affirm and enforce its promoter's contracts for its own benefit.

§ 20. The Inter-Relation of Promoters. The relations that promoters assume among themselves is a matter of discretion. According to the manner of their association together they will be governed by the law as it applies to individuals or to partnerships, and it is a matter for the promoters to determine which they prefer. Care should be taken by an unexperienced person who undertakes the rôle of promoter that he does not assume any