CHAPTER 82

PROMOTERS OF CORPORATIONS

§ 661. Promoters defined.

§ 662. Liability of stockholders or corporations for acts of promoters. § 663. Promoters in position of trust.

§ § 661, 662, 663. (Corporations, Secs. 25, 26, 27.)

Case 643. Cushion Heel Shoe Co. v. Hartt, 50 Lawyers' Reports Anno., new series, 979 (Ind.).

Point Involved: The liability of a corporation for the contracts of its promoters.

SPENCER, J., delivered the opinion of the court:

"It appears from the record in this case that in April, 1909, appellee, who was experienced in the manufacture of shoes, inserted in a shoe journal an advertisement for a shoe factory to locate in the city of Ft. Wayne. Among the answers which he received thereto was one from a man named Johnson, who was the patentee of a certain cushion heel shoe. Johnson came to Ft. Wayne, and with him appellee went to the president of the Commercial Club, whom they interested in the proposition of starting appellant company. Subscription lists were prepared and appellee started out to get subscribers to the undertaking. He testified that Johnson then promised him the position of superintendent when the factory should be established, and also promised that he (appellee) should be paid for his time and money spent in securing the stock subscriptions; that after the company was organized, appellee talked with several of the directors and officers of appellant company and told them that he expected to be paid for his services; that one of the directors said to appellee: 'I believe you should be

compensated. I have told the people, the directors, to settle with you.' No testimony was introduced to show that the board of directors ever acted on appellee's claim, but it is his contention that, by accepting the results of his services and receiving the benefits thereof, appellant is now bound on an implied contract to pay for such service.

"It is certain that, under ordinary circumstances, a corporation cannot be successfully sued on a contract made for its benefit by its projectors before its incorporation. Contracts of this character, however, are not void, but voidable; and it is well settled in nearly all jurisdictions that, in so far as they are not ultra vires, such contracts may become binding on the corporation if ratified by it, either expressly or by implication, after its organization. Smith v. Parker, 148 Ind. 127-133, 45 N. E. 770; Bruner v. Brown, 139 Ind. 600-602, 38 N. E. 318; Davis & R. Bldg. & Mfg. Co. v. Hillsboro Creamery Co., 10 Ind. App. 42, 37 N. E. 549; Tuttle v. Tuttle, 101 Me. 287-292, 64 Atl. 496, 8 Ann. Cas. 260; Battelle v. Northwestern Cement & Concrete Pav. Co., 37 Minn. 89, 33 N. W. 327.

"But the rule that a corporation may be bound, like any individual, by an implied contract, is limited in its application to contracts in which the promoters of such corporation are interested.

"We are aware that cases may be found which seem to sustain appellee's position, but, as is suggested in 10 Cyc. at page 265, 'it is difficult to understand how the corporation could be estopped by accepting benefits which it had no power to reject, without uncreating itself.' We believe that the better reason and the weight of authority support the holding that, in the absence of statutory or charter provisions, a corporation will be held liable for services rendered by its promoters before incorporating only when, by express action taken after it has become a legal entity, it recognizes or affirms such claim. The evidence before us does not indicate such an affirmance. In Tift v. Quaker City Nat. Bank, 141 Pa.

550, 21 Atl. 660, as in this case, it was shown that the plaintiff's claim was brought to the attention of the board of directors after the defendant's incorporation, but that no action was taken thereon. The Court held that 'mere silence of the board of directors, or failure to object when the claim was mentioned, is not such an act of ratification as will bind the bank.'"'

Question 643: (1) Is a promoter the agent of the corporation?

(2) When will the corporation be liable for the acts of a promoter ?

(Note: The rule is everywhere settled that corporations are not liable for the contracts of its promoters merely because made by the promoter. A promoter is not an agent for the future corporation. The corporation may become liable by adopting the act of the promoter. Such adoption may be either express, or it may be implied where the corporation accepts property which it has full liberty to decline (10 Cyc. 263). For mere services, however, the better opinion seems to be that it will not be liable merely because it receives the benefit, as it cannot well decline it. The promoters are themselves liable on their own contracts. The doctrine "respondent superior" does not apply, as the corporation, not being in existence, cannot be the principal.)

Case 644. Yeiser and others v. U. S. Board & Paper Co., 107 Fed. Rep. 340.

Facts: The corporation sues Yeiser and others to annul certain certificates of stock alleged to have been unlawfully obtained by certain parties (Yeiser being the administrator of one of them, now deceased). It appeared that these parties conceived the project of organizing a corporation, obtaining subscriptions thereto and with the proceeds to purchase a paper mill plant for the company at an advanced price on an option secured by them on the property, thereby realizing a considerable profit. They secured this option at the sum of $75,000. They then formed a company with a capital stock of $100,000, subscribing for $25,000 of the stock, but not

paying therefor. Being all the subscribers of the stock, they elected each other directors constituting the whole board. Bell, one of their number, was authorized to secure additional subscriptions. They then voted that the corporation buy the property for $100,000. A prospectus was then issued and subscriptions of $45,000 secured. By manipulating matters the defendants secured their $25,000 of stock, for nothing, and it is the validity of this stock that is questioned as having been secured through fraud on the other stockholders.

SEVERENS, C. J.: "In this country the courts have accepted the essential principle laid down in the English cases, and hold, with scarcely any variation to the doctrine, that the promoter of a company stands in the relation of a trustee to it, and those who become subscribers to its stock, so long as he retains the power of control over it. There is some difference of opinion, as there is in the English cases, in regard to the time when he becomes such promoter, within the meaning and operation of the rule. Some courts are of opinion that he is chargeable with the duties of a trust when he enters into the execution of the scheme which is intended to result in the transfer of the property to a company to be organized and controlled by him. All, however, agree that he comes within the rule when he begins to organize the company, and that from that time he is bound to deal openly and fairly, and in such a way as that those having independent charge of the company, as well as those who are induced to become subscribers to its stock, may be fully advised of the relation he bears to the property which he purposes to sell, in like manner as one who assumes to act as the agent of another in the purchase of property.

"The company, as well as the stockholders, are entitled to the independent judgment of the trustee in regard to the value of the property to be purchased, and the price to be paid, as well as its fitness for the intended use. It is said that the property is worth what the com

pany paid for it, and is adapted to the company's requirements. It happens so. But this in no manner af

fects the operation of the rule.

*

"The substance of the whole matter is that through their breach of trust, they were enabled to get $25,000 of the company's stock without paying for it. It seems to us that a decree annulling their title to it is an appro'priate remedy. The decree of the circuit court is affirmed."

Question 644: (1) State the facts in this case, the question presented and the Court's decision.

(2) Why was it immaterial that the company got its money's worth?

Case 645. Lomita L. & W. Co. v. Robinson, 154 Cal. 36.

Facts: See the opinion.

Point Involved: The right of promoters to make a secret profit on the property sold by them to the corporation.

"As to defendants Freeman and Cline, the case, under the authorities, is, of course, a clear one so far as the $6,500 profit made by Freeman and shared by him in part with the others is concerned. They were essentially promoters of the corporation formed for the avowed purpose of purchasing this property from one other than themselves, and they misrepresented to those whom they induced to join in the enterprise, and who became with them subscribers to the stock of the proposed corporation, the amount the corporation would be required to pay in order to obtain the property, for the purpose of making $6,500 secret profit from the subscribers in the transaction, and this secret profit was in fact made. The findings show that their plan from the beginning was to form a corporation to purchase this property, and that they practically procured its foundation. As promoters of the corporation, they occupied a