person making an assignment to it. And knowledge of the president of a street railroad company, where its rights are being encroached on by a railroad, is knowledge of the corporation."

A corporation can not deny knowledge of facts which are presumptively within its knowledge, although the officer verifying the pleading had no knowledge of them. If a director individually contracts for certain work to be done on the property of the corporation, the corporation is not held to have notice by the fact alone that the work is being done, so as to make it responsible for its cost; this was a case where a director was acting not for the corporation but in his own behalf, in a sense adverse, when notice to him or his knowledge is not imputed to the corporation.

The officers and the corporation are charged with notice of the facts appearing on the books of the corporation, such as the fact that a person holds certain shares of stock as trustee, or the execution of a note."

5 Love v. Anchor etc. Vineyard Co., 5 Cal. Unrep. 425, 45 Pac. 1044; Witter v. McCarthy Co., 5 Cal. Unrep. 267, 43 Pac. 969.

6 Fresno St. R. Co. v. Southern Pac. R. Co., 135 Cal. 202, 67 Pac. 773. 7 Sloane v. Southern Cal. Ry. Co., 111 Cal. 668-685, 32 L. R. A. 193, 44 Pac. 320. What facts the corporation was conclusively presumed to know did not appear in this case; Zany v. Rawhide etc. Min. Co., 15 Cal. App. 373, 375, 114 Pac. 1026.

• Ayers v. Green G. M. Co., 116 Cal. 333, 48 Pac. 221.

• Brewster v. Hartley, 37 Cal. 15, 99 Am. Dec. 237; Curtin v. Salmon River etc. Ditch Co., 141 Cal. 308, 311, 99 Am. St. Rep. 75, 74 Pac. 851.

CHAPTER XXXIII

PROMOTERS

The term promoter can not be satisfactorily defined, for the reason that the relations which persons who have been declared to be promoters bear to the corporation are of so infinite variety that they can hardly be enumerated, much less can they be described in a few words which would not include too much or too little. It has been said to be more of a business than a legal term and that a promoter is an organizer of business operations, familiar to the commercial world, by which a company is brought into existence. The term is quite as well understood by laymen as by lawyers. The fact is also beginning to be realized that, by the very nature of his business, he is to make a profit out of the organization of the company. The earlier cases, indeed almost all cases down to the present time, called him a trustee and said that he occupied a fiduciary relation to the proposed stockholders, as though he were performing some function for the proposed stockholders which they had conferred upon or entrusted to him. The real relation is usually nothing of the kind. In every sense of the word he is an outsider dealing with them, not for them. They know he will, or expects to, make a large profit; the nature of his business puts them on their guard in that respect. It is a case, if there should be any, where the rule of caveat emptor should apply. The persons who are to become the incorporators have the same ambitions to make large, and what is called easy, money as the promoter. They welcome his advent, and usually he is able to compose differences between the capitalists going into the enterprise which they never would be able to do themselves.

For a long time, and even now, the courts regarded him with some suspicion and his status before the law was one more of sufferance than of right. But industrial progress demands his help, and he has become a permanent factor in discovering opportunities and organizing forces to put useful and profitable enterprises on their feet, and this often requires an intelligence and judgment of a high order.

The best statement of his duties and liabilities, we think, is: First, he can not sell property obtained by him merely on option for the purposes of the corporation, and make secret profits; but if he purchased the property before he began promoting the company he may sell it to the company without disclosing his profit. Even then, if he makes any statements in regard to its cost they must be true; nor may he conceal from them the fact that he owns it. Second, the promoter can not receive a commission or bonus from the person who sells the property to the corporation, whether that commission be in cash or shares of the stock of the corporation.

Under the doctrine that the promoter occupies a fiduciary relation towards the corporation, if he violates either of the general rules above, the corporation may elect to rescind the purchase if it was made from him, or to recover from him his secret profits. The profits, if any, must be secret, otherwise there is no cause of complaint. And he is liable for such profits, although the property is worth all the corporation paid for it. If he induces a person to subscribe by false representations in these respects, the subscriber may recover his damage from him, although other subscribers knew all the facts concerning the transaction. And, it has been said in some cases, a promoter may be liable to parties whom he induces to sell their property

1 Deduced from Cook on Corporations, section 651.

to the corporation, if they take securities of the corporation in payment and he conceals all or a part of his profits.

No attempt will be made to cover all cases where promoters have been held liable; that subject would fill a volume in itself. But substantially all of the cases fall within the two classes above mentioned.

In England the requirements of a statute, and the rules of the law, are met by a statement in the prospectus that the promoters are making a profit in the transaction, without stating the amount. If the subscribers are willing to come in under such circumstances they are like one of two parties to any transaction of purchase and sale; they can not afterward complain of the amount of profits. The corporation, by its experts, always examines the property and forms its own opinion as to its value and acts accordingly. If, however, the promoter controls the corporation, if it is already in existence, the rule is different; but not if he is simply inducing persons to form the corporation, for there they are free to act upon their own inclination or judgment.

The promoter, by comparison with those who finance the enterprise, is usually a person of limited means; and capital, being excessively jealous of profits which go elsewhere, has been greatly benefited by these decisions; the decisions often enable capital, by pretending to shut its eyes, to take Naboth's vineyard also.

The first case2 in this state which considered promotion from the point of view of the promoter's duties and liabilities to the corporation, and to the stockholders coming into it, was one where the promoters were an important portion of the proposed, and later actual, stockholders of the corporation. The parties

2 Ex-Mission Land etc. Co. v. Flash, 97 Cal. 610, 32 Pac. 600.

who later were the promoters of the corporation bought land at an administrator's sale for five dollars per acre and represented to the others whom they induced to join them in forming the corporation that it cost them twenty-five dollars per acre, and that all stockholders were to come in on the "ground floor," and the land was turned over to the corporation at that increased price. The corporation paid in cash a sum slightly exceeding five dollars an acre, and gave a mortgage on the land for the balance. When the actual facts were discovered, the other stockholders having secured control of the management of the corporation, the corporation brought suit to cancel the mortgage and a sale under its foreclosure. The court says that even if the parties sustained no fiduciary relation to the corporation (not yet formed, or considered with the other parties) or to the other stockholders at the time they purchased the land, "they afterwards placed themselves in a fiduciary relation to the corporation by promoting it, and while in that relation, by means of the fraudulent representations and concealments, induced the corporation to purchase their land, whereby they made 'secret profits' exceeding seventy-five thousand dollars." The court quotes with approval, "the subscriptions of the shareholders are made upon the trust that the promoters are men of rectitude and business sagacity, who will use their knowledge and exercise their control over the enterprise for the benefit of the company. Justice demands that the promoters of a company should not abuse the confidence placed in. them by the subscribers for shares, or derive any unjust advantage through their control over the organization or management of the company. Accordingly, it has been held that if persons start a company, and induce others to subscribe for shares for the purpose 8 Morawitz on Corporations, sections 545, 546.