done in the meanwhile to enhance the value of the property.' Thus a contract entered into by the officers and directors of a railroad company to purchase lands and locate their line, depots etc., thereon, is contrary to public policy and not enforceable in equity. But if afterwards by the director's energy and skill the property becomes more valuable, he can not be required to account to the company for the increased value.3 Directors can not in general make gains or receive benefits from dealings of the corporation with persons connected with them.* 1 Benson v. Heathorn, 1 Younge & brought by three stockholders, two C. 326, and cases cited infra. of whom were directors, against 2 Cook v. Sherman, 20 Fed. Rep. four other directors, constituting the 167. executive committee, one of whom Twin Lick Oil Co. v. Marbury, 91 U. S. 587, where the sale was to repay money lent by the director himself to the corporation. Addison v. Lewis, 75 Va. 701, 720; Harts v. Brown, 77 Ill. 226. Cf. Seely v. San José Mill Co., 59 Cal. 22. 4 A director of a corporation can not enforce a contract made with his co-directors, under which he is to have one-third of a profit of $100,000 for selling a railroad property, his services being trifling. Such a contract is beyond the power of the directors to make. Hubbard v. New York, N. E. &c. Investment Co., 14 Fed. Rep. 675. In Bent v. Priest, 86 Mo. 475, the defendant, a director in a life insurance company, in consideration of certain railroad bonds delivered to his business partner, agreed to and did advocate and vote for the assignment of the company's policies to another company and for the reinsurance of the same in the latter company; and it was held that so many of the bonds as defendant received belonged to the corporation of which he was a director, and on his failure to produce the same, a judgment for their estimated value was rightly entered. A bill in equity, was treasurer, charged that the treasurer bought exclusively of a firm of which he was a member, at prices largely in excess of the market rates, and asking for his removal and a settlement of his accounts; and it was held to show no equity as not charging fraud on the part of the other members of the committee or alleging that redress had been sought by an appeal to the directors, or by vote of the stockholders, or by other remedies provided by the charter or by-laws. Tuscaloosa Manuf. Co. v. Cox, 68 Ala. 71. While an arrangement by which a managing director à of a railroad corporation, puts forward a third person as a contractor to do work for the corporation, the director designing to secure a special benefit to himself, may be constructively fraudulent, yet where the relation of the director to the contract is not that of an undisclosed principal, and the stockholders have knowledge of the fact and power to prevent the consummation of the contract, if they choose, actual fraud not existing, constructive fraud will not be presumed. Union Pacific R. R. Co. v. Credit Mobilier, 135 Mass. 367. $ 245. Directors entitled to security for money lent to the company. When the lender of money to a corporation is a director, charged along with others with its control and management, his obligation, when he becomes a party to a contract with it, to candor and fair dealing, is increased in the precise degree that his representative character has given him power and control derived from the confidence reposed in him; but the general doctrine with regard to this class of contracts is not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so represented by the party claiming under it.1 Accordingly, a director of a corporation is not prohibited from lending it moneys when needed, if the transaction be open and otherwise without blame; nor is his subsequent purchase of its property at a fair public sale by a trustee under a trust deed executed to secure the repayment of his loan, invalid.? 1 Addison v. Lewis, 75 Va. 701; Hallam v. Indianola Hotel Co., 56 Iowa, 178; s. c. Am. Law Reg. July 1882, and note by Adelbert Hamilton. In order to enable a manufacturing corporation to pay its debts and thus continue its business, its directors may guaranty payment of its note made to its own order, and take as security for their liability its mortgage of all its property. Hopson v. Ætna Axle & Spring Co., 50 Conn. 597. And where a corporation, to secure certain of its notes on which the directors were accommodation indorsers, assigned certain bonds which were part of its assets at a time when suits were pending against it for the appointment of a receiver, it was held that the assignment, if made in good faith, was valid. Planters' Bank v. Whittle, 78 Va. 737. So, the appropriation of bills receivable, by the directors of a bank, as indemnity for notes issued by them for the accommodation of the bank, if done in good faith, in ignorance of the impending insolv ency of the bank, does not render them liable either for fraud or negligence. Appeal of Warner, (Pa. 1887) 7 Atlan. Rep. 216. A wool dealer applied to the Wool-Growers' Exchange for money to purchase wool. The exchange not being able to raise the money on its credit, the directors discounted their individual notes for the amount, and the dealer gave his note as collateral. The directors paid their notes without receiving money from the exchange for that purpose. The exchange made an assignment for the benefit of its creditors. An attorney employed, succeeded in collecting some of the money still due on the dealer's collateral. Held, that the attorney's fees should first be paid out of this money, and that the balance should be distributed among the directors, in preference to the creditors, of the exchange. Appeal of Atkinson, (Pa. 1887) 11 Atlan. Rep. 239. 2 Saltmarsh v. Spaulding, (1888) 147 Mass. 224, citing Twin Lick Oil Co. v. Marbury, 91 U. S. 587; But directors may lend money to the corporation only upon terms as favorable as the most favorable upon which it could borrow from others. Thus a director of a corporation, on a mortgage taken as security for notes given him by the corporation on money advanced by him, can not recover excessive interest stipulated for, nor an amount included therein beyond the sum which he advanced. A director of a corporation is disqualified to vote at a meeting of the board on a resolution authorizing the renewal of notes in his own favor. Shares of its stock owned by a corporation may be assigned to a creditor in satisfaction of the debt, and it makes no difference that the creditor was a trustee and took part in the proceedings authorizing the assignment, if the proceedings were afterwards ratified by the corporation.. Holt v. Bennett, 146 Mass. 439; borrowed money from its directors and secretary, and being in need of funds for its business, negotiated its note, secured by a conveyance of all its property, and with the proceeds paid the loans to its directors and secretary, and with the balance bought materials and defrayed legitimate expenses. Subsequently its property was sold for its full market value, and the proceeds applied as far as they went to the payment of the note. It was held that as all the transactions were in good faith and in the due course of business, a creditor whose debt had not been paid had no claim on the directors individually for the payment of it. Holt v. Bennett, (1886) 146 Mass. 439. 1 Sutter St. R. Co. v. Baum, 66 Cal. 44; Twin Lick Oil Co. v. Marbury, 91 U. S. 587; Campbell's Case, 4 Ch. Div. 470. 2 Sutter St. R. Co. v. Baum, 66 Cal. 44. 3 Smith v. Los Angeles I. & L. Cooperative Assoc., (1889) 78 Cal. 289. 4 Reed v. Hayt, 51 N. Y. Super. Ct. 121. The action of the directors § 246. Dealings by the directors in the company's bonds and stock. A director who buys the bonds of his company from it below par, does so at the peril of their avoidance by the courts at the suit of the corporation.' So where directors purchase from themselves stock at one-third its par value, the corporation and its creditors may hold them for the full value of the stock so procured. But there is no relation of trustee and cestui que trust between directors and shareholders which makes their contracts with each other for the sale of stock voidable at the election of the stockholder. A shareholder's stock is not corporate property and the directors are not agents for the management of it, and there is no trust relation between them in regard to it. In regard to representations as to the value of stock, there is a distinction between directors in their official capacity and as individuals. In the latter capacity they are not under any obligation to say anything about the affairs or condition of the corporation, or to disclose any fact or circumstance material to the value of its shares of stock. But it is the right of a shareholder fully to inform himself concerning the condition of the company. It is the duty of a director to allow and facilitate his doing so, and it is a fraud which will vitiate a sale of stock to the director if he diverts or prevents the seller from getting the information he desires, or if in giving information as director he makes false statements or suppresses the truth. Where two managers of a company conspired together to depress the price of its shares by a system of false accounts and concealment, and in particular entered upon the company's books large quantities of goods as having been sold at prices much less to those of the director himself. Hurting v. Sweet, 33 Kan. 244. 1 Duncomb v. New York &c. R. Co., 84 N. Y. 190. 2 Freeman v. Stine, 15 Phila. 37. 3 Carpenter v. Danforth, 52 Barb. 581. in delivering corporate stock in payment of debts, and consolidating the rest into a mortgage on the corporate property, is not illegal because the directors became guarantors for further advances made to the corporation after it had exhausted its credit, which advances were to be paid by the delivery of the stock. County Court v. Baltimore & O. R. Co., 35 Fed. Rep. 161. An assignee of a claim held by a director against 6 Carpenter v. Danforth, 52 Barb. his company, has no superior equities 581. 4 Carpenter v. Danforth, 52 Barb. 581. 5 Carpenter v. Danforth, 52 Barb. 581. than those actually received, and invested the difference in government stock in the name of one of them, thus succeeding in bearing down the company's stock, some of which they bought at much less than its real value, this was decided to be a fraud which vitiated the sale. In New York directors are prohibited from bearing the market by speculative sales of their companies' shares, trusting to acquire them for delivery at a price below that at which they have agreed to sell.2 § 247. Contracts between companies having directors in common. There is no legal presumption of illegality or unfairness, in transactions between two corporations, from the mere fact that a portion of the board of directors in the one constituted a part of that of the other at the same time, and participated in the dealings between the two. It is only when their dealings are shown to be prejudicial to one of the corporations represented by them that their conduct will be subject to a strict scrutiny by the courts. Thus where a sale of corporate property to pay debts, though made by persons who are directors both of the selling and purchasing corporations, realizes more than the value of the property, stockholders in the former have no ground of complaint. Where a majority of the board are not adversely interested, and have no adverse employment, the right to avoid the contract or transaction does not exist without proof of fraud or unfairness. Nor 1 Walsham v. Stainton, 1 De G. J. not less than six months or by a fine & S. 678. not exceeding $5,000, or by both such fine and imprisonment. N. Y. Laws of 1884, ch. 223, § 2. 2 No officer or director of any railroad corporation shall sell or agree to sell, or be directly or indirectly interested in the sale or agreement to sell any shares of the stock of the corporation of which he is an officer or director, unless at the time of sale or agreement to sell, he is the actual owner of such shares. N. Y. Laws of 1884, ch. 223, § 1. Any person violating any of the provisions of this act shall be guilty of a misdemeanor, and upon conviction thereof shall be punished by imprisonment 3 Booth v. Robinson, 55 Md. 419; Mayor &c. of Griffin v. Inman, 57 Ga. 370; United States Rolling Stock Co. v. Atlantic &c. R. Co., 34 Ohio St. 450. See, also, Foster v. Oxford &c. Ry. Co., 13 Com. B. 200, 203. 4 Manufacturers' Sav. Bank v. O'Reilly, (1889) 97 Mo. 38. 5 United States Rolling Stock Co. v. Atlantic &c. R. Co., 34 Ohio St. 450; s. c. 32 Am. Rep. 380. |