against the wrongdoers, when their action was fraudulent, and done collusively with the promoters of the corporate enterprise, although the plaintiff was not a member at the time, if the facts were not fully disclosed to him at the time he became a member.1

The rule applied in such cases is, that money or property obtained fraudulently or otherwise, to which the party receiving it is not equitably entitled, becomes a resulting trust in favor of the equitable owner.

§ 635. Protection from anterior acts of promoters.—Persons who come forward in the capacity of corporators. or promoters of a company assume a duty of good faith; and all they do in the prosecution of the enterprise, although the company be not yet established, must be done with fidelity and a due regard to the rights and interests of those for whom they profess to act, and who will subsequently be affected by their conduct. They are not exempt from this duty because of the fact that the stockholders have not yet come in. If the acts affect the interest of the prospective stockholders, these acts must be done honestly; because the circumstance that they are absent increases rather than diminishes

1 Hill v. Glasgow R. Co., 41 F. 610; Carson v. Gas-Light Co., 80 Ia. 638; 45 N. W. 1068. The case of New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. D. 73; aff'd L. R. 5 App. Cas. 1213, comes within this principle. In that case members of the company, when the facts became known to them, elected a new board of directors who proceeded in the name of the corporation against those who had set the company on foot and used the former directors as mere tools through which to consummate a sale of their property to it at a price far in excess of its real value. The relief asked for and granted was that the sale be set aside, and for repayment to the company of the money paid to the promoters upon a restoration to them of the property conveyed.

For other applications of the principle of this case, see Simons v. Vulcan Oil Co., 61 Pa. St. 202; Bagnall v. Carlton, L. R. 6 Ch. D. 371; PhosphateSewerage Co. v. Hartmont, L. R. 5 Ch. D. 395; Beck v. Kantorwicz, 3 K. & J. 230; Mason v. Harris, 11 Ch. D. 97; Lindsay Petroleum Co. v. Hurd, L. R. 5 P. C. 221. Compare Albion Steel, etc., Co. v. Martin, 1 Ch. 580.

the obligation to be careful of the interest of persons who, from the nature of the case, are not in a position to take care of themselves.1

§ 636. Acquiescence of complaining shareholder.-Simple acquiescence in the general sense of non-action by individual shareholders constitutes no defence to an action by them for breaches of trust, gross dereliction. of duty, misapplication of corporate funds or other wrongs not within the power of a mere majority to ratify or authorize.

It is the highest and most beneficial function of the corporation to proceed against the delinquents in such cases to obtain redress for the wrongs done to the minority, and the will of no majority short of unanimity should stand in the way.2

But a different rule would apply where a shareholder voluntarily and overtly acquiesced in or condoned the wrong, though he might derive a benefit from a suit by the corporation on account of it. But in order to estop them on the ground of ratification, it must appear that their consent was obtained fairly and with full notice of all the material facts of which it was their right to be informed.1 And a member cannot be bound by acquiescence or even by ratification, if there have been any fraudulent concealments on the part of the directors, or others who had a hand in bringing it about.5

1 Simons v. Vulcan Oil, etc., Co., 61 Pa. St. 202. Infra, Ch. XXV. 2 See Bagshaw v. Eastern Un. Ry. Co., 7 Hare, 130; Salomons v. Laing, 12 Beav. 377. See also, Atwool v. Merryweather, L. R. 5 Eq. 464, n., 468; Heath v. Erie Ry. Co., 8 Blatchf. 406; Hoole v. Gt. West. Ry. Co., L. R. 3 Ch. 274; Hazard v. Durant, 11 R. I. 207. But see Brewster v. Boston Theatre Co.,

104 Mass. 394-397.

3 Pitcher v. Board of Trade, 121 Ill. 412; 13 N. E. 187; Berry v. Broach, 65 Miss. 450; 4 So. 117; Dunphy v. Trav. Newsp. Ass'n, 146 Mass. 495; 16 N. E. 426; App. of Shaeber (Pa.), 17 A. 209.

4 Ives v. Smith, 3 N. Y. S. 645; 19 N. Y. S. Rep. 556.

• In Grayson v. Willoughby (Ia.), 4 L. R. An. 365, it was held that a

§ 637. Not barred by acquiescence in other acts of wrongdoing. The acquiescence of a shareholder in one act of injury to the corporation, or in a series of injuries, constitutes no bar to an action to prevent or recover for other violations of his rights by the same or other parties.

Where the acts of the directors are positively illegal, the fact of being cognizant of them, or even of deriving benefit from them, does not prevent a member from afterwards objecting.

And if such acquiescence by an original holder does not bind him, with much less reason could it be held that his acquiescence would bind a subsequent holder of the stock.1

Indeed, it is doubtful if a shareholder should, in any case, be bound by acquiescence in a transaction which

member of a mutual insurance company may recover from its directors the amount which he has paid into the association in case he has lost his insurance by their acts in consolidating with another company to which they have attempted to turn over all its insurance, but which refuses to permit him to transfer his membership to it on the ground that he has contracted a disease which makes him uninsurable, where they have received large sums of money by reason of the consolidation; and that his application to the new company for a transfer was no ratification of the consolidation such as will estop him from maintaining the action. The decision was based upon the fact that such consolidation was a fraud upon plaintiff, and the principle that when fraud enters into a transaction there is neither ratification nor estoppel. The entire assets of an insurance company were transferred to another company, in violation of law, and a consolidation effected. Held, that the fact that the policy-holders of the original company received dividends on their policies from the consolidated company does not estop them, or the receiver representing them, from maintaining an action against the directors of the original company for wasting its assets by the consolidation. Pierson v. Cronk, 13 N. Y. S. 845.

In the same case it was held that evidence that the illegal consolidation of two companies resulted in taking from the consolidated treasuries an amount largely in excess of the outstanding obligations of one of the original companies, and that the deficiency continued until the company, unable to meet its obligations, passed into the hands of a receiver, is sufficient to show that the deficiency resulted from the consolidation. See also Story on Agency, secs. 242–3.

1 Bloxam v. Metropolitan Ry. Co., L. R. 3 Ch. 337.

is clearly illegal. If he has acted as one of a majority, attempting to legalize an ultra vires act, he should be at liberty to withdraw his assent on further consideration and prevent its consummation. If an act or a course of business not authorized by the charter has been determined upon by the body of shareholders, which the agents of the corporation believe would render its franchise liable to forfeiture by the state, it is clearly their duty to refuse performance.

Courts have exercised a liberal discretion in such cases, and have granted preventive relief to shareholders who have formally acquiesced, if by so doing the rights of third parties would not be sacrificed.1

§ 638. The immediate plaintiff must not be personally disqualified. Any personal disqualification of the plaintiff will be ground for refusing relief, whatever be the equities of others, and whether it arises from his laches or his own acquiescence or that of the original holder from whom he purchased, if he had notice of it. It is a general principle, founded upon the law of contract, that the directors and the majority of a company may be restrained from employing money subscribed for one purpose in the prosecution of another, however advantageous; but, like other general principles, it is subject to many qualifications in its application. So one entitled to an equitable remedy may so conduct himself as to give rise to a new equity against himself and bar his right to the remedy.

One entitled to sue on behalf of the corporation should come with diligence to assert the right. Like many others, it may be lost by delay.2

1 Ffooks v. Southwestern Ry. Co., 1 Sm. & G. 142, 164; Graham v. Birkenhead, etc., Ry. Co., 2 McN. & G. 146; Leo v. Union Pacific Railway Co., 19 Fed. Rep. 283.

2 Ffooks v. Southwestern Ry. Co., 1 Sm. & G. 142, 164; Burt v. British

"As, on the other hand, a plaintiff, who has a right to complain of an act done to a numerous society of which he is a member, is entitled to effectually sue on behalf of himself and all others similarly interested, though no other may wish to sue, so, although there are a hundred who wish to institute a suit and are entitled to sue, still if they sue by a plaintiff who has personally precluded himself from suing, that suit cannot proceed."

§ 639. Amount of interest immaterial. Neither the motives with which the plaintiff purchased his interest, nor the smallness of that interest, is a reason for refusing relief in a meritorious case properly brought before the court.2

Such is the settled rule; but if a bill in equity is brought on behalf of a plaintiff and such others as may come in to prosecute the suit, and no others come in, the plaintiff, in order to maintain his bill, must show that he himself is entitled to equitable relief.3

And if it appears that other persons whose interests

Assur. Ass'n, 4 De G. & J. 158, 174; Taylor v. Holmes, 8 S. Ct. 1192; Belmont v. Erie Ry. Co., 52 Barb. 663; Hubbel v. Warren, 8 Allen, 173; Cent. R. R. Co. v. Collins, 40 Ga. 616.

1 Burt v. British Assur. Ass'n, 4 De G. & J. 158. Supra, § Where it was shown that the complaining shareholders had postponed taking any action for redress of the grievances complained of, for from seven to fifteen years, it was held that they had thereby forfeited their right to equitable relief. Alexander v. Searcy, 81 Ga. 536; 8 S. E. 630. See also, Taylor v. South, etc., Ry. Co., 4 Woods, 575; Houldsworth v. Evans, L. R. 3 H. L. 263; Stewart v. Erie, etc., Transp. Co., 17 Minn. 372; Peabody v. Flint, 88 Mass. 54. In this case a delay of three and a half years was held to be a bar. In Gregory v. Patchett, 33 Beav. 595, six years were held to be a bar; and in Ashurst's App., 60 Pa. St. 290, seven years.

2 See Colman v. Eastern Counties Ry Co., 10 Beav. 1; Ramsey v. Gould, 57 Barb. 398; s. c. 8 Abb. Pr. N. S. 174; Camblos v. Phil., etc., R. R. Co., 4 Brewster, 563, 591, 592; Sanford v. R. R. Co., 24 Pa. St. 378. All share in the results of the suit in proportion to interest. The shareholder bringing the suit obtains priority or preference. Wallace v. Lincoln Sav. B'k (Tenn.), 15 S. W. 448.

3 Hubbell v. Warren, 8 Allen (Mass.), 173; Moore v. S. V. Min. Co., 104 N. C. 534; 10 S. E. 679.