are hostile to those of the company have agreed with the plaintiff to bear and pay the expenses of the litigation, relief, especially upon interlocutory motion, will be refused.1

§ 640. The rule in federal courts.-A qualification of the general right of a shareholder to sue is found in the practice of the United States circuit courts. By act of Congress, March 3, 1875, these courts are authorized to dismiss any suit in which it appears that the parties have been improperly or collusively made or joined as defendants for the purpose of giving the court jurisdiction under that act.2

§641. The character of the tribunal does not alter that of the action. The fact that a court of equity is the proper tribunal in which to bring actions for relief against corporate agents, does not change their character from legal to equitable, or vice versa.3

1 Belmont v. Erie, Ry. Co., 52 Barb. 663. But see Ramsey v. Gould, 57 Barb. 398.

The court, in pursuance of that authority, subsequently formulated the following equity rule, No. 94: "Every bill brought by one or more stockholders in a corporation against the corporation and other parties, founded on rights which may properly be asserted by the corporation, must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share had devolved upon him since by operation of law; and that the suit is not a collusive one, to confer -on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action." Effect was given to that rule in Hawes v. Oakland, 104 U. S. 450 460; Detroit v. Dean, 106 U. S. 537; Dimpfell v. Railroad Co., 110 U. S. 209; and in Squair v. Lookout Mt. Co., 42 F. 729; and the abuses which led to its enactment were stated by Justice MILLER. The decision in that case is therefore generally inapplicable to cases brought in state courts. An averment that protests were made against the diversion of corporate funds and other abuses of trust, though it was not alleged that such protests were made by or on behalf of complainant or any other stockholder, was held to bring the case within the spirit of equity rule 94, and entitle complainant to sue. Weidenfeld v. Alleghany & K. R. Co. et al., 47 F. 11.

3 Where the action was brought for a cancellation of certificates of stock al

Where a state court refuses to permit the receiver appointed by it either to sue or to be made a party defendant, the jurisdiction of the federal court fails.1

§ 642. Practice-Trial.-The complaint in such action is not rendered defective by its failure to allege that the corporation has paid out any money or sustained any damage by defendant's failure to perform their agreement to pay the deferred purchase price of the land, as such payment is essential to the protection of the corporation's right to the property.2 The acts complained of in such action being within the knowledge of the defendants, denial should not be upon information and belief. An answer so framed may be disregarded by plaintiff and a judgment had upon the pleadings. The action being purely equitable, the defendants are not entitled, as a matter of right, to a trial of the whole issues by a jury. But it is proper in such action to frame issues to be tried by a jury. In such actions by

leged to have been illegally issued, the equitable relief could not be granted because no offer had been made to return the purchase money and rescind the contract. And it was held that such being the case, the legal action for damage was barred because not brought within six years. Pierson, Receiver, etc., v. McCurdy, 33 Hun, 520. In Jewett v. Bradford Sav. Bank & Trust Co., 45 F. 801 (April, 1891), it was held that a proceeding in equity to compel the transfer upon the books of a corporation of corporate stock which the complainant had purchased from a third person, is not a suit "to recover the contents of any promissory note or other chose in action in favor of any assignee" of which jurisdiction is excluded from the federal courts by Act Cong. 1888, sec. 1.

1 Porter v. Sabin, 36 F. 475. Where a suit is brought against a corporation and its officers by a stockholder merely for the purpose of obtaining an accounting and the appointment of a receiver, it is error to decree that the corporate property be sold, and the proceeds divided among the stockholders. Wayne Pike Co. v. Hammons (Ind.), 27 N. E. 487.

2 Woodroof v. Howes (Cal.), 26 P. 111.

3 Loveland v. Garner, 79 Cal. 317; 21 P. 766.

↑ Brinkerhoff v. Bostwick, 105 N. Y. 567; 12 N. E. 58. See Hun v. Cary, 82 N. Y. 65; Bradley v. Aldrich, 40 Id. 504; Davidson v. Associates of Jersey Co., 71 N. Y. 333, 340. The complaint should be sufficiently specific to clearly show the ultra vires nature of the transaction. Thompson v. Moxey (N. J.), 20 A.

shareholders against directors, to recover alleged losses caused by their inattention and mismanagement, the burden is on complainant, not only to prove the losses, but that such losses were the consequence of defendants' negligence.1

§ 643. Expenses of suit. The owner of stock in a corporation who sues for himself and all other shareholders successfully, for a wrong done to the corporation, is entitled to be reimbursed, his actual and necessary expenses and expenditures including attorney's fees out of the corporate fund.2

§ 644. Liability for inducing subscriptions through false publications. The general public is so at the mercy of company promoters, sometimes over-sanguine, oftener dishonest, that it requires all the protection that the law can give it. If persons take upon themselves to make false assertions as to which they are ignorant, whether they are true or not, they must, in a civil point of view, be held responsible to the same extent as if they had asserted that which they knew to be untrue.

The general result of all the decisions may be thus stated: Directors and promoters are not liable for injuries and losses resulting from false statements published by them which they believed to be true, though they be guilty of a slight dereliction of duty in not ascertaining the reasonableness or unreasonableness of their belief."

1 Wallace v. Lincoln Sav. Bank (Tenn.), 15 S. W. 448; holding also that a director, in a suit between himself and the corporation, or those suing upon the corporate right of action for losses resulting from his alleged negligence, is not presumed to have knowledge of all that is shown by the books of the company. Such presumption applies only to suits between the bank and a stranger. 2 Winthrop v. Meeker Iron Co., 17 Feb. Rep. 48.

3 Thus the directors of a tramway company issued a prospectus in which they stated that they were authorized to use steam power, and by this means a great saving in working would be effected, but at the time of making this statement they had not in fact obtained authority to use steam power, though they honestly

But they are liable when they make statements to be acted upon by others: 1. If false, and known to be false; 2. If made recklessly, or without care whether they are true or false; 3. Where they are guilty of gross negligence itself amounting to legal fraud in not availing themselves of the means within their reach of ascertaining the truth or falsity of such statements; 4. Where the nature of such false statements, the manner of making them, and the circumstances under which they are made amount to a warranty of their truth, however honestly they were made.

§ 645. Presumption in cases of false publications.—It has become well settled both in England and in this country that where a false statement is published or uttered publicly in such a way that it may reach an indefinite

believed that they would as a matter of course. It was held that they were not liable in an action of deceit brought by a shareholder to apply for shares by the statement in the prospectus. Dewey v. Peck, H. of L. 26; Am. & Eng. Cor. Cas. 341. See also, Arnison v. Smith, L. R. 41 Ch. D. 348; Nelles v. Ontario Inv. Ass'n, Am. & Eng. Cor. Cas. 82. The whole law and many cases on the subject may be found in the notes to Chandelor v. Lopus, 1 Smith Leading Cas. 165 & 2 Id. 74. In Arnison v. Smith, supra, persons had taken debenture stock in a company in reliance on a statement in a prospectus issued by the directors that $200,000 of share capital had been subscribed, when in fact it had only been allotted in fully paid up shares to the contractor. After allotment the directors sent to all the allotters of shares, along with their stock certificates, a circular which, amid statements about other matters, stated the truth as to the matter misrepresented, but did not admit the misrepresentation nor inform the allotters they could retire and get back their money. The concern proving a failure, some of those who had subscribed on the faith of the misrepresentation, and completed payment of all the installments, sued the directors for damages. It was held that the untrue statement in the prospectus was to be taken as inducing the allottees to enter into the contract and entitled them to damages; and that its effect was not done away with by the circular, and that those who went on to pay up in full, after receiving the circular, could recover damages for the loss of the money paid by them after receiving it as well as in respect to what they had paid at first. KEKEWICH, J., said: “It is not possible to analyze the different motives which actuated the applicants for this stock. The whole passage in which this sentence occurs is an exposition of the answer to be made to this defence, showing that as long as the statement in the prospectus was a material inducement the other motives which may also have induced the parties to make applications are of no value.”

number, the presumption arises that all who have acted upon it saw it or heard it and relied upon and were deceived by it.

This principle is often applied to statements contained in reports of corporate officers to stockholders and to prospectuses and advertisements published by them.1 In Peek v. Guerney 2 the court said: "The report, though originally made to the shareholders, was intended for the information of all persons who were disposed to deal in shares; and the representation must be regarded as having been made not indirectly, but directly to each person who obtained the report from the bank where it was publicly announced it was to be bought, in the same manner as if it had been personally delivered to him by the director."8

The doctrine thus established in England, and since followed, was recognized and adopted in Cross v. Sack

1 In Davidson v. Talloch, 6 Jur. (N. S.) 543, it was held that in such case no privity need be shown between the officer issuing or publishing the false statements and the purchaser. One acting upon it in the purchase of stock has his remedy against all who participate in making or issuing the report. But the superior court of Massachusetts has recently decided (Sept., 1891), and apparently contrary to principle and the weight of authority, that no liability is incurred by corporate officers where notes of the corporation are induced to be taken by false and fraudulent representations as to the amount of its paid, up capital stock contained in their statement filed with the state corporation commissioner as required by statute. The reason assigned by the court was that such a statement is not addressed to nor intended for the public. Hunnewell v. Duxbury (Mass.), 28 N. E. 267. It might be pertinent to inquire "For whom were the statements intended if not for the public?"

2 L. R. 6 H. L., citing and commenting upon Scott v. Dixon, 29 L. J. (Ex.) 62. 3 See also Gerhard v. Bates, 20 Eng. L. & Eq. 129. In Cullan v. Thompson, 6 L. T. (N. S.) 870, where directors had issued false reports, and the manager and secretary supplied detailed statements for said reports knowing them to be false, and that they were to be used for the fraudulent purpose of misleading and deceiving third parties acting on the report in the purchase of shares; that each of the officers of the company who knowingly assisted in the fraud was personally liable to third parties for the loss caused by such misrepresentation in the report, though the report was signed only by the directors and not by the subordinate officers.