They are liable to respond in damages to their fellow promoters as well as the corporation for all frauds practiced upon them whereby they are induced to make investments in property or the shares of the projected corporation.1 Such agreements are clearly

promoters divided among themselves in proportion to their respective interests in the undertaking and for which they paid nothing. It was held that the relation of the vendor and vendee did not exist between the promoters and subscribers, but that, because of their concealment of the fact, the purchase was wholly at the expense and risk of the latter, they stood in the relation of trustees to them, and were liable for the damages sustained. 1 Cortes Co. v. Thannauser (April, 1891), 45 F. 730, is an important and instructive case illustrating the duties of a promoter to his associates, as well as the relations held and rights arising between him and them and the corporation after its formation. Defendants received an option to purchase mining property in Mexico, from the owners, for $110,000, and authorized an agent to sell the same for that amount, agreeing to allow him two-thirds of any excess he might obtain over that price. The agent entered into negotiations with certain persons in New York city, which resulted in the formation of a syndicate to organize a corporation for purchasing the property. The agent agreed with the promoters to sell the property for $150,000 and to subscribe and pay for two-tenths of the purchase money himself as one of the promoters. The corporation was organized, and the agent subscribed for stock to the extent of his part of the purchase money. He was irresponsible at the time, and known to be so by the defendants. He had represented to the other promoters that the price which the defendants were to pay the owners for the property was $150,000, less a small commission of about $2,500; that the whole price, less this commission, went to the owners; and that the defendants were interested only as creditors of the owners and to the extent of the commission. Before the corporation received a conveyance of the property its officers discovered the falsity of the representation made by the agent of the defendants, and notified defendants that the corporation would not accept a conveyance. In the meantime the agent, acting under a power of attorney from the corporation, had gone into possession of the property, and, in conducting the mining operations there, had created debts against the corporation beyond the amount of letters of credit which were to be furnished him by the company; but they advanced at his request about $30,000 upon drafts drawn by him upon the corporation. The corporation promptly offered to surrender possession of the property to the defendants, and upon their refusal abandoned possession. The defendants brought suits at law, one to recover the purchase price of the property, and another to recover for their advances upon the drafts. Thereupon the corporation filed this bill in equity to restrain the prosecution of the suit at law and annul the agreement of purchase. It was held (1) Complainant was entitled to rescind the purchase because of fraudulent representations of defendants' agent, though defendants them

valid when contained in the articles, especially where they relate to the acquisition of property necessary for the corporation when formed.2

3

§ 665. Personal liability of promoters.-It may be stated as a general rule that promoters are personally liable to third parties on contracts made and for expenses incurred, in attempting and proceeding to organize a corporation, although the corporation by subsequent ratification and adoption becomes also liable. • But they may by contract exempt themselves from personal liability; and if credit is given to the corporation where there is a clearly understood intention not to assume a personal liability, they cannot be personally held. But personal liability is not incurred by those

selves were innocent of fraud. (2) It is the duty of a promoter towards his associates to make full and fair disclosure of all facts within his knowledge, which, if known, would probably lead to an abandonment of the enterprise. (3) That the agent sustained a fiduciary relation to his co-purchasers, and his false representations entitled them and the corporation to rescind the agreement of purchase. (4) Defendants cannot be made liable for the organizing or conducting the corporation, although the purpose of its organization failed by reason of the fraud of the defendants' agent. (5) The complainant is liable to the defendants for the moneys advanced on the drafts of the agent to the extent of letters of credit given to him by the corporation, but no further.

1 Terrill v. Hutton, 4 H. L. Cas. 1091; Gunn v. London, etc., Ins. Co., 12 C. B., N. S. 694; In re Brampton, etc., Ry., L. R. 10 Ch. 177; Savin v. Haylake Ry., L. R. 1 Ex. 9.

2 Touche v. Metrop. Ry., etc., Co., L. R. 6 Ch. 671; rev'g 4 De G. M. & G. 465. See Williams v. St. George, etc., Co., 2 De G. & J. 547.

* Munson v. Syracuse, etc., R. R. Co., 103 N. Y. 58, 75; 8 N. E. 355; Gent v. Mfg., etc., Co., 107 Ill. 652; s. c. 106; Id. 252; Georgia Co. v. Castleberry, 43 Ga. 187; Bluehill Academy v. Witham, 13 Me. 403; Eley v. Positive, etc., 34 L. T. Rep. (N. S.) 190; 1 Ex. D. 88; Brown v. La Trinidad, 58 L. T. Rep. 137; Hutchinson v. Surrey, etc., Ass'n, 11 C. B. 689; Leominster, etc., Co. v. Shrewsbury, etc., Ry., 3 K, & J. 654.

4 Rockford, etc., R. R. v. Sage, 65 Ill. 328.

5 Safety, etc., Co. v. Smith, 65 Ill. 309.

• See Western, etc., Co. v. Cousley, 72 Ill. 531; Morrison v. Gold, etc., Co., 52 Cal, 306; N. Y., etc., R. R. v. Ketchum, 27 Conn. 169.

not participating as promoters at the time the liability is incurred.1

Under the system which prevails in England, of appointing a provisional committee to procure subscriptions, and take the preliminary steps toward the formation of a corporation, the members of such provisional committee do not incur personal liability. Whether there is an assumption of personal liability by provisional committee is a question for the jury in each case.3

§ 666. Liability to account.-When the action is for an accounting, it can only be maintained by showing that, at the time the purchase was made, the promoters were so acting as to place themselves in a position which would prevent them from making a secret profit on the sale of the property to the company after it was formed.1

1 Reichwald v. Comm. Hotel Co., 106 Ill. 439; Grape, etc., Co. v. Small, 40 Md. 395.

2 See Battelle v. Northwestern, etc., Co., 33 N. W. Rep. 327; 37 Minn. 89. Compare Spiller v. Paris, etc., Co., L. R. 7 Ch. D. 368.

3 Re Cumberland Ave. Hotel Co., Ltd., Sully's Case, 54 L. T. Rep. N. S. 777; Eley v. Positive, etc., Co., L. R. 1 Ex. D. 20; 60 L. T. Rep. 406; Aldred v. North, etc., Co., 1 Ry. Cas. 404; Re Rotheram, etc., Co., 50 L. T. Rep. 219.

The principles stated in the text were applied in the following cases: Ladywell Min. Co. v. Brookes, L. R. 35 Ch. D. 400; St. Louis & U. Silver Min. Co. v. Jackson, 5 Cent. L. J. 317; Getty v. Devlin, 70 N. Y. 504; Simons v. Vulcan Oil Co., 61 Pa. St. 202. Promoter who secures an option on a property with a view to organizing a corporation, and selling property to it, and who, together with another person employed by him, forms the company and places the stock on representation that the property cost $2,000 more than it actually did, and also that certain notes would be included in the sale, but after the company is organized informs the stockholders that the notes were not included though they were received by himself, is accountable to the corporation for the profits thus realized by himself, as he occupied a position of trust and could not make a secret profit out of the transaction. South Joplin Land Co. v. Case (Mo.), 16 S. W. 390. Where by the registered articles of a company a promoter was to receive $1,500 and the promoter was the owner of the property which was bought by the company of him for $6,250, and which he had recently purchased, it was held that the difference between the $1,500 and $6,250 must be considered as so much promotion money, and not warranted by the articles. Kent v. Freehold Land & Brick-making Co., L. R. 4 Eq. 58S.

For all necessary expenditures and services actually rendered in setting a corporate enterprise on foot and advancing its interests, a party is entitled to reimbursement and compensation. But the right of the company to have secret profits refunded exists notwithstanding the deceit was not practiced directly upon it.. If it is practiced upon other promoters through whom the company acquired title it is entitled to an accounting. And in such case the fact that the company has compromised a suit against the vendors for the rescission of the contract of sale affords no defense to an action against promoters to compel them to account for secret profits. It seems that in no case is the rescission of the contract necessary to entitle the company to recover. There is, however, a conflict of authority on this point.* It has been held that in the case of a secret understanding between a promoter and a third party, whereby the property was sold, and such third party and the promoter received a bonus on the amount stipulated in the contract, as returned to the corporation, that the company might recover from the vendor the amount of the bonus paid to the promoter.5

The same principles apply where a shareholder be

1 Lydney & Wigpool Iron Ore Co. v. Bird, L. R. 33 Ch. D. 85; Bagnall v. Carlton, L. R. 6 Ch. Div. 371.

2 Beck v. Kantorewicz, 3 Kay & J. 230.

3 Bagnall v. Carlton, L. R. Ch. Div. 371.

The rule stated in the text was affirmed in Emma Silver Mir. Co. v. Lewis, L. R. 4 C. P. Div. 396, 497. Compare Ladywell Min. Co. v. Brookes, L. R. 35 Ch. D. 400. Where promoters, by an agreement with the vendors, had secretly obtained title to a portion of the stock issued in payment for the property, it was held that the company had a right of election whether it would insist upon the shares being restored to it, or to an account for the profits of the sale, the shares having been sold, or would claim damages for the loss sustained through being deprived of the right to place the shares with other persons. Chandler v. Bacon, 30 Fed. Rep. 538. See Joy v. Marion, 28 Mo. App. 55; Abbott v. Hapgood, 150 Mass. 248; 22 N. E. 907.

5 Whaley, etc., Co. v. Green, L. R. 5 Q. B. D. 109.

comes interested as promoter of a sale of the property of the corporation, retaining, through a secret understanding, a bonus over and above the price reported to the company. In such case the secret understanding is a fraud upon the company, and is founded upon an illegal consideration. The money paid is treated as part of the purchase money for which the company is entitled to an account from the recipient.1

§ 667. Parties. In these actions, as in those of suits against officers and agents where a member is plaintiff, he must allege in the complaint and prove an unavailing demand upon the corporation to bring the suit in its own name and right. Where the corporation is not the plaintiff, it must be joined as defendant."

1 Stanford v. Gillies, 1 Ollivier, B. & F. Sup. Ct. (N. C.), 91. For cases where promoters of companies were held liable for misrepresentations and fraudulent concealments, see Phosphate Sewage Co. v. Hartmont, L. R. 5 Ch. D. 394; In re Royal Victoria Palace Syndicate, L. R. 18 Eq. 661; Petrie v. Guelph Lumber Co., 11 Can. S. C. 451; 15 Am. & End. Corp. Cas. 487. As to the power of promoters to bind the corporation, see Munson v. Syracuse G. & C. R. Co., 29 Am. & Eng. R. Cas. 377; 103 N. Y. 58; Braddock v. Phil. M. & M. R. Co., 44 N. J. L. 363; Gent v. Mfg. & M. Mut. Ins. Co., 107 Ill. 652; Joslin v. Stokes, 38 N. J. Eq. 31; Carmody v. Powers, 13 Am. & Eng. Corp. Cas. 4; Paxton Cattle Co. v. First Nat. B'k of Arapahoe, 17 Ib. 1, note; 21 Neb. 621; 33 N. W. 271; 4 Am. & Eng. Ency. of Law, 201.

2 Atwool v. Merriweather, 37 L. J. Ch. 35, see Beatty v. Neelon, 13 Can. S. C. 1; 19 Am. & Eng. Corp. Cas. 236; Cortes Co. v. Traunhauser, 45 F. 730.