he abstained from participating in the action of the directors at the time of the prohibited transaction does not remove the taint, as it was his duty to be active in his trust, and for that purpose to keep himself clear of embarrassing positions.1 Nor will it avail a trustee, seeking to maintain the contract, that it was the best one which could have been made for the corporation. The rule is the same, whether the director entered into the contract at its inception, or acquired an interest in it subsequently; whether he was a sole director, or one of a body; whether he was a sole or joint contractor, or whether the contract made while he was a director was modified after he ceased to be such. It has been held to disable him from receiving a share of the profits of a contract made with another corporation of which he is a member, whether he was a member at the time or became one later.5 The contract is voidable by the corporation against other parties who, being co-contractors with the director, knew his fiduciary character." A director cannot buy corporate property directly or indirectly; he cannot buy at a sale on execution, or at a judicial sale. He cannot make a profit out of sales made by him to the corporation, as by buying at one price for himself and selling at a higher one to the corporation; 10 nor can he enforce an executory contract for furnishing supplies to the corporation." He cannot make a profit out of shares of the capital stock belonging to the corporation, which were placed in his hands for sale,12 or receive where the articles of association were construed as allowing a director to have an interest in business brought by him to the company. Coal Co. v. Cumberland Coal & I. Co., 16 8 Hoyle v. Plattsburgh & M. R. Co., 54 N. Y. 314; but quære as to his right to 1 Stewart v. Lehigh Valley R. Co., 9 buy at a sale on an execution in his own Vroom, 505. 2 Ib.; Aberdeen R. Co. v. Blaikie, 1 Macq. 461. * European & N. A. R. Co. v. Poor, 59 Me. 277. ✦ Aberdeen R. Co. v. Blaikie, 1 Macq. 461. favor, or on a prior execution, where he could not otherwise protect himself. Id. See Harts v. Brown, 77 Ill. 226. 9 Covington & L. R. Co. v. Bowler, 9 Bush, 468. 10 Great Luxembourg R. Co. v. Magnay, 25 Beav. 586; Benson v. Heathorn, 1 Y. & Gilman, C., & S. R. Co. v. Kelly, 77 C. 326; Simons v. Vulcan Oil & M. Co., Ill. 426. Hoffman Steam Coal Co. v. Cumberland Coal & I. Co., 16 Md. 456; Blake v. Buffalo Creek R. Co., 56 N. Y. 485. 7 Abbot v. American Hard Rubber Co., 33 Barb. 578; Wilson v. Central Bridge, 9 R. I. 590; Cook v. Berlin Woollen Mill Co., 43 Wis. 433; Hoffman Steam 61 Pa. St. 202; McElhenny's Appeal, 61 Pa. St. 188; Rice's Appeal, 79 Pa. St. 168; Getty v. Devlin, 54 N. Y. 403. 11 Aberdeen R. Co. v. Blaikie, 1 Macq. 461; Flanagan v. Great Western R. Co., L. R. 7 Eq. Cas. 116. 12 York & M. N. R. Co. v. Hudson, 16 Beav. 485. a consideration for selecting a particular route for the railroad.1 He cannot have an interest in contracts for the construction of the railroad made by the corporation with contractors; and the corporation may recover of him the profits he has received therefrom. He cannot hold for himself property which it was his duty to acquire for the corporation; and, if acquired by him, he I will hold the same as trustee for it. Thus, if he takes a deed of land to himself which he was deputed to buy for the corporation, or which, as a part of the location, is essential to its business, the purchase will inure to its benefit. He cannot treat purchases made by himself for the corporation as his own purchases in order to make a profit thereby.4 6 A director cannot, as a creditor of the corporation, secure an advantage to himself which is not common to all its creditors; 5 nor can he purchase claims against it on his own account, and any purchase made by him will inure to its benefit; nor can he pledge or assign corporate property for the security or payment of his individual debt. A vote of the directors transferring property to any one of their number without consideration, or simply to induce him to do his duty, is void.8 Agreements for influencing the action of the directors to the prejudice of the corporation, or to enable the directors to keep the control of its management, are void. A director who receives from the promoters of the company a gift of shares, as an inducement to become a 1 Holladay v. Davis, 5 Oreg. 40. 2 European & N. A. R. Co. v. Poor, 59 Me. 277; Flint & P. M. R. Co. v. Dewey, 14 Mich. 477; Gilman, C., & S. R. Co. v. Kelly, 77 Ill. 426; Paine v. Lake Erie & L. R. Co., 31 Ind. 283; Port v. Russell, 36 Ind. 60; Ryan v. Leavenworth, A., & N. W. R. Co., 21 Kan. 365; Wardell v. Union Pacific R. Co., 4 Dill. 330; 5 Cent. Law J. 527; United States v. Union Pacific R. Co., 98 U. S. 569, 610; Thomas v. Brownville, Ft. K., & P. R. Co. (U. S. C. C., D. Neb., May, 1880), 2 Fed. Rep. 877. 3 Blake v. Buffalo Creek R. Co., 56 N. Y. 485; Buffalo, N. Y., & E. R. Co. v. Lampson, 47 Barb. 533. 4 Blair Town Lot & L. Co. ". Walker, 50 Iowa, 376. 5 Koehler v. Black River Falls I. Co., 2 Black, 715; Emporium Real Estate & M. Co. v. Emrie, 54 Ill. 345; Cumberland Coal & I. Co. v. Parish, 42 Md. 598; Bennett's Case, 18 Beav. 339. See Smith v. Lansing, 22 N. Y. 520; Murray v. Vanderbilt, 39 Barb. 140. He may buy the bonds of the corporation. Harts v. Brown, 77 Ill. 226. 6 Kimmell v. Geeting, 2 Grant, 125; McDonald v. Haughton, 70 N. C. 393; Brewster v. Stratman, 4 Mo. App. 41; European & N. A. R. Co. v. Poor, 59 Me. 277, 279; Ryan v. Leavenworth, A., & N. W. R. Co., 21 Kan. 365, 398. But see Bradly v. Williams, 3 Hughes, 26; Merrick v. Peru Coal Co., 61 Ill. 472. Conro v. Port Henry Iron Co., 12 Barb. 27. 8 Hilles v. Parrish, 1 McCarter (N. J.), 380; Butts v. Wood, 37 N. Y. 317, 38 Barb. 181. 9 Bliss v. Matteson, 45 N. Y. 22; Northern R. v. Concord R., 50 N. H. 166. director, may be compelled to restore them, or to account to the company for their highest value while in his possession.1 A director may lend money to, or make advances for, the corporation, and he is entitled to reimbursement for advances in its behalf made in good faith, although it had no power to borrow.3 A mere stockholder does not stand in a fiduciary relation to the corporation.* 6 The contracts and transactions of a director, which involve a breach of his duty as trustee, are not void but voidable; and they are voidable only at the election of the corporation.5 Its right of election must be exercised within a reasonable time, and is lost by acquiescence. It must adopt or repudiate the contract or transaction altogether, and it must not disable itself from putting the director in the position he was in before it elected to reject." If it repudiates his purchase of the corporate property, it must reimburse him for the amount paid by him.8 The corporation may ratify the director's acts which are constructively a breach of trust, but the ratification without a knowledge of the facts will not estop it from repudiating the transaction.10 Its acquiescence is not to be presumed from its rejection of the director's unreasonable propositions. A direc 1 Nant-Y-Glo & B. I. Co. v. Grave, L. R. 12 Ch. Div. 738; McKay's Case, L. R. 2 Ch. Div. 1; Pearson's Case, L. R. 5 Ch. Div. 336; Carling's Case, L. R. 20 Eq. Cas. 580. 2 Twin-Lick Oil Co. v. Marbury, 91 U. S. 587; Bradly v. Williams, Hughes, 26; Merrick v. Peru Coal Co., 61 Ill. 472; Harts v. Brown, 77 Ill. 226; Darst v. Gale, 83 Ill. 136; Hotel Co. v. Wade, 97 U. S. 13. tween the two corporations, at the instance merely of a stockholder of either, against its will. Wallace v. Long Island R. Co., 12 Hun, 460. 6 Ashhurst's Appeal, 60 Pa. St. 290; Watts's Appeal, 78 Pa. St. 370; TwinLick Oil Co. v. Marbury, 91 U. S. 587; Hayward v. National Bank, 96 U. S. 611; Ramsey . Erie R. Co., 7 Abbott Pr. N. 8. 156. But see Thomas . Brownville, Ft. K., & P. R. Co. (U. S. C. C., D. Neb., 3 Chippendale's Case, 4 De Gex, M. & May, 1880), 2 Fed. Rep. 877. G. 19. 4 Mickles v. Rochester City Bank, 11 Paige, 118, 127; Merrick v. Peru Coal Co., 61 Ill 472. › European & N. A. R. Co. v. Poor, 59 Me. 277; Stewart v. Lehigh Valley R. Co., 9 Vroom, 505; Risley v. Indianapolis, B., & W. R. Co., 62 N. Y. 240, 1 Hun, 202, 4 Thomp. & C. 13; Barnes v. Brown (N. Y. Ct. App., 80 N. Y. 527), 10 N. Y. Week. Dig. 227; Hedges v. Paquett, 3 Oreg. 77. The fact that two corporations have, to some extent, the same directors, is not sufficient of itself to avoid a contract be 7 Great Luxembourg R. Co. v. Magnay, 25 Beav. 586; Risley v. Indianapolis, B., & W. R. Co., 62 N. Y. 240, 1 Hun, 202, 4 Thomp. & C. 13; Peninsular Bank v. Hanmer, 14 Mich. 208. 8 Covington & L. R. Co. v. Bowler, 9 Bush, 468. 9 Hotel Co. v. Wade, 97 U. S. 13. 10 Hoffman Steam Coal Co. v. Cumberland Coal & I. Co., 16 Md. 456; Gilman, C., & S. R. Co. v. Kelly, 77 Ill. 426. 11 Covington & L. R. Co. v. Bowler, 9 Bush, 468. tor's fraud cannot be condoned by the board of directors, or by the stockholders, without unanimous consent. A director does not stand in the relation of a trustee to individual stockholders; and his superior knowledge of the value of the shares of the capital stock, gained through his official position, will not, in the absence of fraudulent statements, affect his transactions with them in the purchase or sale of shares.2 Diligence in the Trust. The directors are liable to the corporation for their own frauds and breaches of trust, and for those of subordinate agents, at which they have connived. Their liability is not confined to losses in transactions from which they have derived or sought some personal advantage. They are bound, in the discharge of their duties, to act in good faith and use ordinary diligence, but they are not liable for losses arising from mistakes of judgment. Thus they are liable for embezzlements by officers and agents whom they have appointed or kept in office, with knowledge that they were unworthy of trust. A director is not, however, a surety for the fidelity of such officers and agents; and where he took ordinary precautions, and had no grounds of suspicion, he is not liable for their misconduct, even though the fraud covered a long period, and a special scrutiny would have disclosed it. What should be the character of the supervision of directors over subordinate agents, how frequent and minute should be their examination of the books and property of the corporation, when their observation of the conduct of such agents may be in a great measure perfunctory, and when it must approach to espionage, these and other considerations determining their liability must depend upon the facts of the case, the customs of the business, and the circumstances inviting confidence or suspicion.4 A director is not liable for ruinous investments of the cor 1 Hazard v. Durant, 11 R. I. 195; Paine v. Lake Erie & L. R. Co., 31 Ind. 283, 348; Thomas v. Brownville, Ft. K., & P. R. Co. (U. S. C. C., D. Neb., May, 1880), 2 Fed. Rep. 877. Works, 50 Vt. 477; York & N. M. R. 2 Board of Commissioners v. Reynolds, 620. 44 Ind. 509. 3 Angell & A. on Corp. § 314; Robinson v. Smith, 3 Paige, 222; Spering's Appeal, 71 Pa. St. 11; Watts's Appeal, 78 Pa. St. 370; Lewis v. St. Albans I. & S. 4 Scott v Depeyster, 1 Edw. Ch. 513, Spering's Appeal, 71 Pa. St. 11, Dunn v. Kyle, 14 Bush, 134; Hodges v. New England Screw Co., 1 R. I. 312, 3 R. I. 9. See New York & N. H R. Co. v. porate property, except when made in bad faith or with crassa negligentia; and, in determining his liability, courts will not exact of him the high degree of caution which is approved by the judicial mind, but will judge his conduct by what was at the time customary and generally thought proper in such transactions.1 It is suggested by some authorities, that not being technically a trustee, and being elected by stockholders, he is to be held to a less rigid liability than ordinary trustees.2 Directors are not liable for losses occasioned by honest mistakes of the law; as where in good faith they make a prohibited investment, or perform acts ultra vires, or declare a dividend when there are no funds which can be legally appropriated for the purpose.3 Stockholders who have known and acquiesced in the illegal transactions cannot hold the directors responsible for losses occasioned by such transactions.4 Liability to the Public for Fraud. A director who has made false statements, knowing them to be such, as to the condition of the corporation, or as to material facts affecting the value of its capital stock, is liable to parties to whom he made them, who relied upon his statements, and who suffered injury by giving them credit. The action being one for deceit, the statement, to be actionable, must be false, material in its kind, and have had the effect to mislead the injured party. Fraud of this kind may be committed in the way of false representations in a prospectus or report printed for general circulation. Any one who, relying upon such false representations, purchases the stock from the corporation, or from any owner thereof, has a right of action against any one or more directors who issued or sanctioned them; and no Schuyler, 34 N. Y. 30, 57. The directors are not bound to require a bond of the treasurer where such is not the practice. Scott v. Depeyster, 1 Edw. Ch. 513. But a president has been held liable for not requiring a bond where the by-laws imposed on him the duty of requiring one. Pontchartrain R. Co. v. Paulding, 11 La. 41. As to his liability for omitting to bring a suit to recover a debt due to the corporation, see Forest of Dean Coal M. Co., In re, L. R. 10 Ch. Div. 450. 1 Overend & G. Co. v. Gibb, L. R. 5 H. L. 480, L. R. 4 Ch. App. 701; Turquand v. Marshall, L. R. 4 Ch. App. 376, L. R. 6 Eq. 112; Spering's Appeal, 71 2 Spering's Appeal, 71 Pa. St. 11. 3 Scott v. Depeyster, 1 Edw. Ch. 513; Spering's Appeal, 71 Pa. St. 11; Watts's Appeal, 78 Pa. St. 370; Hodges v. New England Screw Co., 1 R. I. 312, 3 R. I. 9; Godbold v. Branch Bank of Mobile, 11 Ala. 191; Lexington & O. R. Co. v. Bridges, 7 B. Mon. 556. See Turquand v. Marshall, L. R. 4 Ch. App. 376, L. R. 6 Eq. Cas. 112. 4 Scott v. Depeyster, 1 Edw. Ch. 513; Watts's Appeal, 78 Pa. St. 370. 5 Teague v. Irwin, 127 Mass. 217. |