knew as well as he the probable price that might be obtained on such sale. The lands were the only valuable asset owned by the company. Under these circumstances and before the negotiations for the sale were completed the defendant employs an agent to purchase the stock, and conceals from the plaintiff's agent his own identity and his knowledge of the state of the negotiations and their probable result, with which he was familiar as the agent of the shareholders and much of which knowledge he obtained while acting as such agent and by reason thereof. The inference is inevitable that at this time he had concluded to press the negotiations for a sale of the lands to a successful conclusion, else why would he desire to purchase more shares which, if no sale went through, were in his opinion, worthless, because of the failure of the Government to properly protect the lands in the hands of their then owners? The agent of the plaintiff was ignorant in regard to the state of the negotiations for the sale of the land, which negotiations and their probable result were a most material fact affecting the value of the shares of stock of the company, and he would not have sold them at the price he did had he known the actual state of the negotiations as to the lands and that it was the defendant who was seeking to purchase the stock. Concealing his identity when procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of the defendant. Why did he not ask Jones, who occupied an adjoining office, if he would sell? But by concealing his identity he could by such means the more easily avoid any questions relative to the negotiations for the sale of the lands and their probable result, and could also avoid any actual misrepresentations on that subject, which he evidently thought were necessary in his case to constitute a fraud. He kept up the concealment as long as he could, by giving the check of a third person for the purchase money. Evidence that he did so was objected to on the ground that it could not possibly even tend to prove that the prior consent to sell had been procured by the subsequent check given in payment. That was not its purpose. Of course, the giving of the check could not have induced the prior consent, but it was proper evidence as tending to show that the concealment of identity was not a mere inadvertent omission, an omission without any fraudulent or deceitful intent, but was a studied and intentional omission to be characterized as part of the deceitful machinations to obtain the purchase without giving any information whatever as to the state and probable result of the negotiations, to the vendor of the stock, and to in that way obtain the same at a lower price. After the purchase of the stock he continued his negotiations for the sale of the lands, and finally, he says, as administrator general of the company, under the special authority of the shareholders, and as attorney in fact he entered into the contract of sale December 21, 1903. The whole transaction gives conclusive evidence of the overwhelming influence defendant had in the course of the negotiations as owner of a majority of the stock and as agent for the other owners, and it is clear that the final consummation was in his hands at all times. If under all these

facts he purchased the stock from the plaintiff, the law would indeed be impotent if the sale could not be set aside or the defendant cast in damages for his fraud.

The Supreme Court of the islands, in holding that there was no fraud in the purchase, said that the responsibility of the directors of a corporation to the individual stockholders did not extend beyond the corporate property actually under the control of the directors; that they did not owe any duty to the members in respect to their individual stock, which would prevent them from purchasing the same in the usual manner. While this may in general be true, we think it is not an accurate statement of the case, regard being had to the facts above mentioned.

It is said that by the code of commerce of the Philippine Islands the directors are declared to be mandatories of the society, and that by article 1459 of the Spanish Civil Code they are prohibited from acquiring by purchase, even at public or judicial auction, the property the administration or sale of which may have been entrusted to them, and that this is the extent of the prohibition. This provision has no reference to the purchase for himself, under such facts as existed here, by an officer of a corporation, of stock in the corporation owned by another. The case before us seems a plain. one for holding that, under the circumstances detailed, there was a legal obligation on the part of the defendant to make these dis

closures.

* *

Other objections made by the defendant's counsel we have examined, but do not regard them as important. We therefore reverse. the judgment of the Supreme Court, dismissing the complaint and affirm that of the Court of First Instance, and

It is so ordered.34

34 In Oliver v. Oliver (1903) 118 Ga. 362, 45 S. E. 232, held that where a president and director of a corporation purchases its stock from shareholders at $110 per share, studiously concealing the circumstance that negotiations for the sale of the company's properties are being consummated, which would make the stock worth $185 per share, the shareholders are entitled to a rescission of the sale of their stock. The court, speaking by Lamar, J. (now Mr. Justice Lamar) said: "No process of reasoning and no amount of argument can destroy the fact that the director is, in a most important and legitimate sense, trustee for the stockholder. Jackson v. Ludeling, 21 Wall. 616: 2 Pom. Eq. Jur. (2 ed.) § 1090. Not a strict trustee, since he does not hold title to the shares; not even a strict trustee who is practically prohibited from dealing with his cestui que trust; but a quasi trustee as to the shareholder's interest in the shares. If the market or contract price of the stock should be different from the book value, he would be under no legal obligation to call special attention to that fact; for the stockholder is entitled to examine the books, and this source of information, at least theoretically, is equally accessible to both. It might be that the director is in possession of information which his duty to the company requires him to keep secret; and if so, he must not disclose the fact even to the shareholder; for his obligation to the company overrides that to an individual holder of the stock. But if the fact so known to the director cannot be published, it does not follow that he may use it to his own advantage, and to the disadvantage of one whom he also represents. The very fact that he cannot disclose prevents him from dealing with one who does not know, and to whom material information cannot be made known. If, however,

the fact within the knowledge of the director is of a character calculated to affect the selling price, and can, without detriment to the interest of the company, be imparted to the shareholder, the director, before he buys, is bound to make a full disclosure. In a certain sense the information is a quasi asset of the company, and the shareholder is as much entitled to the advantage of that sort of an asset as to any other regularly entered on the list of the company's holdings. If the officer should purposely conceal from a stockholder information as to the existence of valuable property belonging to the company, and take advantage of this concealment, the sale would necessarily be set aside." (pp. 367-8.)

In Stewart v. Harris (1904) 69 Kans. 498, 77 Pac. 277, 66 L. R. A. 261, 105 Am. St. 178, Oliver v. Oliver (1903) 118 Ga. 362, 45 S. E. 232, is followed and Atkinson, J., in repudiating Board of Commissioners of Tippecanoe Co. v. Reynolds (1873) 44 Ind. 509, said: "The rule laid down has met with much criticism. The position taken leaves the stockholders' interest in the corporation and all matters affecting its value wholly in the charge and keeping of the managing officers of the corporation, and leaves the stockholders their legitimate prey. We cannot give the sanction of our approval to the views there expressed." But see, contra, Crowell v. Jackson (1891) 53 N. J. L. 656, 23 Atl. 426.

See also note, 17 Harv. Law Rev. 58; and article by H. L. Wilgus in 8 Michigan Law Rev. 267.

DE FACTO DIRECTORS.

See Machen, Modern Law of Corporations, sec. 1477, pp. 1224, 1225; Cook, Principles of the Law of Corporations, sec. 367; Fletcher, Cyc. of Corporations, sec. 1835; 24 Harv. Law Rev. 658; 25 Harv. Law Rev. 550; Clark on Corporations (3rd ed. by Wormser), p. 611.

Waterman v. Chicago & I. R. Co. (1892) 139 Ill. 658, 29 N. E. 689, in which the court said at p. 665: “A de facto officer is distinguished on the one hand from a mere usurper of an office, and on the other hand from an officer de jure. He is one who is in actual possession of an office under the claim and color of an election or appointment * *

De facto directors have in general the same power as de jure directors to bind the corporation or acquire rights for it. It has been held that if the office is created by an unconstitutional statute, all the acts of the assumed officer are open to attack. Norton v. Shelby County (1885) 118 U. S. 425, 30 L. ed. 178, 6 Sup. Ct. 1121; cf. Bradford v. Frankfort, St. Louis & Toledo R. Co., (1895) 142 Ind. 383, 40 N. E. 741, 41 N. E. 819, holding that acts of de facto directors not open to attack before unconstitutionality of act has been declared. Matter of Ringler & Co. (1912) 204 N. Y. 30, 97 N. E. 593 (persons appointed directors by de facto directors can not be de jure directors).

The doctrine is not applied in favor of the de facto director himself, 20 Harv. Law Rev. at p. 458; 25 Harv. Law Rev. at p. 630; Machen, sec. 284, note 2.

Dolan v. New York (1877) 68 N. Y. 274, 23 Am. Rep. 168 (de facto) public officer can not recover salary to which he would have been entitled as de jure officer). Short v. Symmes (1889) 150 Mass. 298, 23 N. E. 42 (de facto police officer liable for an arrest which he could lawfully make as de jure officer). But see 24 Harv. Law Rev. 658; Brinkerhoff v. Jersey City (1899) 64 N. J. L. 225, 46 Atl. 170, and other cases cited in the footnote in 24 Harv. L. Rev., p. 659, which are contra to Dolan v. New York, supra.—Eds.

CHAPTER VII.

STOCKHOLDERS.

Section 1.-The Distinction Between Capital Stock and Shares of Stock.

PEOPLE v. COLEMAN.

1891. 126 N. Y. 433, 27 N. E. 818.1

FINCH, J.-The relator has been assessed upon an "actual value" of its capital stock derived entirely from the market value of its shares. These are selling at the large premium of something over five hundred dollars for each share of one hundred dollars, and the assessors have concededly taken that valuation, or the principal part thereof, as the "actual value" of the company's stock liable to taxation, instead of its own proved and established value. The relator challenges the assessment, and through all the proceeding has persistently raised and pressed the inquiry, not so much as to the mode or manner of ascertaining value, but rather as to what is the precise thing to be valued, whether the capital stock of the company or the capital stock held in shares by the corporators. If these are the same, or, in any just sense, equivalents, either might be valued without substantial error, but if they are not such, we must determine which is to be valued before we can solve the problem of how to value it. Now, it is certain that the two things are neither identical nor equivalent. The capital stock of a company is one thing; that of the shareholders is another and different thing. That of the company is simply its capital, existing in money or property, or both; while that of the shareholders is representative, not merely of that existing and tangible capital, but also of surplus, of dividend earning power, of franchise and the good will of an established and prosperous business. The capital stock of the company is owned and held by the company in its corporate character; the capital stock of the shareholders they own and hold in different proportions as individuals. The one belongs to the corporation; the other to the corporators. The franchise of the company, which may be deemed its business opportunity and capacity, is the property of the corporation, but constitutes no part or element of its capital stock; while the same franchise does enter into and form part, and a very essential part, of the shareholder's capital stock. While the nominal or par value of 1 The facts sufficiently appear in the opinion. Portion of opinion omitted.Eds.

the capital stock and of the share stock are the same, the actual value is often widely different. The capital stock of the company may be wholly in cash or in property, or both, which may be counted and valued. It may have in addition a surplus, consisting of some accumulated and reserved fund, or of undivided profits, or both, but that surplus is no part of the company's capital stock, and, therefore, is not itself capital stock. The capital cannot be divided and distributed; the surplus may be. But that surplus does enter into and form part of the share stock, for that represents and absorbs into its own value surplus as well as capital, and the franchise in addition. So that the property of every company may consist of three separate and distinct things, which are its capital stock, its surplus, its franchise; but these three things, several in the ownership of the company are united in the ownership of the shareholders. The share stock covers, embraces, represents all three in their totality, for it is a business photograph of all the corporate possessions and possibilities. A company also may have no surplus, but, on the contrary, a deficiency which works an impairment of its capital stock. Its actual value is then less than its nominal or par value, while yet the share stock, strengthened by hope of the future and the support of earnings, may be worth its par, or even more. And thus the two things -the company's capital stock and the shareholder's capital stock— are essentially and in every material respect different. They differ in their character, in their elements, in their ownership and in their values. How important and vital the difference is, became evident in the effort by the state authorities to tax the property of the national banks. The effort failed, and yet the share stock in the ownership of individuals was held to be taxable as against them. The corporation and its property were shielded, but the shareholders and their property were taxed.

Now some degree of confusion and trouble have come in because these two different things are denominated alike capital stock, making the expression sometimes ambiguous. It is the important and decisive phrase in the law of 1857, under which the assessment here resisted was made, and requires of us to determine at the outset in which sense it was used. The section reads thus: "The capital stock of every company liable to taxation, except such part of it as shall have been excepted in the assessment-roll, or shall have been exempted by law, together with its surplus profits or reserved funds. exceeding ten per cent. of its capital, after deducting the assessed value of its real estate, and all shares of stock in other corporations actually owned by such company which are taxable upon their capital stock under the laws of this state, shall be assessed at its actual value and taxed in the same manner as the other real and personal estate of the county."

There are reasons in abundance for the conclusion that by the phrase "capital stock" the statute means not the share stock, but the capital owned by the corporation; the fund required to be paid in and kept intact as the basis of the business enterprise, and the chief factor