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Automobile & Motor Co., 139 Fed. Rep., 766; s. c. 153 Id., 345; Strickland v. National Salt Co., 72 N. J. Eq., 170; 76 Atl. Rep., 1048. Patents.

See Am. Mutoscope Co. v. Assessors, 70 N. J. Law, 172.

An individual creditor cannot bring an action in his own behalf at law against a stockholder upon the ground that the property for which the stock was issued was not of the value of the stock. All such

suits must be by a general creditors' bill. Wetherbee v. Baker, 35 N. J. Eq., 501.

The earlier cases held that the contract of the subscribers could

only be fulfilled by payment in money. In later cases this doctrine has been relaxed, and stock issued and paid up in work and labor, or in the purchase of property the corporation is authorized to hold, has been held to have been legally issued. Wetherbee v. Baker, supra. See also Rubino v. Pressed Steel Car Co., 53 Atl. Rep., 1050.

Sales to company by promoters.

For a discussion of the liability of promoters who, through controlled or interested directors, sell to a corporation (N. J.) their property, and at an undisclosed profit, see Old Dominion Copper Co. v. Bigelow, 188 Mass., 315. But it has been held that where the promoters are the only stockholders in the corporation to which they have sold their property at a secret profit, no one is deceived and the corporation has no cause of action. Old Dominion Copper Co., v. Lewisohn, 136 Fed. Rep., 915; aff'd in 148 Fed. Rep., 1020, and in 210 U. S., 206; 52 L. Ed., 1025.

One promoter may be held liable for the entire secret profit of a joint enterprise, the other being without the jurisdiction. The liability of a promoter may be determined by the law of this state or the law of the state where the transaction occurred. Courts of equity everywhere recognize the fiduciary relation which exists between a promoter and the company. Bigelow v. Old Dominion Copper Co., 71 Atl. Rep.,

153.

Where promoters are the sole stockholders of a corporation, the corporation cannot rescind a purchase made at their instigation. Old Dominion Copper Co. v. Lewisohn, 136 Fed. Rep., 915; aff'd 148 Id., 1020; supra.

See also Groel v. United Electric Co. of N. J., 70 N. J. Eq., 616; Plaquemines Tropical Fruit Co., v. Buck, 52 N. J. Eq., 219; Seacoast R. Co. v. Wood, 65 N. J. Eq., 530; Erlanger v. New Sombrero Phosphate Co., 3 App. Cas., 1218, 1236; s. c., 6 English Ruling Cases, 777.

Where a promoter to whom stock was issued agrees to hold part of it for a specified purpose, the corporation by issuing other stock in place of it, and recognizing the validity of the issue and subsequent transfers thereof, is estopped to deny its validity in the hands of a subsequent bona fide purchaser without notice of the equities in favor of

the corporation or the promoter. New York & Eastern Tel. & Tel. Co. v. Great Eastern Tel. Co., 74 N. J. Eq., 221; aff'd 75 Id., 297.

False and fraudulent representations in a prospectus issued by promoters respecting the value of property which is to be transferred to the corporation when organized, afford ground for equitable relief against the corporation in behalf of one who, relying on such representations, subscribed for its stock. Manning v. Berdan, 135 Fed. Rep., 159.

It has been held that where a promoter has a mere option to purchase lands, a one-sided contract which could not be enforced against him, and he contracts to sell those lands to his company, he is liable for the profits made by himself, but not for profits made by his joint promoter. Loudenslager v. Woodbury Heights Land Co., 58 N. J. Eq., 556.

When two persons are interested in promoting an enterprise and one furnishes the money and the other expends it for the common benefit, the latter is liable to account for his disbursements. He may not retain disbursements made because of his own negligence. Bailey v. Burgess, 48 N. J. Eq., 411.

When a promoter, who is instrumental in securing a consolidation of corporations by an exchange of shares, induces subscriptions on the promise that, in consideration of stock to be retained by him as a part of the plan, he will furnish subscriptions to stock for the benefit of the subscribers, that promise is a part of the consideration entering into the contract of subscription, and a default on the part of the promoter avoids the contract. Audenried v. East Coast Milling Co., 68 N. J. Eq., 450.

Promoters secured an option on the capital stock of an old corporation, formed a syndicate for the purpose of transferring the shares of the old corporation to a new, and sold, at a secret profit, their options to the syndicate, which in turn became the corporation. Held, The members of the syndicate were in effect the stockholders of the new corporation and the promoters were accountable to them for the secret profit. Arnold v. Searing, 73 N. J. Eq., 262.

A company organized under agreements to purchase the property of other companies succeeds to the right to enforce the agreement against the promoters and the vendors and promoters, who by collusion and fraud secured secret profits, are liable to account to the company, and all parties may be joined. Shutts v. United Box, Board & Paper Co., 67 N. J. Eq., 225.

And a receiver may bring an action in behalf of the corporation against promoters who have secured secret profits. Voorhees v. Malott, 69 Atl. Rep., 643.

When conveyance of stock for property has been held void, and the corporation has become insolvent, the receiver may, within the discretion of the court, file a bill to determine the rights of such

stockholders. McMaster v. Drew, 70 N. J. Eq., 6; Id. 68 Atl. Rep., 771. Such a bill need not disclose whether the assets are sufficient to satisfy creditors.

Fraud being the basis for any relief under this section, he who would attack such a transaction must comply with the rules of equity pleading and alleged in the premises of his bill every material fact necessary to establish his right to relief. Schuler v. Southern Iron & Steel Co., 75 Atl. Rep., 552.

When stock is fraudulently issued for property purchased in excess of the value of the property, it may be doubted whether the remedy is to compel the surrender and cancellation of the stock, thereby reducing the capital stock of the corporation. Stephany v. Marsden, 75 Atl.

Rep., 899.

Such contracts will not be enforced between the parties themselves. Cummings v. Syundt, 120 Fed. Rep., 84.

Joint tort feasors.

Promoters who sell their property to a corporation, through interested directors, at a secret profit, are joint tort feasors and their liability is both joint and several. In such a case there is no right of contribution. Bigelow v. Old Dominion Copper, etc., Co., 71 Atl. Rep., 153.

Secret profits and limitation of actions against promoters.

"The principle running through all the authorities upon this branch of the law rests not upon the imposition of a penalty for the concealment, but upon the single ground that one in a fiduciary capacity will not be permitted to retain a profit inequitably obtained." Loudenslager v. Woodbury Heights Land Co., 58 N. J. Eq., 556, 559.

The general rule is that the parties are liable for the inequitable profits made at the corporation's expense, and no statute of limitation will begin to run until the discovery of the fact. Indeed, it has been judicially determined that such parties are substantially trustees of an expressed trust, and that to the equities arising between them the statute of limitations is not applicable as a bar. Williams v. McKay,

40 N. J. Eq., 189, at p. 199.

49a.* Corporations May Not Plead Usury.

No corporation shall hereafter plead or set up the defense of usury to any action brought against it to recover damages or enforce a remedy on any obliga

* Arbitrary number; section inserted here merely for convenience of reference.

tion executed by said corporation; provided, that this act shall not apply to any such action which is now pending.

For the statute allowing conversion of preferred stock into bonds and of bonds into common stock, see Section 18a.

("An act relating to usury," approved April 3, 1902; P. L. 1902, p. 459.)

This act is for the protection of holders of corporate bonds and obligations originally issued at less than par, and makes such securities unimpeachable so far as the question of usury is concerned. At common law, such bonds, in the absence of fraud in their issue, were valid, but were open to the defence of usury, where usury statutes were in force. Indirectly, therefore, the act enables corporations to issue securities, when market conditions require, at less than the face value.

A statute for the same purpose has been in force in New Jersey with respect to railway companies since 1855. Gen. Stat., p. 3703.

A similar statute, applicable to all corporations, foreign and do mestic, has existed in New York since 1850 (Chap. 172), and other states have like statutory provisions.

See, as to the effect of the New York act, Stevens v. Watson, 4 Abb. App. Dec., 302; Butterworth v. O'Brien, 23 N. Y., 275; Rosa v. Butterfield, 33 N. Y., 665; Bank v. Hoge, 35 N. Y., 65; Bank v. Commercial Warehouse Co., 49 N. Y., 635; Stewart v. Bramhall, 74 N. Y., 85; Hawley v. Kountze, 6 App. Div., 217.

A practical way of avoiding usury act before the passage of the act of 1902 is indicated by the decisions in Franklin Trust Co. v. Rutherford B. S. & C. Electric Co., 57 N. J. Eq., 42; aff'd 58 N. J. Eq., 584, and Lane v. Watson, 51 N. J. Law, 186; aff'd 52 N, J. Law, 550.

50. Certain Corporations May Take Stock and Bonds in Other Corporations in Payment for Labor and Materials.

Corporations having for their object the building, constructing or repairing of railroads, water, gas or electric works, tunnels, bridges, viaducts, canals, hotels, wharves, piers or any like works of internal improvement or public use or utility, may subscribe for, take, pay for, hold, use and dispose of stock or bonds in any corporations formed for the purpose of con

structing, maintaining and operating any such public works; and the directors of any such corporation formed for the purpose of constructing, maintaining and operating any public work of the description aforesaid may accept in payment of any such subscription, or purchase, real or personal property, necessary for the purposes of such corporation, or work, labor and services performed or materials furnished to or for such corporation to the amount of the value thereof, and from time to time issue upon any such subscription or purchase, in such instalments or proportions as such directors may agree upon, full-paid stock in full or partial performance of the whole or any part of such subscription or purchase, and the stock so issued shall be full-paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payments, and in all statements and reports of the corporation to be published or filed this stock shall not be stated or reported as being issued for cash paid to the corporation, but shall be reported in this respect according to the fact.

P. L. 1891, p. 329.

Although express power is given only to certain designated corporations to issue stock in payment of work, labor and services, it would seem from the case of Wetherbee v. Baker, 35 N. J. Eq., 501, 512, that where the contract for the rendition of services has been made in good faith and stock issued thereon, such stock is legally issued.

The effect of this section is essentially the same as that of section 49; the judgment of the directors is conclusive in the absence of actual fraud. But the value of the services or labor performed must equal the value of the stock issued therefor. McCarter v. Pitman, Glassboro & Clayton Gas Co., 69 Atl. Rep., 211.

While a court of equity will not intervene at the instance of the state to prevent an usurpation of corporate authority by a private corporation, a quasi-public corporation, intrusted by the state with public powers for the public good, must perform its duties with due regard to its trust, and equity will not permit an ultra vires act on the part of such a corporation. The state is a proper party to enjoin the threatened act.

Ibid.

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