Story Case

Mr. B. H. Mann secured an option on some oil land. By the terms of the option, he secured the right to buy one hundred acres at $50 per acre. Not having a sufficient amount of capital to finance the development of the land, he decided that he would promote a corporation to which he would sell the property. In accordance with this decision, he carried out the proceedings required to bring a corporation into existence. At the first meeting of the stockholders, directors were elected. However, Mr. Mann was not elected as a director. Acting for himself, Mr. Mann offered to sell the land to the corporation for $100 per acre. The directors, on the behalf of the corporation, accepted the offer and paid him therefor. It was subsequently discovered that Mr. Mann had paid only $50 per acre for it. The corporation claims that it is entitled to recover back the extra $50 per acre, which had been paid to Mr. Mann. What should the Court decide?

Ruling Court Case. Pittsburg Mining Co. Vs. Spooner, Volume 74 Wisconsin Reports, Page 307

Spooner, Oakley and Main secured an option on a mine, for which they paid $20,000; this was held in the name of Main. They then secured subscriptions to a corporation, which they proposed to form, to develop the mine. But, instead of an agreement to pay to the corporation, they made their subscription agreement read, that the signers agreed to pay to Main the amount set opposite their names, for stock in a corporation to be formed. The three promoters also represented that the option had cost $90,000, and that they would get no profit from the organization of the corporation, other than that which all the shareholders expected from its operation. Upon these statements, they secured subscriptions for the whole of the proposed capital stock, $100,000, and the charter was secured. But the only incorporators of the company were Spooner, Oakley and Main, and they held the first meeting and elected themselves officers. That meeting then voted to issue one share of stock to Spooner, one share to Oakley, and all the rest to Main, and to take in full payment for Main's stock, his option on the mine. The stock of Main was then delivered to the subscribers, and Main collected the cash from them. $10,000 was put into the corporation treasury, but the $90,000, which the subscribers believed had been used to buy the option, was divided among the three promoters. The fraud was later discovered, and the corporation sued the three promoters, in this action, alleging that the $70,000 which they had received above the price of the option, was money to which the corporation was entitled.

The Court decided in favor of the corporation, because it is inconsistent with the relation of a promoter to the corporation that he is organizing, that he should make any secret profits at the expense of the corporation. He is in a position of trust, like that of an agent, and if he uses that position to employ the funds or property of his principal, in order to make a profit for himself, he may be compelled to turn that profit over to the principal. It is true, that the corporation had acted, by its nominal board of directors, and had authorized this transaction, but the method of organizing so that there would be a board of directors who would sacrifice the interests of the real body of subscribers for the benefit of the few, was, in itself, a fraud on the corporation. The promoters are responsible, and must turn back what they have received, if they put at the head of the corporation directors who will bleed it of its capital, and pay out to each other, under the cloak of purchases, the money that should be employed in the business of the corporation.

Mr. Justice Taylor, delivering the opinion of the Court, said: "It is urged that, at the time of this sale, there were no persons interested in the corporation, except the said agents and trustees themselves, and so no one was injured, as all the interested parties were fully aware of the facts. We do not think this a true statement of the case. All the present owners of the stock were interested parties. They were, in fact, the corporation, and the defendants represented them in making the sale. No sale or purchase, by the corporation, was made until all these persons had agreed to take stock, and, although the written agreement which they signed, stated that they were to buy stock of the defendant, Main, it is apparent, that they were the real persons behind the corporation, and their money paid for the option." Judgment was given for the plaintiff.

Ruling Law. Story Case Answer

When a person acts in the capacity of a promoter in bringing into existence a corporation, he occupies the position of a trustee in respect to the future corporation. He cannot make contracts on behalf of the corporation, from which he is to receive secret profits. While acting for the corporation, as a purchasing agent, he cannot buy from himself, so as to derive a personal gain from the transaction. But a promoter, acting individually, may sell property to a corporation, after it is organized, for whatever price he may be able to get. In the Story Case, Main sold to the corporation, through its directors, land belonging to himself and bought, for the purpose of selling it to the corporation. But the corporation, through its board of directors, of which he was not a member, exercised its independent judgment and bought it. The fact that he made profit is not material. This profit he is entitled to retain.