Story Case

In promoting a corporation for the purpose of conducting the business of manufacturing automobiles, James Donaldson and Godfred Camp issued a prospectus, in which the nature of the corporation, its purpose, and the amount of capital stock, were set forth in detail. The prospectus also stated that it was proposed to erect the manufacturing plant in Elgin, Illinois. Mr. Murphy, of Elgin, saw and read one of these catalogs, and decided to subscribe to the stock of the corporation. He entered his name for five shares of stock at $50 per share. After he had subscribed, the promoters decided that they would not locate the plant in Elgin, but would locate nearer to Chicago. The prospectus was then altered, and the new location for the plant described. Mr. Murphy, however, was not aware of this proposed copy. After the corporation was formed, and the plant was erected, it called upon him for his subscription. He then discovered the change made by the promoters, and refused to be bound by his subscription. The corporation, without offering to locate the plant in Elgin, brought suit upon his subscription contract. What should the Court decide!

Ruling Court Case. Norwich Lock And Manufacturing Company Vs. Hockaday, Volume 89 Virginia Reports, Page 877

Certain promoters circulated a prospectus which announced their intention of organizing a corporation for the purpose of manufacturing locks and other household hardware; it was planned to locate the manufacturing plant in the city of Roanoke, Virginia; the capital stock of the corporation was to be $400,000. Hockaday, among others, subscribed for stock in the corporation to be formed, in the following words: "We hereby subscribe the amount set opposite our names, respectively, to the capital stock of the company to be formed, in accordance with the provisions of the foregoing prospectus." Now, no corporation was organized in accordance with this prospectus, and the contemplated amount of capital was not subscribed. Later, the same promoters again opened the subscription books and asked for additional subscriptions, in order to make up the amount proposed. Under the new stock subscription, the plant of the company was not to be located in Roanoke, but outside the city. The powers of the corporation were increased; the maximum limit of the capital stock was fixed at $500,000. Hockaday, at no time, consented to the changes made; in fact, it was shown that he positively refused to be considered a subscriber under the new terms of the proposed corporation. When, under the latter arrangement, the corporation, Norwich Lock and Manufacturing Company, was finally completed, it brought this action against Hockaday, seeking to recover from him for the stock which he subscribed for under the original arrangement, as proposed by the promoters of the corporation.

It was contended by counsel for Hockaday that he could not be held upon his subscription because the promoters had proposed one corporation, to which Hockaday had agreed to become a member, and another corporation had been organized to which Hockaday had not agreed to become a member.

Decision

When a person subscribes to the stock of a proposed corporation, he is bound only when the corporation is organized in accordance with the terms of his contract of subscription. In this case, Hockaday agreed to become a subscriber to one corporation, and he is now being asked to become a member of another. He did not agree to the terms of the newly proposed organization, and, accordingly, is not bound thereto.

Mr. Justice Fauntleroy, said: "The prospectus, to which the defendant subscribed his name, conditionally, was substituted by another and a radically different prospectus (to which he refused to subscribe) and by agreement between parties with whom he had no privity; and the substitution and changes made in the schemes and scope of the enterprise were made before the charter was granted or applied for. If, after one has signed a contract agreeing to form a corporation for a named purpose, such contract is changed in any way, before the incorporation, without such subscriber's consent, he is not bound, because the company formed is not the company he subscribed to."

Judgment was given for Hockaday.

Ruling Law. Story Case Answer

The facts in the prospectus of a proposed corporation constitute a part of the contract between the corporation and the subscriber, if the subscriber makes his subscription, relying upon the terms and facts stated therein. The corporation must fulfill all the material terms and conditions, upon which those who have subscribed have relied in making their subscription. Unless these terms have been satisfied, the subscriber is under no legal obligation to accept and pay for the stock which he agreed to buy. That is, if the promoters represent that the capital stock is to be $50,000, and a prospective stockholder subscribes on that basis, he is under no obligation to accept the stock if the capital is subsequently raised to $100,000 without his consent. In the Story Case, Mr. Murphy made his subscription in reliance on the belief that the manufacturing plant was to be located in Elgin, where he resided. Consequently, he was under no obligation to accept the stock when he found that the plant would be located elsewhere. Accordingly, judgment should be given for Mr. Murphy.