Story Case

Frank Corbett, Henry Knowlin, and Edward Comp proposed to organize the Pan-American Sales corporation to act as a selling organization in Sonth America. Corbett persuaded Andrew Bacon to agree to subscribe for ten shares of stock at $100 a share. Shortly before the corporation was perfected, Bacon informed Corbett that he had no faith in this venture and would not buy the stock. After the corporation was organized, it brought suit against Bacon upon this subscription contract. Bacon maintained in defense that no contract existed between the corporation and himself. Is this defense valid?

Ruling Court Case. Bryant's Pond Steam Mill Company Vs. Felt, Volume 87 Maine Reports, Page 234; 47 American State Reports, Page 323

Certain persons had associated themselves for the purpose of organizing a corporation; they had opened books in which were entered the names of those who were willing to take stock in the organization when it had been brought into existence. Felt subscribed for a certain amount of stock, but before the corporation was consummated he decided that he was unwilling to accept the stock. Accordingly, he notified the persons who were promoting the organization that he had decided to withdraw his name as a subscriber. They would not consent to his withdrawal. When the corporation, the Bryant's Pond Steam Mill Company, had completed the organization, it brought this action against Felt to recover for the amount of stock which he had agreed to accept.

It was contended by Felt, that the entering of his name for the stock did not impose any obligation upon him, so far as the corporation was concerned, until the corporation had come into existence.

Decision

So far as a proposed corporation is concerned, there can be no contract made between it and third persons before the company actually exists. Any person may withdraw his name from the subscription list before the organization is fully completed, and the corporation, thereafter formed, has no right to insist upon his taking the stock.

Mr. Justice "Walton, who delivered the opinion of the Court, said in part: "The right of subscribers to the capital stock of a proposed corporation to withdraw their subscription at any time before the organization of the corporation is completed has been affirmed in several recent well considered opinions. The right rests upon the impregnable ground of the legal impossibility of completing a contract between two parties, only one of which is in existence. There can be no meeting of the minds of the parties. There can be no acceptance of the subscriber's proposition to become a stockholder. There can be no mutuality of rights or obligations. There can be no consideration for the subscriber's promise. As said in one of our decisions, it is a mere nudum pactum - a promise without a promisee - a contractor without a contractee. In fact, every element of a binding contract is wanting."

Accordingly, judgment was given for the defendant Felt in this action.

Ruling Law. Story Case Answer

When a corporation is actually in existence, subscription to its stock depends upon the ordinary principles of contract law. The subscriber is then dealing with a legal entity, or a legal person, and he is bound by any contract he may make with it, provided it is otherwise legal. But if the corporation is not yet in existence and the promoters, testing the worth of the proposition, interest various persons to such an extent that they are willing to sign an agreement to take stock when the corporation is actually formed, clearly there can be no present contract between the corporation and the subscriber, for there is no other contracting party then in existence. But the agreement constitutes a continuing offer on the part of the subscriber to the corporation yet to be formed. When the organization is completed, it may accept his offer, or it may reject it. A subscriber also may withdraw his offer at any time before the corporation accepts it. In the Story Case, Mr. Bacon exercised his right to withdraw his offer before the corporation came into existence, and before it could accept his offer. Consequently, the corporation, when it was consummated, had no contract with him; there was no offer which it could accept. Judgment should be given for Mr. Bacon.

If, in the Story Case or any case, the promoters had given the subscriber any consideration for his promise to subscribe, they personally could hold him. For example, if the subscription contract read "For one dollar paid to Bacon, he herein agrees to subscribe etc." Also, if the subscription contract were signed under seal, the promoters can hold the subscriber.