This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
While a contract requires two parties, the theory of the separate existence of a corporation distinct from its members and officers makes it possible for a valid contract to be made between two corporations which have the same directors, or which have a majority of each board in common,1 or which have the same officers, as the same treasurer, auditors, and cashier,2 or a common agent.3 Such contracts are subject to sharp scrutiny because of the opportunities for fraud thus given,4 and if such contract is so framed as to give to one corporation an unfair advantage at the expense of the other, and the common directors represent both corporations at once, the corporation of which such advantage is taken may avoid the contract.5 Such contracts are, however, voidable, not void;6 A majority of the stockholders may ratify it,7 and if the majority of the stockholders acquiesce therein, a single stockholder can not avoid such contract.8 If two corporations have some directors in common, but not a majority of either board, contracts between them are not regarded as prima facie fraudulent.9 One who is a director or officer in two corporations owes to each the duty of good faith and vigilance in preserving its property.10 If one who is a director of a corporation and officer of another corporation learns that another person who is an officer in each of such corporations has appropriated funds of one corporation for the benefit of another, it is the duty of such director to disclose such facts to the corporation; and in case of his failure so to do, he will be liable personally.11
1 United States. Geddes v. Anaconda Copper Mining Co., 222 Fed. 129; Marcy v. Guanajuato Development Co., 228 Fed. 150.
Arizona. Gould Copper Mining Co. v. Walker, 17 Ariz. 332, 152 Pac. 853.
California. San Diego, etc., R. R. Co. v. Beach Co., 112 Cal. 53, 33 L. R. A. 788, 44 Pac. 333; Manning v. App Consolidated Gold Mining Co., 171 Cal. 610, 154 Pac. 301.
Indiana. Evansville, etc., Co. v. Bank, 144 Ind. 3.4, 42 N. E. 1097.
Kansas. Saliaa Nat. Bank v. Pres-cott, 60 Kan. 490, 57 Pac. 121 [reversing, 53 Pac. 769].
Maryland. Cannon v. Brush Electric Co., 96 Md. 446, 54 Atl. 121; Pennsylvania R. R. Co. v. Minis, 120 Md. 461, 87 Atl. 1062.
Missouri. Manufacturers', etc., Bank v. Iron Co., 97 Mo. 38, 10 S. W. 865.
Pennsylvania. South Side Trust Co. v. Washington Tin Plate Co., 252 Pa. St. 237, 97 Atl. 450.
Contra, O'Conner Mining & Manufacturing Co. v. Coosa Furnace Co., 95 Ala. 614, 36 Am. St. Rep. 251, 10 So. 290; Pearson v. Concord Railroad Corporation, 62 N. H. 537, 13 Am. St. Rep. 590; see The Validity of Contracts Between Corporations Having Common Directors, by Harold M. Bowman, 4 Michigan Law Review 577.
2Davidson v. Ry., 58 Fed. 653. 3Aldine Mfg. Co. v. Phillips, 129 Mich. 240, 88 N. W. 632.
4 United States. Geddes v. Anaconda Copper Mining Co., 222 Fed. 129; March v. Guanajuato Development Co., 228 Fed. 150.
Alabama. Memphis, etc., Ry. v. Woods, 88 Ala. 630, 7 L. R. A. 605, 16 Am. St. Rep. 81, 7 So. 108.
Massachusetts. Parker v. Nickerson, 112 Mass. 195.
New Hampshire. Pearson v. Ry. Corp., 62 N. H. 537, 13 Am. St. Rep. 590.
New Jersey. Robotham v. Ins. Co., 64 N. J. Eq. 673, 53 Atl. 842.
Pennsylvania. Mercantile Library Hall Co. v. Library Association, 173 Pa. St. 30, 33 Atl. 744.
West Virginia. Sweeney v. Sugar Refining Co., 30 W. Va. 443, 8 Am. St. Rep. 88, 4 S. E. 431.
5 O'Connor, etc., Co. v. Furnace Co., 95 Ala. 614, 36 Am. St. Rep. 251, 10 So. 290; Burden v. Burden, 159 N. Y. 287, 54 N. E. 17; Goodin v. Canal Co., 18 O. S. 169, 98 Am. Dec. 95; Bear River Valley Orchard Co. v. Hanley, 15 Utah 506, 50 Pac. 611.
6San Diego, etc., Co. v. Beach Co., 112 Cal. 53, 33 L. R. A. 788, 44 Pac. 333; Burden v. Burden, 159 N. Y. 287, 54 N. E. 17.