There is a tendency blindly to follow outworn rules. But more extended administrative activity has compelled a keener interest in the problem of administrative responsibility. This interest must soon be reflected by judicial opinion. We may well anticipate rapid and interesting developments within the next few years. John M. Maguire.




IN the well-known case of the Old Dominion Copper Mining &

Smelting Company v. Bigelow, the Supreme Judicial Court of Massachusetts adopted in an extreme and literal form the doctrine that the promoter or organizer of a corporation, so long as he owns or controls all of its outstanding stock, stands in a fiduciary relation to the company. While the company is in his control he owes it the same duty not to sell to it his own property or his own services for more than they are worth, that a trustee owes his beneficiary not to obtain a personal advantage at the expense of the trust. This duty exists and is violated even though he intends to remain the owner of all the capital stock and to manage the company indefinitely as his own private enterprise. It exists and is violated even though he intends to subscribe and pay for all the stock himself without offering a share for public subscription, carries out this intention, and subsequently sells the stock as his own stock in the market. The duty exists and is violated even though he intends to make, and does make, to future subscribers the fullest disclosure as to any profit he may have taken. If, indeed, the organizer does retain all the stock; if the promoter takes all the stock himself and subsequently sells it to the public; or if he makes a full disclosure to future subscribers, he escapes liability. He escapes, however, not because he is innocent but because the corporation forgives him. All the shareholders having assented, the corporation condones the wrong. When, however, the corporation cannot be said to have condoned the wrong it is entitled in equity to a remedy for the injury done it by the promoter's breach of fiduciary duty. When, as in the Bigelow case, the promoter, owning or controlling all the capital

* The author of this article, R. D. Weston, was appointed Master in the matter of two petitions brought by Bigelow in the spring of 1914 for leave to file bills of review on the ground of newly discovered evidence. After he had heard the parties and their evidence and had submitted to counsel his draft report, the petitioner agreed that his petitions might be dismissed, and they were disposed of accordingly in June, 1916.

203 Mass. 159, 89 N. E. 193 (1909).


stock then outstanding, sells the company his own property for more than it is worth and subsequently, as part of his scheme of promotion, has his company issue more stock to the public without disclosing the amount of profit he has taken, the breach of duty is not condoned by anybody having power to bind the corporation. The promoter has no such power. He cannot as a shareholder or director take any action which will work a condonation of his own wrong. When the subscribers become shareholders, then, for the first time, there are innocent shareholders who have power to bind the company. But they pay for their shares without knowing and, therefore, without forgiving the wrong which the promoter has already done. The wrong does not lie in the promoter's failure to make a frank disclosure to subscribers. It is not done when the public are induced to subscribe. It is done earlier when the

promoter takes from the company an unfair price for his property. No wrong is done to the subscribers whom the promoter induces to part with their money by keeping them in the dark. The wrong is done to the company when the promoter does the things which he subsequently fails to disclose. This is the Massachusetts doctrine. Consequently, the corporation can recover full damages, though not a cent of the money recovered will find its way into the pocket of a single subscriber who has been deceived by the promoter, and every dollar recovered may inure to the benefit of shareholders who have never suffered any injury whatsoever at his hands. Consequently, too, the subscribers who are induced to take the company's stock can recover nothing, no matter how grossly they have been misled as to the real value of the company's assets.

The doctrine in this form strikes us as extravagant and fantastic. A fiduciary duty, the breach of which neither does injure nor ever will injure anybody, is inconceivable. It seems very strange that the Massachusetts court, thinking, as it obviously did, that the ignorant subscribers are really deceived by the use which the promoter makes of the corporation, should have elaborated and stoutly maintained a doctrine which deprives the subscribers of their right to redress, instead of shaping the doctrine so that it would afford them an adequate remedy. We are naturally led to inquire how the doctrine was built up. Can anything apparently so artificial rest on a foundation of plain and substantial equity?

The purpose of this article is to show that the Massachusetts doctrine as finally developed has no such foundation, but involves a complete denial of rights which in equity belong to subscribers, and also involves the doing of great injustice to promoters.

What I call for convenience the Bigelow case was in fact two cases. They were begun in 1902. There were two cases only because there happened to be two transactions in which separate properties had been sold to the company. One case went first to the full bench on demurrer and was decided in favor of the company in 1905. Both were tried together on the merits in 1907, went again to the full bench, and in accordance with its decision, final decrees were entered in 1909.

The decrees charged Bigelow with the “unrighteous profits” which he and one Lewisohn had made out of the company, while they were engaged in promoting it and while they were in control of its board of directors, by selling to the company their own mining properties for much more than their fair market value. The promoters had paid $1,000,000 for the properties. They had turned them over to the corporation immediately after its organization in 1895 for 130,000 shares of its stock, having a par value of $25 a share and being worth $25 a share in the market. The total value of the shares they got was $3,250,000. But they had been under no obligation to let the company buy their properties for what they themselves had paid for them. They were bound only to turn the properties over to the company for what an independent board of directors would have paid, namely, the fair market value. This was found to be not more than about $2,000,000. The difference between the market value of the properties and the market value of the stock which the promoters had taken, approximately $1,200,000, was the sum for which they were held liable to account as of some time in 1895. With interest this amounted in 1909 to over $2,000,

The so-called unrighteous profit had in fact been about equally divided between Bigelow and Lewisohn, but Bigelow as one of two joint wrongdoers was held liable for the whole.

If the promoters had done nothing more than sell their own properties to a corporation all of whose stock then issued was owned or controlled by themselves; if they themselves had bought the residue of the company's stock (20,000 shares having a par value of $500,000) and had resold it to the public, they would have


2 188 Mass. 315, 74 N. E. 653.


203 Mass. 159, 89 N. E. 193.

incurred no liability. It was a part of their scheme, however, to have the company issue the residue of the stock to the public and to make to subscribers no disclosure as to what the promoters had paid for the property or as to the profit which they had taken for themselves, and this scheme had been carried out. The subscribers for the 20,000 shares had bought in ignorance of the promoters' profits and had not assented in any way to the transactions between the promoters and the company.

The following additional facts were found by Mr. Justice Sheldon, before whom the case was tried. They do not all appear in the report, nor were they regarded as material by the court. Bigelow had disposed of all the stock which he had got as the purchase price of the properties some time before the suits were brought; he had remained a director and president of the company till a new board was elected by the stockholders in April, 1902; the new board discovered that the company had a claim against the promoters, a fact that had not been known before even to the officers of the company; and the new board made this discovery seven years after the organization of the company and only a short time before the suits were begun in the autumn of 1902. I mention these facts because they seem to me to have important bearings on the real equities of the case.

It was neither alleged nor found that any of the original subscribers still owned their stock when the suits were begun.

The decision of the full bench overruling the demurrer was unanimous. The opinion was written by Loring, J.

When the cases went to the full bench after the hearing on the merits, the court was divided - Loring, Braley, Sheldon, and Rugg, JJ., being of the opinion that the defendant was liable; Knowlton, C. J., Morton and Hammond, JJ., dissenting. Rugg, J. (now C. J.), wrote the opinion for the majority. Knowlton, C. J., wrote a dissenting opinion.

At the same time that the company brought its suits against Bigelow in Massachusetts, it brought like suits against Lewisohn's executors in the United States Circuit Court for the Southern District of New York. The defendants fared much better in the federal courts. They demurred, as Bigelow had demurred in Massachusetts, and their demurrer was sustained first by the Circuit Court,

4 Old Dominion Mining Co. v. Lewisohn, 136 Fed. 915 (1905).

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