or any other considerable period of time, elapses, many of the subscribers will have sold their stock and taken their loss. Again, we may assume that the selling price is 6623 cents a share, representing the value of the company's assets. Purchasers from them buy without knowledge of any claim of the corporation against the promoters, and consequently without any reliance on such a claim. The corporation afterwards discovers the claim and enforces it against the promoters. The purchasers of the original subscribers' shares suddenly find their shares worth par. They have all got 33% cents a share which does not belong to them, but which does belong in equity to the original subscribers who sold at a loss in consequence of the fact that the promoters, in pursuance of their original unrighteous scheme, have kept the subscribers in the dark as to the promoters' profits. If all the original subscribers have disposed of their stock before the promoters are found out, then not a single person whom the Massachusetts doctrine was invented to protect obtains any sort of redress by virtue of the company's recovery. It certainly seems as if the corporation should recover, if at all, only as a trustee for original subscribers who may or may not have parted with their stock.

Another difficulty with the decision (traceable apparently to the same conception or misconception of the promoter as a trustee for the corporation who has wrongfully misappropriated shares of stock) is that the market value of the stock wrongfully appropriated was held to be the unrighteous profit for which the promoter must account. Let us see how the Massachusetts rule works in this respect.

It is notorious that the market value of stock may differ widely from the value of the company's assets. In the Bigelow case the market value of the stock happened to be at least par, while the company's assets could not have been sold in the market for an amount equal to anything like the par value of all the stock. If the company had been wound up the assets, including the $500,000 paid in by the subscribers, would have sold for not more than $2,550,000, while the par value of its outstanding stock, 150,000 shares at $25 apiece, was $3,750,000. This made the shares really worth less than 63 cents on the dollar.

Taking again our small and simple corporation, we may first suppose that the market value of the shares is 50 cents, or 11⁄2 of par,

and then that it is $2, or twice par, and see the result of applying the Massachusetts rule in each case.

The promoters took 5,000 more shares than they should have taken. The company, we will suppose, recovers the market value of these shares. At 50 cents apiece this is $2,500. The company's assets then stand thus:

To this total the promoters have contributed $10,500. The subscribers have contributed $2,000. The promoters and subscribers ought to own the stock in the proportion of 102 to 2. As a matter of fact, they hold it in the proportion of 13 to 2.

In order to make the subscribers whole the promoters should be required to pay $5,000 regardless of the market value of the stock. Under the Massachusetts rule the subscribers' stock, for which they have paid par, or $1 a share, is really worth after the promoters have accounted only 1% of par, or 833 cents. Collectively they have lost, notwithstanding the enforcement of the promoters' liability, $333.33%, or 1% of all they put in. If the market value of the Old Dominion stock had been only 12 par and the amount for which the promoters had been forced to account had been ascertained accordingly, the subscribers' loss would have been % of $500,000, or over $83,000.

We are next to suppose that the market price of the promoters' unrighteous profit, 5,000 shares, was twice par, or $2 a share. The company recovers on this basis $10,000. Its assets then stand thus:

There are 15,000 shares outstanding, and the subscribers' shares have become worth of $1, or $1.33%. The subscribers have gained immensely at the promoters' expense. Instead of being required to account at the market price, the promoters ought to have accounted at the price at which the stock was offered to sub

scribers. The liability of the promoters should be exactly the amount which will make the total value of the assets, as of the time immediately after the sale by the promoters to the company, exactly what the subscribers had a right to think the value was when they agreed to take stock. If the promoters be permitted to pay less, then they retain a part of their unrighteous profit as against those whom they have deceived. If they are forced to pay more, the subscribers get an unrighteous profit at the expense of the promoters.

I have now pointed out that the proposition which the Massachusetts court laid down in the Bigelow case, namely, that the promoters stood in a fiduciary relation to the corporation, did not commend itself to a large majority of the able judges who heard it argued. I have shown that in some circumstances the Massachusetts doctrine may be applied so as to accomplish its purpose and not produce any strikingly inequitable result. But I have also shown that when it is applied as it was in the Bigelow case the results produced appear to be grossly inequitable. We stand appalled when we think that a court of equity was prepared to strip Bigelow of over $2,000,ooo, the circumstances then being such that of this huge sum would inure to the benefit of stockholders who themselves had never been injured, and whose predecessors in title had never been injured, by Bigelow, and that only a small fraction of it () could by any possibility reach the pockets of the original subscribers, who were the only persons who had ever been deceived or injured by Bigelow's conduct as a promoter.

What I may call "the rule of damages" was a subordinate matter. It happened that the market value of the shares in the Bigelow case was found to be par, which was the price at which they had been sold to subscribers. But if this had not been so if the market value had been either less or more than the price charged to subscribers we have seen how this rule would have worked.

We at last come to the vital question: Is the doctrine which the Massachusetts court applied a sound doctrine? It surely is not kind, but is it sound?

The doctrine, as the court applied it, makes the promoter a real trustee or fiduciary not for the subscribers but for the corporation. Consequently, the wrong which he commits is committed not against the subscribers but against the company. If this be

true, then all the conclusions reached by the court follow of necessity.

If the promoter be a real trustee for the company, then the injury which he does to subsequent subscribers is not an injury which he does directly to them, and is not an injury in the nature of common-law deceit, but is an equitable wrong done to the corporation, such as a trustee does to his beneficiary when he sells his own property to himself as trustee at an excessive price. So regarded, the wrong is done to the corporation before the subscribers are taken in either as stockholders or as innocent victims. And if they subsequently assent to the prior transaction between the promoter and the company, this does not mean that no wrong was done. It only means that the beneficiary or corporation, through the action or acquiescence of all its stockholders, forgives the wrong. This was all worked out by the Massachusetts court.11

If the promoter be a real trustee for the company, then it also follows that we are not concerned with what disposition the subscribers and promoters may have made of their stock or with any question as to who may be the present shareholders. If a man has abused his power over a corporation to get possession of certain shares of its stock, holds the stock as trustee for the corporation in the ordinary sense, and misappropriates the trust res, then, of course, he must account to the company for the whole value. It makes no difference whether the stockholders have or have not been aware that the corporation owned any such asset as an equitable interest in the stock held by the trustee. The company's shares may have been bought and sold in the market for years before the trustee is brought to book, so that the stockholders who benefit by making him account to the company may all be different persons from those who were stockholders when the breach of trust was committed. The corporation directly, and indirectly every person who then happened to be a stockholder, were wronged thereby. The corporation directly, and indirectly every person who happens to be a stockholder when the breach of trust is found out and damages are recovered, get the benefit. But the trustee who has wronged the corporation cannot say that there is anything inequitable in making him restore to the company all that he has wrongfully taken. And it has never been deemed practicable to go further and marshal a

11 Old Dominion v. Bigelow, 203 Mass. 159, 179–93.

company's assets with reference to claims which former stockholders might advance against the amount recovered. This was also worked out by the Massachusetts court.12

Finally, if the promoter be a real trustee for the company, no exception can be taken to the rule of damages which the Massachusetts court laid down.

All the results of which I have been speaking follow if the promoter's relation to the corporation, in a case like the Bigelow case, is what the court say it is. We have to go back a step further and ask whether they are right in saying that he is a real trustee and that he ought to be treated as such. It is submitted that they are clearly wrong, and clearly wrong on their own showing.

The essential, the radical, the fundamental difference between a case such as the court imagined the Bigelow case to be, and a case such as the Bigelow case really was, is this: In the case of a real trustee for the corporation the company is the artificial person directly injured by the trustee's wrongdoing. In the promoter's case the subscribers are the persons directly injured. When a real trustee appropriates to his own use shares of stock which he holds in trust for a corporation, the company is the equitable owner and is the person injured. All the stockholders are injured too, but only indirectly, as they are stockholders of the injured company. The same is true if a person, holding the majority of stock in a corporation and managing it by means of a board of dummy directors, sells the company his property at an unfair price and makes the directors ratify the transaction. This the Massachusetts court regarded as a case on all-fours with the Bigelow case. In such a case, however, the corporation is the person directly injured by the breach of fiduciary duty. The minority stockholders are injured only indirectly. In the promoter's case, if anybody is directly injured then the subscribers are the persons who are directly injured. There is no escape from this as a fact. And if there be no escape from it as a fact, then it ought not to be blinked as a proposition of law. It must be accepted as a proposition of law, and when so accepted the doctrine of the Bigelow case cannot be reconciled with it.

We find the Massachusetts court on the horns of this rather picturesque dilemma. Are the subscribers deceived by the manner in which the promoter uses the company in order to obtain their

12 203 Mass. 159, 193, 194.