subscriptions or are they not? If they are not, then the assumption of fact which lay at the root of the whole doctrine was false. If they are, then the doctrine as interpreted and applied takes away from the subscribers, the persons directly injured, the remedy which belongs to them personally and gives it to the corporation which in legal contemplation is a separate and distinct person. I yield nothing to the Massachusetts court in respect to the necessity of treating the corporation as a person separate and distinct from its shareholders.

There can be no doubt that the court believed that in these cases subscribers are deceived, and that it started off with the intention of affording the subscribers a remedy. What aroused the judicial indignation was not that the artificial person, the corporation, was wronged, but that the unenlightened public were induced to pay their money for shares in a company whose assets were not as valuable as they had a right to suppose they were. The subscribers would not put in their money as against the promoter's property if they knew that the property had been overvalued. The promoter intends to mislead them. His scheme is conceived in fraud, and ipso facto in the very nature of the thing-deceives subscribers when carried into effect. In the opinion written by Mr. Justice Rugg we find him using language and quoting with approval the language of other judges so as to leave no doubt that the majority of the court believed that in such cases the subscribers are the innocent victims of a very real sort of fraud. For example, on page 183, he quotes from Jessell, M. R., as follows:

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"it is intended to cheat the future shareholders. future allottees as well as present allottees." 13 Again, on page 184, from In re Leeds and Hanley Theatres of Varieties: 14

"When it is said that the promoters stood in a fiduciary position towards the company, that does not mean that they stood in such a relation to these directors and these seven signatories [the persons corresponding to Bigelow's dummy directors and shareholders]. It means that they stood in a fiduciary relation to the future allottees of shares to the persons who were invited to come in and take up the shares of the company."


13 In re British Seamless Paper Box Co., 17 Ch. D. 467, 471.
14 [1902] 2 Ch. 809, 823.

Again, on page 184, he quotes Lord Robertson in Gluckstein v. Barnes: 15

"The people for whom these gentlemen [the promoters] were bound to act were their coming constituents, the persons out of whose money they proposed to make their gain."

Again, on page 184, from Pietsch v. Milbrath: 16

"It [the corporation] is deceived in a legal sense when it is rendered helpless by its managers as to protecting those invited to subscribe for its stock and is then used to aid in defrauding them."

Again, on page 191, from James, L. J., in In re British Seamless Box Co.: 17

"If they [the promoters] were intending, although then constituting the whole company, that other people should come in afterwards to whom what had been done would be injurious, the court would feel no difficulty in saying, as Lord Langdale did in Society of Practical Knowledge v. Abbott, 2 Beav. 559, that they intended to commit a fraud."

At pages 189 and 190 Mr. Justice Rugg himself uses these words: "But the vicious intent looks forward to the procurement of money from the ignorant public by means of original subscriptions, and the execution of this evil intent extends backwards to contaminate the sale and its profit."

And in Hayward v. Leeson 18 Mr. Justice Loring, delivering the opinion of the court, had said:

"The persons to whom the promoters owe the duty which they owe by reason of their fiduciary relation are the persons who put their money into the enterprise at the invitation of the promoters, that is to say, the future stockholders, . . . if the promoters undertake to make to themselves remuneration for their services as promoters, without making a full disclosure of the fact to future stockholders, their principals, and getting their consent, they are guilty of a fraud."

Such language as we have quoted was not used hastily and inadvisedly, but soberly, discreetly, and in the fear of God. It is plain that all the judges thought that an injury in the nature of fraud was actually done directly to the subscribers. It is inconceivable that

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the Massachusetts court, or any other court, should have consciously and deliberately intended to deprive them of their remedy. Such a proceeding would violate all our notions of justice and equity.

To take away their remedy from subscribers and give it to the corporation is well enough, so long as you can do them substantial justice without doing substantial injustice to the promoter. We have seen that this may be the result of applying the Massachusetts doctrine in some cases. But when you apply it to a case like the Bigelow case, we have seen that you may not be doing justice to a single subscriber and that you are certainly doing great injustice to the promoter. If I have been defrauded by somebody, and a court of equity says that some company in which I once happened to own stock can recover for my protection without any obligation to account to me, it is manifestly absurd. If I have sold my stock, the company's recovery does not help me a bit. If the same court says that, because I have been defrauded, the company, in which I happened to be a stockholder, can recover ten times as much as is required to make me whole, then palpable injustice is done to the wrongdoer. But such are the consequences of the Massachusetts doctrine. Such are the consequences of taking away the remedy from the persons really injured, of treating the corporation as if it were the person really injured, and of swallowing the fiduciary theory, bait, hook, and sinker.

It is curious to see how the acceptance of the doctrine in its literal and rigid form led the court into a quagmire of inconsistencies, irrelevancies, and self-contradictions. They are discovered in the way the court dealt with four classes of cases closely related to the case at bar.

1. Cases where the organizers intend to retain all the stock and to manage the company as a private enterprise without inviting the public to subscribe.

2. Cases where the promoters take all the stock themselves, not intending that stock shall be issued by the company to future stockholders but intending to sell their own stock in the market.

3. Cases where the promoters intend that the company shall issue stock to subscribers as distinguished from cases where the promoters have no such intention.

4. Cases where the promoters make a full disclosure to future subscribers or allottees.

Let us consider these four classes of cases in their order, and first the cases where the organizers intend to retain all the stock. Of these cases the Massachusetts court said:


"The real ground of the decisions of which Salomon v. Salomon [(1897) A. C. 22] is a type, is that the corporation is estopped by the circumstance that all persons with financial concern in the matter have assented with knowledge and thus the lips of everybody are sealed. It is not that no wrong has been done, but that whatever wrong has been done has been condoned."

That is to say, if A. and B. who are carrying on a business as partners determine to incorporate it for the convenience and protection of themselves and their families, and, anticipating the growth of the business, choose to turn the partnership assets over to the corporation for twice their present value, they violate a fiduciary duty to the corporation even though they intend to remain the proprietors of all the stock so long as they live, and to transmit it at their deaths to their wives and children. No one, to be sure, can complain. Nevertheless a wrong is done which the organizers, being the owners of all the stock, forthwith condone. Could anything be more extravagant than the proposition that the corporation is wronged? To such lengths was the Massachusetts court carried in working out the theory of fiduciary duty to the corporation.

But this is not all. If there is anything clearly stated in the opinion of the court, it is that the organizers or promoters who have done the wrong cannot condone it by anything they themselves do.

"It would be a vain thing," said Mr. Justice Rugg, "for the law to say that the promoter is a trustee subject to all the stringent liabilities which inhere in that character, and at the same time say that, at any period during his trusteeship and long before an essential part of it was executed or his general duty as such ended, he could, by changing for a moment the cloak of the promoter for that of the director or stockholder, by his own act alone, absolve himself from all past, present, and future liability in his capacity as promoter." 20

According to this principle, again and again asserted, the corporation could never be said to forgive the wrong until it was repre

19 203 Mass. 159, 192.

20 Id., 188.

sented by an independent board of directors, or by stockholders uncontaminated by the original breach of trust duty—until innocent stockholders, with full knowledge of the facts, ratified the transactions between the organizers and the company. The position of the court involves a flat self-contradiction, or compels them to recognize the Salomon v. Salomon class of cases as constituting an exception to their general rule.

The same fate befalls the theory of the court as to the cases where the promoters take all the stock in payment for their properties. Then, no matter how excessive the price, the promoters incur no liability. The corporation is wronged, but somehow forgives the wrong or is estopped to complain. But how does it forgive or how is it estopped? No one has assented except the promoters themselves, and they ex hypothesi cannot change for a moment the cloak of the promoter for that of the shareholder and give their own consent to their own wrong. Nor can the corporation while acting under the control of the promoters properly be said to do anything which estops it from complaining of the wrong after it has reached a condition where independent action on its part becomes possible. The rule laid down by the court for these cases either involves another contradiction or must be recognized as another exception.


As to the third class of cases, in which the intention of the promoters to have their company issue stock to future subscribers has been treated as a matter of vital importance, it now appears that that intention is and always has been wholly irrelevant. In Hayward v. Leeson,21 in the Bigelow case 22 when the court dealt with it on demurrer, and even in the final opinion of Mr. Justice Rugg,2 all the talk that we find about "a scheme of corporate organization which contemplates an issue of stock to the unenlightened public" was as the crackling of thorns under a pot. It was, indeed, worse than idle. It was extremely misleading. For, according to the Massachusetts doctrine as finally formulated, the breach of trust is committed when the organizers or promoters sell the company their properties or their services at an excessive price, even though they do not intend to offer a share of stock for public subscription. Therefore neither their intention when they commit the breach of trust in respect to the subsequent issue of more stock, nor the actual 22 188 Mass. 315, 74 N. E. 653.

21 176 Mass. 310, 57 N. E. 656.

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