far as a contract or other transaction between the corporation and the officer, or between the corporation and a party in whom the officer is interested, is concerned, that if the contract or transaction is voidable by the corporation—and that is a question hereafter considered ,25 then the corporation may elect to not repudiate the contract, which is voidable but not void,26 but to merely recover from the officer the profits made by him. In regard to trustees in general, Mr. Perry, in his work on Trusts, states that "they cannot use the trust property, nor their relation to it, for their own personal advantage. All the power and influence which the possession of the trust fund gives must be used for the advantage and profit of the beneficial owners, and not for the personal gain and emolument of the trustee. No other rule would be safe; nor would it be possible for courts to apply any other rule, as between trustee and cestui que trust." 27 In respect to agents in general, Professor Mechem states the rule to be that "all profits made and advantage gained by the agent in the execution of the agency belong to the principal. And it matters not whether such profit or advantage be the result of the performance or of the violation of the duty of the agent if it be the fruit of the agency. All profits and every advantage beyond lawful compensation, made by the agent in the business, or by dealing or speculating with the effects of his principal, though in violation of his duty as agent, and though the loss, if one had occurred, would have fallen on the agent, will, wherever they can be regarded as the fruit or the outgrowth of the agency, be deemed to have been acquired for the benefit of the principal." 28 In such a case, the corporation or its receiver may sue to recover the profit made,29 or, under certain circumstances, a suit in equity may Porter, 148 Mo. 176, 49 S. W. 982, rev'g 65 Mo. App. 448. New York. McClure v. Law, 161 N. Y. 78, 76 Am. St. Rep. 262, 55 N. E. 388. Pennsylvania. Bird Coal & Iron Co. v. Humes, 157 Pa. St. 278, 37 Am. St. Rep. 727, 27 Atl. 750; Simons v. Vulcan Oil & Mining Co., 61 Pa. St. 202, 100 Am. Dec. 628. Vermont. Rutland Elec. Light Co. v. Bates, 68 Vt. 579, 54 Am. St. Rep. 904, 35 Atl. 480. be maintained by a stockholder on behalf of himself and other stockholders.30 The fact that the amount of the profit cannot be readily ascertained is immaterial since the burden of proving the amount is not on the corporation.31 This rule applies equally well to profits made by a director who owned nearly all of the stock of the corporation.32 In scrutinizing the acts of such officers, it has been said that "the court will not heed mere forms when the substance which lurks behind them shows profits from a dealing in the corporation property."' 33 If the person sought to be held liable is a mere agent, and not an officer, then the general rules of agency apply, without regard to whether the principal is a corporation or an individual.34 So the question as to the liability of a corporate agent for profits in other business, where he has agreed to devote his entire time to the business of the company, is not peculiar to corporation law but is governed by the law relating to agents in general.35 Secret profits made by promoters of a corporation, i. e., profits made without disclosing the same to the real parties in interest and obtaining their express or implied consent thereto, may be recovered by the parties in interest; and much of the law pertaining thereto, as stated in a preceding chapter,36 is also applicable to secret profits retained by directors or other corporate officers. Furthermore, the rule stated in a preceding chapter that a sale by a promoter to the corporation even at a profit may be valid, provided the corporation is represented by an independent and impartial board of directors, and provided the promoters have made a full and fair disclosure of their ownership 30 Memphis & C. R. Co. v. Woods, 88 Ala. 630, 7 L. R. A. 605, 16 Am. St. Rep. 81, 7 So. 108; Chicago Hansom Cab Co. v. Yerkes, 141 Ill. 320, 33 Am. St. Rep. 315, 30 N. E. 667; Pearson v. Concord R. Corporation, 62 N. H. 537, 13 Am. St. Rep. 590; Earle v. Burland, 27 Ont. App. (Can.) 540. 31 Rutland Elec. Light Co. v. Bates, 68 Vt. 579, 54 Am. St. Rep. 904, 35 Atl. 480. 32 Central Mfg. Co. v. Montgomery, 144 Mo. App. 494, 129 S. W. 460. 33 Commonwealth Title Insurance & "will not be permitted 'to derive any 34 General rules applicable to all agents, see 1 Clark & Skyles, Agency, § 406. 35 This question is fully discussed in Sheppard Pub. Co. v. Harkins, 9 Ont. L. Rep. 504. 36 See §§ 135-149, vol. 1. or interest in the property, of the profit which they will make as a result of the transaction, and of all material facts generally,37 is applicable to sales to the corporation by a director or other corporate officer. § 2304. Limitations of rule-In general. The doctrine that a director or other officer of a corporation cannot obtain a profit or advantage in dealings on behalf of the corporation only applies where the officer is acting for the corporation, or for some other reason owes a duty to the corporation which is inconsistent with his obtaining the profit or advantage. By the weight of authority, as hereafter stated, the fact that a person is a director or other officer of a corporation does not prevent him from entering into a contract with the corporation, or selling it property, or purchasing property from it, etc., if the corporation is represented by other officers, and there is no fraud.38 And of course, if a contract between a corporation and one of its officers is a valid one, he cannot be compelled to account for profits subsequently made under such contract or in dealing with the subjectmatter of the contract.39 And the fact that directors are personally interested in a contract made with the corporation and to a certain extent are to profit by it, where the contract is not unfair and it is to the interest of the corporation that it be accepted, does not warrant a stockholder enjoining the carrying out of the contract.40 So if a transfer of corporate property to a director is valid and there is no ground for setting it aside, his trusteeship as to such property ends, so that the corporation cannot hold him for profits thereafter made in connection with the property.41 Furthermore, the rule does not apply to commissions for making a sale of property agreed on long before the agent became an officer of the purchasing corporation and which both parties to the sale had knowledge of.42 If a director or other officer purchases property, being at the time under no duty to purchase for the corporation, he may afterwards sell it to the corporation, if it is represented by other officers, without disclosing what he paid for it, and, if there is no fraud, he will not be compelled to account for the profit he may make in the transaction. In like manner, it is generally held that an officer of a cor poration may enforce claims against it for their full amount, although he may have purchased them at a discount, if he owed no duty to the company at the time he purchased." $2305. Exception where corporation insolvent or unable to act. When the corporation is insolvent, "its officers and directors do not owe it the duty of turning over to it the profits realized by the exercise of their skill and judgment, unless, at the time of the transaction out of which the profit arose, they were acting for said corporate interest and not in their own individual capacity." 45 It follows that if a corporation is financially unable to purchase property valuable or even necessary for corporate purposes, there is no breach of trust in a purchase of it for himself either by a director or other officer, and hence where he does purchase the property, and it increases in value, the corporation cannot hold the officer for the profits made. For instance, where a corporation had leased realty for a term of years with the right to purchase at the end of a certain number of years by making a stipulated cash payment, but at the end of such time. it was financially unable to make the payment, whereupon the president of the company purchased it for himself, the corporation cannot hold its president for profits realized by him in the purchase.47 So, in a still stronger case, it was held that where a director of a gas company, after the company had become wholly insolvent, purchased at public sale a franchise to lay gas mains in a city, the company could not hold the director for profits realized from such purchase.48 A like question arose at an early day in New York in a case where it appeared that Cornelius Vanderbilt had organized a transportation company for the purpose of transporting passengers and freight in and through Nicaragua. The company became financially embarrassed and unable to continue business whereupon Vanderbilt, then the president, decided to engage in the business on his own. account, but the Pacific Mail Company, which was also engaged, in the same business, on learning of Vanderbilt's intention, bought him off for a large sum said to amount to more than a million. It was held that a stockholder of the defunct company could not require him to account to such company for the money received.49 44 See § 2289, supra. 45 Jasper v. Appalachian Gas Co., 152 Ky. 68, Ann. Cas. 1915 B 192, 153 S. W. 50. 46 Hannerty v. Standard Theater Co., 109 Mo. 297, 19 S. W. 82. 47 Hannerty v. Standard Theater Co., 109 Mo. 297, 19 S. W. 82. 48 Jasper v. Appalachian Gas Co., 152 Ky. 68, Ann. Cas. 1915 B 192, 153 S. W. 50. 49 Murray v. Vanderbilt, 39 Barb. (N. Y.) 140. A director may purchase a majority of the outstanding stock of the corporation for himself, in order to protect his own interests, especially where the complaining stockholder was sent a written notice that the company was in financial difficulties and asking a pro rata advancement to preserve the property of the company, but he declined to contribute.50 § 2306. Secrecy as essential element. "The illegality of a profit made by a director," it is well said, "arises almost wholly. by reason of some undisclosed and secret bias on his part against the interest of the corporation of which he is a director. If a profit is made in a transaction that is honest in itself and is open and fully disclosed, and the transaction is consummated after an honest statement of the facts to the board of directors and to the stockholders, there is no reason for criticism or for charging such director with any profits that he may make."'51 However, it might well be thought, from reading many of the decisions, that this rule applies only in case of "secret" profits, but there is no doubt that the rule also applies in many cases to profits obtained openly, since, as has been stated, "the publicity alone of an illegal and unauthorized act does not make it legal or valid." 52 However, if the profit is not a secret one, then of course the question of ratification by the stockholders may arise, and the corporation may be barred from recovering the profits because of a ratification.53 In a California case it was contended that "because the action of the directors was open, and not secret, the rule does not apply that a trustee is prohibited from making a profit out of his trust relation," but it was held that openness of the transaction did not of itself validate it, although if the transaction is open and the shareholders know of it, they may be precluded from recovering the profits either by expressly assenting thereto or by acquiescence for a considerable time.54 In other words, wher. it is said that corporate officers cannot retain "secret" profits it is not meant that they may always retain profits 30 It was held that since the corporation could not purchase its own stock, the director did nothing as an individual that he could have done as a trustee, and that he did nothing detrimental to the interests of the corporation. Buchler v. Black, 213 Fed. $80, 885. 51 Continental Securities Co. v. Bel IV Priv. Corp.-13 mont, 83 N. Y. Misc. 340, 144 N. Y. Supp. 801. 52 Goodell v. Verdugo Canon Water Co., 138 Cal. 308, 71 Pac. 354. 53 Goodell v. Verdugo Canon Water Co., 138 Cal. 308, 71 Pac. 354. 54 Goodell v. Verdugo' Canon Water Co., 138 Cal. 308, 314, 71 Pac. 354. |