openly made, but merely that, if the profits are secret, as they usually are, the rule applies without any qualification as to previous assent or subsequent ratification by the stockholders or of other officers, while if the transaction or arrangement is open and not a secret one, the right to sue for profits may be barred by laches 55 or by ratification. And it is held that a corporate officer, with the knowledge and consent of the corporation, may make a valid contract for the payment of commissions to him as an individual, with the other party to the contract.5 56 § 2307. Good faith of officer or want of damage to corporation as immaterial. The good faith of the officer obtaining the secret profit does not affect his liability therefor 57 nor does the fact that the corporation was not damaged by the transaction in which the profit was made.58 "It is not essential," said the Missouri Court of Appeals, "to the liability of the director that the company has suffered a loss from what he has done; it is sufficient that he has gained a profit through it. Whether the contract which he has made, or in the making or ratification of which he has concurred, was in point of fact beneficial or injurious to the company, is wholly an immaterial inquiry. The broad principle is that whatever he acquires by virtue of his fiduciary relation, except in open dealings with the company, such as a director in common with strangers may sometimes have, belongs not to him, but to the company. Nothing else than this satisfies the demands of the law." 59 § 2308. Lawfulness of means used to secure profit as immaterial. In all transactions in which corporate interests are involved, if it appears that the officer making the deal has acted against the interest of his corporation, "the mere fact that the means used to accomplish the unlawful end would, if standing alone, be lawful in themselves, will not save such officer from responsibility to account for profits thus made by him which otherwise might have gone into the coffers of his corporation." 60 55 Keeney v. Converse, 99 Mich. 316, 318, 58 N. W. 325, delay of ten years. 56 Jameson v. Coldwell, 23 Ore. 144, 147, 31 Pac. 279. 57 Western States Life Ins. Co. v. Lockwood, 166 Cal. 185, 135 Pac. 496. 58 Western States Life Ins. Co. v. Lockwood, 166 Cal. 185, 135 Pac. 496. The fact that the transaction is ad vantageous to the corporation does not change the rule. Bird Coal & Iron Co. v. Humes, 157 Pa. St. 278, 37 Am. St. Rep. 727, 27 Atl. 750. 59 Bent v. Priest, 10 Mo. App. 543, aff'd 86 Mo. 475. 60 Commonwealth Title Insurance & Trust Co. v. Seltzer, 227 Pa. 410, 136 Am. St. Rep. 896, 76 Atl. 77. § 2309. Effect of acts being ultra vires. It has been contended in some cases that profits are not recoverable from an officer where the lines of endeavor in which the money was made are ultra vires, i. e., beyond the powers of the corporation, but this contention has been universally rejected,61 at least where the acts were not malum in se.62 For instance, where one was sued for profits made while serving as manager, and defended upon the ground that the corporation was without power to do the things that he had done in the production of the profits, the Minnesota court said: "It is not necessary to determine whether the corporation had power to purchase grain and sell it for profit. It may be conceded that it had not, yet the agent cannot, while engaged in the service of his employer or principal, act in the capacity of both buyer and purchaser [seller], without such principal's consent; and in such cases 'all profits made in the course of an agency belong to the principal, whether they are the fruits of the performance or the violation of the agent's duty.'"'63 * On a like theory, it has been held that land given the president of a railroad company in consideration of the extension of the line to the property of the grantor belongs to the company, even though it was without power to acquire such property.6 § 2310. Contracts as contrary to public policy. A contract between an officer of a corporation and a third person is contrary to public policy, and therefore illegal and void, where it contemplates a fraud upon the corporation, or where, by giving the officer a secret 61 Memphis & Arkansas River Packet Co. v. Agnew, 132 Tenn. 265, L. R. A. 1916 A 640, 177 S. W. 949, reviewing decisions at length. To same effeet, Mt. Vernon Bank v. Porter, 148 Mo. 176, 49 S. W. 982; St. Louis Stoneware Co. v. Partridge, 8 Mo. App. 217. "Courts should close their ears when dishonest men attempt to wrest and quote rules of law in an effort to shield them from the consequences of their misdeeds." Memphis & A. River Packet Co. v. Agnew, 132 Tenn. 265, L. R. A. 1916 A 640, 177 S. W. 949. The cashier of a bank cannot set up as a defense to an action by the bank for the proceeds of bonds sold by him, that it was ultra vires for the bank to negotiate the bonds-such transaction not being malum in se. Mt. Vernon Bank v. Porter, 52 Mo. App. 244, 248. The governing rule in cases of agency in general, in line with the statement in the text, is well stated in Hertzler v. Geigley, 196 Pa. St. 419, 79 Am. St. Rep. 724, 46 Atl. 366. 62 Memphis & A. River Packet Co. v. Agnew, 132 Tenn. 265, L. R. A. 1916 A 640, 177 S. W. 949. 63 Goodhue Farmers' Warehouse Co. v. Davis, 81 Minn. 210, 83 N. W. 531. 64 Scott v. Farmers' & Merchants' Nat. Bank, 97 Tex. 31, 104 Am. St. Rep. 835, 75 S. W. 7, rev'g (Tex. Civ. App.), 67 S. W. 343, 66 S. W. 485. profit or personal advantage, or otherwise, it places his private interests in conflict with his duty to the corporation. Such a contract, therefore, cannot be enforced by either party,65 and may be rescinded by the corporation.66 In any event, this is the rule where the contract is executory. Thus, where a person contracted with a railroad company to construct its road for a certain per cent. of the cost of construction, and thereafter on the same day contracted with five of the seven directors of the road to pay them two-thirds of such per cent., the two contracts are to be treated as pari materia and as constituting one contract which is void as against public policy, and the contractor cannot sue for failure to carry out the contract, under the rule that where an illegal contract is executory neither party can ask the aid of a court to enforce it.67 So if a secret advantage is given officers, the other party to the contract cannot enforce specific performance against the corporation.68 Moreover, it seems that a stipulation in a sale of the property of one street railway company to another, that the purchaser was to operate its lines for a certain number of years to a tract Minn. 278, 57 N. W. 662. Missouri. Sidway v. Missouri Land New York. Koster v. Pain, 41 App. See also 2415, infra. A contract is not enforceable against a corporation when the party dealing with the corporate officers has given to any of them a secret interest in the contract. Kelsey v. New England St. Ry. Co., 62 N. J. Eq. 742, 48 Atl. 1001. Rule applied to sale of shares of stock in another corporation by a special committee of the directors, where there was a stipulation in the contract that such members of the committee should have the option to sell shares held by them individually to the same vendee at the same price, where no such option was given to other stockholders who also owned shares in the other company. Kelsey v. New England St. Ry. Co., 62 N. J. Eq. 742, 48 Atl. 1001. A contract by a president and director of a bank for the sale of stock by him, stipulating that the purchaser shall be elected cashier of the bank, is contrary to public policy, and void. Noel v. Drake, 28 Kan. 265, 42 Am. Rep. 162. 66 Finck v. Canadaway Fertilizer Co., 152 N. Y. App. Div. 391, 136 N. Y. Supp. 914. 67 Stanton v. Sturgis, 140 Fed. 789. 68 Kelsey v. New England St. Ry. Co., 62 N. J. Eq. 742, 48 Atl. 1001. of land owned by the directors of the seller, is yoid as being for the benefit of the directors.69 On the same theory, it is held that a contract made by an officer of a railroad company whereby he is to receive a personal benefit as the real consideration for locating a station at a particular place is void as against public policy.70 So it was held at an early day in railroading that managing officers of a railroad company could not purchase lands in advance of the location of the line, with a view to locating the line on or near such lands—such a contract being held to be against public policy.71 So where a railroad company made a construction contract with a company and agreed that the payment should be made in mortgage bonds, but the construction company agreed as part of the transaction to assume the stock subscriptions of all the directors of the railroad company to the worthless capital stock of the railroad company, stockholders of the railroad company may attack the bonds as being voidable because of the voidable contract.72 Likewise, if a special committee of a board of directors contracts to sell shares of stock in another company owned by the corporation, with the stipulation that they shall personally have an option to deliver their own shares in the same company at the same price, but the option is not extended to the other stockholders, the contract cannot be enforced against the corporation.7 73 Moreover, if the contract on which the action is founded is against good morals, or expressly forbidden by statute, the corporation may plead its invalidity even though it was a participator in the wrong.74 For instance, it has been held that where a corporation contracted for the construction of a building for its use, and a large bonus was added to the price, to be divided between the president of the company and the other contracting party, the latter could not recover on the con 69 Scott v. Farmers' & Merchants' Nat. Bank, 97 Tex. 31, 104 Am. St. Rep. 835, 75 S. W. 7, rev'g (Tex. Civ. App.), 67 S. W. 343, 66 S. W. 485. 70 Peckham v. Lane, 81 Kan. 489, 25 L. R. A. (N. S.) 967, 19 Ann. Cas. 369, 106 Pac. 464. A contract by which officers of a railroad company agreed to assist in establishing a town on certain lands which its contemplated line would cross, in consideration of a conveyance to them of a part of the land, was held illegal and void, as an attempt by the officers to use the cor poration for their private benefit. Bestor v. Wathen, 60 Ill. 138. And see Linder v. Carpenter, 62 Ill. 309. 71 Woodstock Iron Co. v. Richmond & D. Extension Co., 129 U. S. 643, 32 L. Ed. 819; Cook v. Sherman, 20 Fed. 167. 72 Thomas v. Brownville, Ft. K. & P. R. Co., 109 U. S. 522, 27 L. Ed. 1018. 73 Kelsey v. New England St. Ry. Co., 62 N. J. Eq. 742, 48 Atl. 1001. 74 Standard Lumber Co. v. Butler Ice Co., 146 Fed. 359, 7 L. R. A. (N. S.) 467. tract where a statute made the conduct of the company a misdemeanor.75 The transactions may be set aside by the company or its stockholders provided they act within a reasonable time.76 "But if the reason for such repudiation [by the corporation] has ceased, on account of an assignment to a new party, who at the request of the corporation guarantees its fulfilment, a technical ratification is not necessary. The contract then stands by its own force, there being no longer a right of repudiation." 77 § 2311. Bribes or presents from third persons. A corporate officer must account for bribes received from third persons, to influence his official conduct, and ordinarily for gifts from third persons where tending to induce him to violate his duty to the corporation as such officer.78 Thus, if a director receives bonds from a third person for voting a certain way as a director, such bonds belong to the corporation.79 However, it has been said that the rule that all profits and advantage made by the agent in the course of his agency belong to the principal, does not apply to mere personal gratuities or gifts from third persons to the agent which neither he nor the principal had any right to expect, and which did and could offer no inducement to the agent to violate his duty, although they were made in consideration of benefits incidentally derived from the performance of the agent.80 In a case in a federal court, where it appeared that, as a condition to consolidation of two corporations, one of them insisted that the president of the other should agree not to compete in the business for a certain number of years, the consideration paid to such president by the corporation of which he was not an officer for agreeing to not compete, was held not a profit which his corporation could recover from him, where he, in conducting the negotiations for the consolidation, fully protected the interests of his corporation. The reasoning of the court was that this payment to the president was not a reward 75 Standard Lumber Co. v. Butler Ice Co., 146 Fed. 359, 7 L. R. A. (N. S.) 467. 76 Coombs v. Barker, 31 Mont. 526, 79 Pac. 1. 77 Union Pac. Ry. Co. v. Credit Mobilier, 135 Mass. 367, 377. 78 The acceptance by a corporate officer of secret gifts from a company dealing with the corporation is a breach of trust for which he must - 79 Bent v. Priest, 86 Mo. 475, 486. 801 Mechem, Agency (2nd Ed.), § 1231, and see Aetna Ins. Co. v. Church, 21 Ohio St. 492 which supports the rule. |