directors or other managing officers are heavily interested as stockholders in another corporation with whom a contract is made, the contract will be closely scrutinized and will be set aside where an undue advantage has been taken or an unconscionable bargain made.16 It is immaterial, so far as the validity of such transactions are concerned, that they are open and not secret, where not agreed to by the stockholders of the company in which they are officers.17 In England, however, it is held that a corporation cannot buy shares of stock or other property from a company in which one of its directors is pecuniarily interested as a shareholder, without regard to whether he holds his shares as trustee or otherwise; 18 and extent of the interest of the officer in the other company is immaterial, according to the English decisions.19 It has been held that "no director could rightfully become a member of the improvement [construction] company, with whom the railroad company had a contract to furnish the means with which to build the road, with a view to share in the profits, and that if any gains should be realized in the enterprise, they would belong to the railroad company, upon the equitable principle which forbids the trustee, or person acting in a fiduciary capacity, from speculating out of the subject of the trust. The duties devolving on a director of the railroad company were in antagonism with his interest and relation to the improvement company. What might be to the advantage of one company might be detrimental to the best interests of the other." 20 Utica Gas & Electric Co., 151 N. Y. If directors lease corporate property to another company in which they are financially interested for a much less rental than that offered by another responsible party, minority stockholders may enjoin the execution of the lease. Schmid v. Lancaster Ave. Theater Co., 244 Pa. 373, 91 Atl. 363. 16 Hill v. Gould, 129 Mo. 106, 112, 30 S. W. 181. Rule applied to irrigation contract by directors of water company, a majority of whom were members of an association for whose benefit the contract was made. Goodell v. Verdugo Canon Water Co., 138 Cal. 308, 313, 71 Pac. 354. 17 Goodell v. Verdugo Canon Water Co., 138 Cal. 308, 314, 71 Pac. 354. 18 Transvaal Lands Co. v. New Belgium Land & Development Co., [1914] 2 Ch. 488, 501. 19 Transvaal Lands Co. v. New Belgium Land & Development Co., [1914] 2 Ch. 488, 503, citing Todd v. Robinson, 14 Q. B. Div. 739, as an instance of a very small interest as shareholder of a company being held to make a person "interested" in a contract. 20 Gilman, C. & S. R. Co. v, Kelly, 77 Ill. 426, 433, in which case it will be noticed that the directors did not become interested in the construction company until after the contract with it was executed. A fortiori, where managing officers of a corporation, without the knowledge of the corporation, organize with others a company for the purpose of making a contract with the corporation of which they are officers whereby the new company was to sell property to the old one at a large profit, the old corporation may have the contract set aside; 21 and the governing principle is stated by the Supreme Court of the United States as follows: "Hence, all arrangements by directors of a railroad company, to secure an undue advantage to themselves at its expense, by the formation of a new company as an auxiliary to the original one, with an understanding that they or some of them shall take stock in it, and then, that valuable contracts shall be given to it, in the profits of which they, as stockholders in the new company, are to share, are so many unlawful devices to enrich themselves to the detriment of the stockholders and creditors of the original company, and will be condemned whenever properly brought before the courts for consideration.” 22 On the other hand, where a street railway company leased its lines to another company in which a majority of the directors were interested, the corporation or minority stockholders cannot have the lease set aside where it has been beneficial not only to the public but also to the stockholders as a body by placing it upon a dividendpaying basis for the first time and by advancing its stock almost fifty per cent. upon the market.23 The fact that a minority of the board of directors are stockholders in another corporation where a transaction between the two corporations is approved by a majority of the directors, who are not interested in the other company, does not of itself invalidate the transaction.24 § 2361. Contracts between corporation and subsidiary corporation. Where one corporation controls another of which it holds a majority of the stock, by electing sufficient of its employees to control the board of directors of the latter, contracts between the two corporations must be regarded as if between a corporation and its directors or other trustees, and must be governed by the same prin 21The principle here announced authorizes the annulment of a contract such as the present one, if seasonably challenged, without regard to whether it is favorable or unfavorable to the complaining principal." Attalla Iron Ore Co. v. Virginia Iron, Coal & Coke Co., 111 Tenn. 527, 537, 77 S. W. 774, where the question is ably considered at some length. 22 Wardell v. Union Pac. R. Co., 103 U. S. 651, 26 L. Ed. 509. 23 Dickinson v. Consolidated Traction Co., 114 Fed. 232, 250. 24 Jesup v. Illinois Cent. R. Co., 43 Fed. 483, 503. ciples, so that the courts will set aside such contracts unless they are fair and reasonable.25 This rule is practically the same as the one laid down in the preceding section where a director or other corporate officer organizes a dummy corporation in order to deal directly with his company. 26 § 2362. Dealings between corporation and wife of officer. The policy which makes voidable a contract between a corporation and its director necessarily includes a director's wife.27 As to this matter, a prominent textbook writer has commented as follows: "If the husband acted in the matter on behalf of his wife, this conclusion would necessarily follow. Even if he did not so act, the doctrine would doubtless work well in practice, because the husband's interest in his wife's welfare would tend to bias his judgment as director; but nevertheless one may doubt whether so stringent a rule would be consistently adhered to by many courts." 28 In any event, if an officer of a corporation sells corporate property to his wife, the sale is voidable where it was practically a purchase for and on behalf of her husband, as where it became a part of the community estate of herself and her husband in a state where community estates are recognized.29 § 2363. Contracts where officers and third persons are jointly interested. If a third person joins with a corporate officer in dealing with the corporation, with knowledge that he is such officer, the contract may be set aside as to him as well as the corporate officer.30 This is upon the theory that where a stranger participates with the officer of a corporation in the commission of an act of manifest bad faith or breach of duty to it, he, equally with the officer, commits a wrong and ought not to be allowed to derive profit from it.31 § 2364. Application of general rules to particular transactions— In general. The rules already laid down as to the validity of dealings between corporations and their officers are generally applied with full force to particular contracts or transactions, although some 25 Montgomery Traction Co. v. Harmon, 140 Ala. 505, 520, 37 So. 371. 26 See § 2360, supra. 27 Voorhees v. Nixon, 72 N. J. Eq. 791, 66 Atl. 192. See also J. W. Butler Paper Co. v. Robbins, 151 Ill. 588, 38 N. E. 153, rev'g 37 Ill. App. 96. 28 2 Machen, Corporations, § 1583. 29 Nueces Valley Irrigation Co. v. Davis, 103 Tex. 243, 126 S. W. 4. 30 Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co., 16 Md. 456, 509, 77 Am. Dec. 311. 31 Attalla Iron Ore Co. v. Virginia Iron, Coal & Coke Co., 111 Tenn. 527, 537, 77 S. W. 774. times the courts fail to distinguish between cases where the officer deals with himself as the corporate representative, in whole or in part, and those cases where he deals with other officers as the representatives of the corporation. The most common application of the general rules is where an officer purchases from 32 or sells to 33 the corporation, or where the officer loans money to the corporation.34 Other miscellaneous cases applying the rule are also noticed in this connection. § 2365. Purchase of corporate property by director or other officer. The old rule which prevailed in some jurisdictions was that a director or other managing officer of a corporation, for the reason that he holds a fiduciary relation as trustee, could not purchase the trust property, all or in part, or directly or indirectly, and that, if he did, the sale was voidable at the mere pleasure of the corporation or its shareholders, notwithstanding the officer may have paid a full price and gained no advantage.35 And in Wisconsin, in 1877, a purchase by a director was differentiated from a purchase by the superintendent of the corporation on the ground that the one was a trustee within the rule that trustees cannot purchase any interest in the trust property, while the other was a mere agent within the rule that an agent is disqualified to purchase property of his principal only where his agency is so connected with the sale as to make it his duty to obtain the best terms for his principal on such sale, although equity regards with great jealousy any purchase by an agent from his principal.36 Moreover, it was held that so long as a contract of sale of real property of a corporation to a stranger remains executory, a director cannot purchase of such stranger, provided he could not have purchased directly from the corporation.37 All this is not the law of the present day, however, except in a very few jurisdictions, as will now be noticed, unless the purchasing officer acts as the selling agent for the corporation. Whether a purchase of corporate property-it being assumed that IV Priv. Corp.-17 debt, where sold for a price sufficient to discharge the lien. 36 Cook v. Berlin Woolen Mill Co., 43 Wis. 433. Purchases by agents from their principals in general, see 1 Mechem, Agency (2nd Ed.), §§ 1198-1204. 37 Cook v. Berlin Woolen Mill Co., 43 Wis. 433. the board of directors has power to sell the property-38 by a director or other corporate officer, from the corporation, is valid, depends upon the rules laid down in the preceding sections of this subdivision.39 Ordinarily such a purchase is not void as distinguished from voidable,40 and will be upheld providing it is fair and made in good faith, but not otherwise.42 41 The law is clearly stated by Justice Cole in an early Iowa case as follows: "There is no showing of any actual fraud on the part of Elijah Buell, in his purchase of the property from the board of directors. His position, as one of the board, was that of a trustee or guardian of the rights and interests of the stockholders in the corporation, and his purchase, while occupying that relation, cannot be regarded in a more unfavorable light than a purchase by a trustee of the property of his cestui que trust. The rule is well settled that a purchase of property by a trustee of his cestui que trust is not void in equity, but only voidable at the election of the cestui que trust. A court of equity will scrutinize such a transaction closely, and will not only set it aside for fraud, but will do so upon a very slight showing of advantage or of bad faith. But when it is clear that the cestui que trust intended that the trustee should buy, and there is no fraud, no concealment, and no advantage taken by the trustee of information acquired by him as such, the purchase will be upheld and enforced.” 43 38 Power of board to sell all or part of property, see §§ 1971, 1998, vol. 3. 39 See 2332 et seq., supra. 40 Arkansas. Town of Searcy v. Yarnell, 47 Ark. 269, 1 S. W. 319. Indiana. Hill v. Nisbet, 100 Ind. 341. Kansas. Webb v. Rockefeller, 66 Kan. 160, 71 Pac. 283. Nebraska. Miller v. Brown, 1 Neb. (Unoff.) 754, 95 N. W. 797. New Jersey. Barry v. Moeller, 68 N. J. Eq. 483, 59 Atl. 97. Pennsylvania. In re Ashhurst's Appeal, 60 Pa. St. 290. 41 Union Trust Co. of Maryland v. Carter, 139 Fed. 717, 731; Little Rock & F. S. R. Co. v. Page, 35 Ark. 304; Tenison v. Patton, 95 Tex. 284, 67 S. W. 92, rev'g (Tex. Civ. App.), 64 S. W. 810; Cook v. Berlin Woolen Mill Co., 43 Wis. 433. The president of a company may purchase treasury stock from the company. Dusenberry v. Sagamore Development Co., 164 N. Y. App. Div. 573, 150 N. Y. Supp. 229. Where a corporation holds an option to purchase land, but is unable to raise the money to make the purchase, an assignment of such option to a director is valid. Hannerty v. Standard Theatre Co., 109 Mo. 297, 19 S. W. 82. 42 Crescent City Brewing Co. V. Flanner, 44 La. 22, 10 So. 384. At any event, there is a presumption of fraud where a director purchases land from his corporation at one-tenth of its real value, so as to place the burden upon him of showing that the transaction was fair. Woodroof v. Howes, 88 Cal. 184, 26 Pac. 111. 43 Buell v. Buckingham & Co., 16 |