44

If the sale is actually, or in effect, made by the officer to himself, as where he wholly or partially represents the corporation and also is the purchaser either as an individual or as a member of a firm or the like, the sale is voidable at the option of the corporation merely because of the relationship of the parties and without regard to whether the sale is a fair or an unfair one, according to the general rule already stated.45 Thus, the president of a corporation has no authority to sell its goods to himself,46 nor can he sell its future output to himself so as to cut off a prior vendor's lien of which he as president was bound to take notice. So the president of a corporation cannot purchase notes belonging to the corporation from the corporation as represented by himself and indorse them to himself.48 On the other hand, if the purchasing officer does not represent the corporation in making the sale, then, according to the weight of authority,49 the sale is voidable only if unfair or the officer has acted in bad faith.50 There is a class of cases already noticed,51 however, which hold that such a purchase is voidable at the option of the corporation although there is perfect good faith and the consideration is adequate; 52 but the great majority of the cases deny this doctrine

Iowa 284, 85 Am. Dec. 516, but which states the rule that an interested director (in this case the purchaser) could be counted to make up a quorum, which is contrary to the general rule as already noticed in § 2354, supra.

44 If a director or other officer purchases for himself, and he also acts as the representative of the corporation in making the sale, then it is voidable by the corporation or minority stockholders without regard to fairness or good faith. Stanley v. Luse, 36 Ore. 25, 58 Pac. 75.

45 See §§ 2338-2342, supra.

46 In re Schoenfield, 190 Fed. 53; Bowdon Lime Works v. Moss, 14 Ala. App. 433, 70 So. 292.

47 Frellsen v. Strader Cypress Co., 110 La. 877, 34 So. 857.

48 Pacific Vinegar & Pickle Works v. Smith, 145 Cal. 352, 104 Am. St. Rep. 42, 78 Pac. 550.

49 See § 2347, supra.

50 While Carter, as a director, in one sense occupied a fiduciary relation

to the stockholders, he was not a trustee in the technical meaning of that word, and he was not prohibited from purchasing the property of the Clinchfield Corporation, as a trustee is from purchasing at a sale made by him. As a director he was not prohibited by the law from purchasing the property of the Clinchfield Corporation, if the sale to him was authorized by the other six directors of that company, and the transaction was fair, made in good faith, and for an adequate consideration. A court will closely scrutinize such a sale and the burden of proving good faith and adequate compensation will be placed on the party purchasing under such circumstances."' Union Trust Co. of Maryland v. Carter, 139 Fed. 717, 731. 51 See § 2346, supra.

52 In such a case, it was said by the Supreme Court of Colorado that "it is clear that the purchase of the stock in question cannot be upheld, even though the defendants were able

and hold that something more than the mere relationship of the parties must be shown in order to set aside the sale, where the corporation is represented in the deal by other officers.53 Moreover, a purchase by a director from a trustee, whose selection he did not influence or control, who was chosen by creditors and stockholders to hold corporate property in trust to sell to pay debts, is valid, since the relation between a director and such a trustee is not one in which confidence is given and reposed, between them.54

If the corporation is insolvent, it is generally held that an officer thereof cannot purchase all or a part of the corporate property and thereby secure a preference over other creditors.55

The remedy, where the sale is voidable, has been said to be to proceed to set aside the sale, or to compel an accounting of profits, or to collect the difference between the price actually paid and the real value of the property at the time of the purchase.56

In Ohio, a statute providing that "all capital stock, bonds, notes, or other securities of a company, purchased of a company by a director thereof, either directly or indirectly, for less than the par value thereof, shall be null and void," has been construed as not broad enough to include securities issued by other companies even though guaranteed by the corporation holding them and attempting to sell them at a discount to one of its directors.57

§ 2366. Sales by directors or other officers to corporation. Ordinarily a director or other corporate officer may sell his property to the corporation if the sale is open and fair.58 In any event, "a

corporation among themselves, and hence is within the principle governing cases where the officer acts as the representative of both sides, as already noticed, rather than within this class of cases.

53 See $2347, supra.

54 Kessler & Co. v. Ensley Co., 141 Fed. 130, 162, aff'd 148 Fed. 1019 (mem. dec.).

55 Infra, chapter on Insolvency.

56 Millsaps v. Chapman, 76 Miss. 942, 71 Am. St. Rep. 547, 26 So. 369. 57 Cincinnati, H. & D. R. Co. v. Kleybolte, 80 Ohio St. 311, 88 N. E. 879.

58 Figge v. Bergenthal, 130 Wis. 594, 110 N. W. 798. 109 N. W. 581 A majority of the directors of a

director is not disabled from selling his own property to his corporation, provided there are enough directors present who have no personal interest in the property and the sale is open, fair and honest." 59 Further analyzing the question it would seem that if the selling officer or officers also act as the representatives of the corporation then the sale is voidable at the option of the corporation or its stockholders without regard to its fairness or the good faith of the officers,60 according to the general rule laid down in a preceding section, although this rule seems to have been disregarded at times.62 In any event, such a sale may be set aside where unfair or where the selling officer or officers have acted in bad faith.63 If the officer buys from himself, i. e., if he represents both the buyer and the seller, the cor

coal company may sell coal to a railroad company in which they hold a majority of the stock, where the price is a fair one and the best obtainable. Hill v. Gould, 129 Mo. 106, 30 S. W. 181. But it would seem that such a sale ought to be set aside on application, merely because of the relationship of the parties, according to the rules stated in §§ 2340, 2363.

59 Howland v. Corn, 232 Fed. 35, 44. 60 If a majority of the directors, during the time of their being in office, purchased property in their own name and afterwards sell it to the corporation as represented by themselves at a price much greater than the original price and for a sum much greater than its value, the case comes within the rule that where officers act for themselves on one side of the transaction and for the corporation on the other side, the corporation may repudiate the sale merely because of such relationship, or it may charge the profits made by the officers with an implied trust for its benefit. Parker v. Nickerson, 112 Mass. 195, purchase of steamboats.

61

v. Lansingh, 154 Ill. 301, 376, 40 N. F. 362.

61 See §§ 2340-2342, supra.

62 A sale by a director, who was a majority stockholder, to the corporation acting through its manager-the husband of the seller-is valid where

open and fair. Figge v. Bergenthal, 130 Wis. 594, 110 N. W. 798, 109 N. W. 581.

63 Purchase by directors, for the corporation, of property in which they are personally interested, for a sum largely in excess of its market value, is voidable at the instance of the corporation or nonconsenting stockholders. Klein v. Independent Brewing Ass'n, 231 Ill. 594, 83 N. E. 434.

Where persons purchase land and afterwards become directors of a corporation, the fact that the property was bought with a view to reselling it to a corporation to be organized for the purpose, and that that purpose was ultimately carried into effect, does not give to the corporation a right to the benefit of the purchase; but where the directors who own all the stock sell the land to the corporation at a price largely in excess of the value of the property, without making a full disclosure of at least the price at which the property was bought by the directors, and where the original capital stock of a thousand dollars, al

If the managers of a corporation purchase real estate while acting as such, but in their own name, in order to resell it to themselves as managers of the company, for a profit, the profit belongs to the corporation. Higgins

poration may rescind the sale if it can restore the property, or, if it cannot restore the property, it is liable to pay not the price agreed upon but only a reasonable price.64 So a purchase by directors and a resale by them to the corporation as represented by themselves, at a big profit, has been held invalid even where such directors owned all the stock, where the company issued stock in payment for the property, since the public is interested.65

What is meant by the statement that the selling officer must act in good faith and the sale must be fair? This is correctly answered, it is believed by a Kansas decision where, in determining the validity of a sale of a roadbed to a railroad company by a director thereof, it was said that "the sale must be a fair, open one in all respects; the price paid by Tiernan [the selling director] and his associates must have been disclosed to the directors of the company, and the whole transaction must not only be for the evident interests of the company, but it must have been conducted in all its stages in the utmost good faith on the part of the directors, and with a complete knowledge of the time when, the circumstances under which, and the exact amount paid by Tiernan at the date of his purchase, to be relieved of that suspicion with which courts of justice universally regard a transaction in which the seller and the buyer are represented by one and the same person. It is submitted, however, that the rule stated applies where the corporation is represented by other officers than the selling officers rather than, as stated, when the selling officers also represent the purchasing corporation, since in the latter case the sale may be set aside without reference to its fairness or the good faith of the officers.67 There is no objection to a sale of property by a director or other officer to the corporation, at a price in excess of what the officer paid for it, where the price paid by the corporation is a fair one, and there is no secrecy, and the officer was not acting for the company, nor under duty so to do, in making the original purchase. 68

66

though in the hands of the directors who knew the facts, was to be at once increased to nearly four million and a majority of it issued to third persons having no knowledge of the sale, the corporation may have the sale set aside. Old Dominion Copper Mining & Smelting Co. v. Bigelow, 188 Mass. 315, 108 Am. St. Rep. 479, 74 N. E. 653.

64 Parker v. Nickerson, 137 Mass.

487,

497.

65 Redmond v. Dickerson, 9 N. J. Eq. 507, 515, 59 Am. Dec. 418.

66 St. Louis, Ft. S. & W. R. Co. v. Tiernan, 37 Kan. 606, 632, 15 Pac. 544. See also Emma Silver Min. Co. v. Park, 14 Blatchf. 411, Fed Cas. No. 4,467.

67 See § 2342, supra.

68 Bennett v. Havelock Elec. Light & Power Co., 20 Ont. Wkly. Rep. 578.

Can a corporate officer buy property and then resell it to his company at a profit? In regard to this question it was held in Massachusetts that if a corporate officer buys property in his name at a time when he had corporate funds in his hands with which to buy the property, and it was his duty to buy it for the company,69 or, it seems, if the officer originally bought the property for the purpose of selling it to the corporation,70 he is to be treated as an agent of the corporation and a trustee for the profits which are the difference between what he paid for the property and what he sold it to the company for, less the necessary intervening expenses; 71 but if the officer originally bought the property not for the purpose of selling it to the company, nor at a time when it was his duty to buy it for the company, the officer may sell it to the company for more than he paid for it plus expenses.72 In any event, if a corporation purchases land from one of its officers, it cannot, upon rescinding the sale, compel him to pay for improvements put on the property by the corporation.73 The question of secret profits has already been considered.74

If a corporation purchases the stock of its director at a time when it had no authority to do so because it was insolvent, the director, being chargeable with knowledge of the insolvency, cannot recover on a note given for the price of the stock, even as against one who indorsed it before delivery.75

§ 2367. Leases by or to directors or other officers. The rules already stated as to the validity of contracts in general between a corporation and its officers apply equally well to leases by or to directors or other officers where the corporation is the other party to the lease. For instance, the general rules have been applied by holding that a lease made by a corporation through an officer thereof on the one side, with himself as an individual as the lessor, is not void, but may be ratified by the corporation.76 So a corporation may lease property from its president, in a proper case.77 The lease of corporate property to persons who are directors of the corporation, says the Massachusetts court, "is a suspicious circumstance, which 69 Parker v. Nickerson, 137 Mass. 497.

487,

74 See §§ 2303-2324, supra.

75 Burke v. Smith, 111 Md. 624, 75 Atl. 114.

76 Louisville, N. A. & C. R. Co. v. Carson, 151 Ill. 444, 38 N. E. 140.

77 Metzger v. Knox, 77 N. Y. Misc. 271, 136 N. Y. Supp. 681, aff'd 153 N. Y. App. Div. 911, 137 N. Y. Supp. 1129.