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sold by them to the corporation. Justice Thompson, after ruling that the profit was illegal, said: “Let it be shown that a promoter obtained property when it was his duty to obtain it for the company, and it immediately follows that he cannot, without the fullest disclosure on his part, charge the company more than he actually gave for it.”* Later in a case in the same court where B contracted to sell land to the promoters of a corporation for $12,000, and afterwards associated himself with them so that the company when formed should buy the land for $40,000, out of which B should receive the original contract price and an aliquot portion of promoter's profits, it was held that since B's position with relation to the company was one of trust and confidence, any money in the nature of secret profits received to his own use was therefore money of the company.† In Heckman's Estate, 15 Pennsylvania County Court Reports, Judge Penrose held that a secret agreement between a promoter and the owner of property leased to the corporation by which the promoter received a percentage of the rental constituted such fraud as to invalidate the lease.
As a part of the doctrine that a promoter could not bind a non-existing principal, it has been argued that it was legally impossible for the subsequently formed company to transfer to itself by adoption, or, as the cases say, “ by ratification,” any rights or to assume any liabilities on the contracts made by promoters. Massachusetts by its highest court in Abbott against Hapgood, 150 Mass., 252, has said if a contract is made in the name and for the benefit of a projected corporation, the corporation after its organization cannot become a party to the contract, even by adoption of it, and in support of this rule of law refers specifically to the previously mentioned English case of Melhado against the Railroad Company. In that case the articles of association of a company provided that all accounts, charges and expenses incurred in the establishment of the company not exceeding in the whole the sum of £2,000 might be deemed as preliminary expenses and defrayed by the company. In an action to charge the company on promoters' contracts in accordance with this provision, Lord Coleridge held that the company could not ratify and adopt such contracts since it was not in existence at the time the contracts were made. Lord Cotton ruled similarly in Northumberland
57 Pa. 321. † 61 Pa. 188.
Avenue Hotel Company,* where a company was incorporated on July 25, 1882, and the day before a contract in writing was entered into between one Wallis and a person acting for the company. The court said that the contract was in no way binding on the company nor could the company after it was formed ratify it. But the courts generally have refused to follow these decisions, and by far the great weight of authority on this point has taken the opposite view and recognized the power and the right of the corporation when formed to adopt or ratify the precorporate contracts of its promoters. Some cases employ the word “ratify,” yet this term is inaccurate and ill chosen, for ratification presupposes a principal existing at the time the acts ratified were done, and we have seen that generally the corporation does not come into existence until after such time. What the corporation really does is to take over the contract and its liability, etc. Liability rests upon its immediate and voluntary act and not upon the idea of ratifying any supposed agency or authority. There is no difference between the making of an entirely new contract by a corporation and the adopting of one made by promoters. The contract itself is to be regarded as having been made by the corporation as of the date of its adoption and not as of the date of the agreement by the promoter. And it follows that since a contract is not binding on the corporation until adopted, it may resist an action brought against it for specific performance of its provisions, since adoption is purely optional. In the Supreme Court of Arkansas a case is reported where suit was instituted to recover a large sum of money for services rendered, materials furnished and money expended in and about the building and construction of the Little Rock and Fort Smith Railroad. The contract was originally made with the promoters of the corporation, but it was subsequently adopted and its benefits enjoyed by the corporation. The Court, in stating the principle, says, “that in order for a plaintiff to recover in such case he must show an express promise of the new company to perform, or, where an express promise cannot be shown, it must appear that the contract was made with persons then engaged in its formation, and on behalf of the new company, in the expectation on the part of the plaintiff, and with the assurance on the part of the promoters, that it would become a corporate debt, and furthermore that the company afterwards entered upon and en* 33 Ca. Div. 16.
joyed the benefit of the contract. From these circumstances an affirmative of the contract would be implied.* In the United States Court, in the case of Whitney against Wymen, 101 U. S., 392, where promoters purchased machinery which was afterwards used by the corporation, the corporation was held liable for its price on the ground that such action showed an intention to adopt the contract. Also where a proposition was made on behalf of a railroad company by its promoters that if a bonus should be subscribed and paid to it, it would build a road between certain points and would carry coal at a stipulated rate, it was held that the corporation by accepting the bonus after its organization thereby adopted the contract and was bound to fulfill its stipulations. Railroad Company against Granger, 86 Texas, 350. The Maryland Court of Appeals in Manufacturing Company against Small, 40 Md., 395, says: “Where under a contract with the acting president of a manufacturing company, made after the certificate of incorporation was signed by the members of the proposed corporation, but before it was recorded as required by law, work is done for the company and accepted after its incorporation is complete, the corporation will be estopped both at law and in equity from denying its liability on account of the same."
In one of the latest decisions on the subject of promoters in Pennsylvania, the Supreme Court in Trust Company vs. Lappe, † decided January 7, 1907, that where one was actively engaged with others in promoting a company and for the purposes of the company took a lease of certain property in his own name and the company when formed ratified the same, and lease thereupon became the property of the company and it was liable for the rent, whether the ownership of such lease was advantageous or otherwise. The promoter lessee was decreed trustee of the lease for the company and was enjoined from transacting it to any other person. From these last mentioned cases it may be seen that the corporation makes itself liable upon promoters' contracts by expressly adopting them, or adoption may be implied from the acts and general conduct of the corporation in relation to them. The
question must be submitted to the jury to determine whether the acts of the corporation show an intention to adopt the contracts. And furthermore, where the corporation after its organization, and with knowledge of the facts, accepts the benefits of promoters' contracts, it must also assume their burdens, or, as the cases say, “it must take them cum onere.” The rule in Illinois * and Connecticut † require an express promise on the part of the corporation to carry out the terms of the contract before there can be an adoption.
* 37 Ark. 164. 72:6 Pa. 549.
But there is a limitation to this right that may be exercised by the corporation. It goes to the nature and subject matter of the contract in question. The rule as stated is that a corporation may adopt only such contracts as it has express or implied authority to make. They must be within the purposes for which the corporation was organized. Hence an ultra vires contract could no more be adopted than it could have been made by the corporation in the first instance. In Stanton against the Railroad Company, A and B, the promoters of a corporation, previous to its organization, made a contract with C for the purchase by him of a right of way for a railroad and after organization the corporation adopted the contract. Subsequently, after C had secured the right of way, the directors abandoned the enterprise and allowed the corporate powers to expire. In a suit by C to recover for his services the court said that since the contract made by the promoters was within its powers and was a reasonable means for carrying out its authorized purposes, the corporation was bound by it and liable to C for the services rendered. Conversely, in Shrewsbury against the Railroad Company, a leading English case, the promoters of a railroad company contracted with a land owner, a Peer of Parliament, to pay him £20,000 for his support in obtaining its act. After Parliament passed the act the directors of the company when formed adopted the contract. Lord Kindersley said that the original contract was not such as the company had power to make and consequently there could be no adoption of it by the directors of the company when formed. This rule governs the cases in our country. In Tit vs. Bank,|| a Pennsylvania case, the late Judge Arnold said: “The contract which is to be adopted by the corporation must be one within the scope of the business of the corporation, for it can no more adopt an illegal act than it can do such an act."
In Pennsylvania and Connecticut a further limitation is placed on the power of adoption. It is held that the contract which the corporation seeks to adopt must have been made by a majority in number of the promoters, and in Railroad Company against Christy, 79 Penn., 59, and Tift against the Bank, 141 Pa., 550, a recovery was refused because the contract was made with less than a majority of the promoters.
*65 Ill. 332. † 27 Conn. 170. 159 Conn. 272. L. R. 1 Eq. 593. 141 Pa. 550.
In conclusion the cases referred to show clearly that promoters are not agents of the corporation to be formed because they have no existing principal, consequently they are personally liable unless they have stipulated to the contrary or unless the statute under which the corporation was chartered provides that the corporation shall be liable for the expenses of promoting the scheme. They are the fiduciaries of the intended corporation and it is illegal for them to profit secretly out of any transaction made in its interests. The corporation when formed may adopt the pre-corporate contracts of its promoters either expressly or by implication. In the latter case the general conduct of the corporation in relation to such contracts determines the question of adoption. Having adopted a contract and accepted its benefits, a corporation is estopped from denying its liability thereon. But a contract beyond its express or implied powers, or in Pennsylvania one made by a minority of promoters, cannot be adopted by a corporation.