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issue of more stock, can possibly be material. Regardless of their intention, the breach of trust is irrevocably committed as soon as they have completed their transaction with the company. The wrong may afterwards be condoned, but condonation implies that the wrong has been done; and, so long as they control the outstanding stock and the board of directors, they cannot condone for the company the wrong which they themselves have done it. Unless stock is in fact issued to future subscribers, there may be no one financially interested in the company who has either a right to complain or any desire to see a suit brought by the company against the promoters. This, however, is an accidental circumstance which does not affect the quality or nature of the wrong. The issue of stock to future subscribers simply brings upon the scene innocent shareholders who either may act for the company in condoning the wrong or may institute proceedings in its name and for its benefit in order to make the promoters account for their unrighteous profits.
Finally we come to the cases where the promoters intend to disclose, and do disclose, all the facts to future subscribers. While the court is of the opinion that the promoters who have sold their properties to the corporation at an overvaluation have done it a wrong, they nevertheless assume in all their opinions that if the subscribers choose to take the stock after disclosure, neither they nor the corporation can complain. And this would be so even though a very small part of the capital stock — say 15, as in the Bigelow case — were issued to innocent subscribers. Purchase after disclosure would be equivalent to assent on the part of the subscribers. It is impossible, however, to see why after becoming shareholders they should not say that the promoters had admitted their breach of fiduciary duty and insist that the corporation should sue the promoters to recover. When they buy as subscribers they do not deal with the promoters but with the company, and there is no reason why the company as such should stipulate either expressly or by implication that if the subscribers buy with knowledge of the earlier transactions between the corporation and the promoters, the subscribers must assent to what the promoters have told them. This would be permitting the promoters to use the corporation, still in their control, as a means of extorting forgiveness for their wrongdoing from persons who had not yet become shareholders. Free action on the part of the subscribers after they had become share
holders would be necessary before it could be said that they had assented to the prior transactions.
And if it could with any propriety be said that subscribers who took the stock after disclosure were estopped to complain, this would not help matters unless they took a majority of all the stock. If they were a small minority in value, we should again encounter the difficulty that the promoters, being still the owners of a majority in value of the stock, could not possibly forgive their own breach of trust. Yet the Massachusetts court virtually admits that they can do this. Here is another contradiction, or a rule which the Massachusetts court must treat as another exception to their general rule of fiduciary duty.
The explanation of all these inconsistencies, irrelevancies, and contradictions is obvious. The gist of the action against the promoter is not a breach of duty to the corporation, but is a breach of duty — call it if you like a fiduciary or equitable duty, or call it the common-law duty not to deceive — which the promoter owes to future subscribers. Hence it is that if an issue of stock to future subscribers is not contemplated, there is no breach of duty at all. Hence it is that where the promoters subscribe and pay for all the stock which the corporation issues, there is no breach of duty to the company. Hence it is that the intention to issue stock to future subscribers has so often been spoken of by the Massachusetts court and by the English courts as essential to raise the duty to deal fairly with the company. Hence it is that a full disclosure to the future subscribers makes it impossible to hold that any wrong was done to the corporation. On the theory that the real wrong is done to the subscribers we do not have to recognize numerous exceptions to any general rule. All the classes of cases we have been discussing fall into place without difficulty or friction, and we have a number of subordinate rules which are all in harmony with one general principle.
It is, therefore, submitted that the Massachusetts doctrine can be supported only as a fiction by virtue of which, in a very limited class of cases, an injury committed directly against the subscribers in the nature of fraud and deceit may be carried back and metamorphosed into a breach of fiduciary duty on the part of the promoter toward the company as a fiction by virtue of which an anticipatory breach of duty not to deceive the subscribers may be
treated as if it were a present breach of duty owed by the promoter to the company. And the Massachusetts doctrine can be supported only so far as in its application the subscribers, being the persons directly injured, are protected by and through the company which the promoter has used as an instrument of fraud. As the promoter has used the corporation as a means of deceiving the public, so the court, by invoking the fiduciary theory, may use the corporation as a means of righting the wrong. There seems to be a sort of poetic justice in such a proceeding; and it is obvious that in a proper case a single suit brought by the corporation may redress the wrongs suffered by all the subscribers, many of whom, if left to pursue their separate remedies, would probably not secure any redress at all. But the fiduciary theory cannot be employed with any propriety unless it does right the wrong. When the use of the fiction fails to right the wrong so far as the subscribers are concerned, and charges the promoter for an amount out of all proportion to the damages sustained by the subscribers, then the fiction is not being used with wisdom and discretion, but is being grossly abused.
Such a fiction is a dangerous thing to work with. Shadows are too easily mistaken for substances. A fiction cannot be handled with safety unless its true character is recognized and its reason and its purpose are kept constantly in view. If the fictitious character of the doctrine had been recognized by the court when they were asked to apply it in the Bigelow case, and if the court had kept in view its reason and its purpose, the corporation would either not have been allowed to recover at all or to recover only as trustee for the original subscribers; and the amount for which the promoters would have been held accountable would have been only the amount required to make the original subscribers whole. By failing to recognize that the trusteeship was a fiction; by declaring that the subscribers were the persons directly injured, and by declaring in almost the same breath that the corporation was the person directly injured; by treating the promoter as a real trustee for the company and not as a quasi trustee who might be treated as if he were a real trustee simply for the purpose of affording the subscribers the protection and the remedy to which they were entitled, the Massachusetts court came to grief. They had contrived to defeat the very object which they had set out to attain. They had pursued the
offender so far and through ways so devious that by the time they had caught him they had forgotten what his offense had been and whom he had offended. They stood ready to mulct him in a sum of over $2,000,000 without knowing whether a single person whom they believed he had cheated would be made whole, and without perceiving that less than a seventh of that amount would have sufficed to atone for all the wrongs of which he had been guilty.
R. D. Weston.
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RESIGNATION OF PROFESSOR BRANNAN. It is with great regret that we record the resignation from the Law School faculty of Joseph Doddridge Brannan, Bussey Professor of Law. Professor Brannan's connection with the School began in 1871, when he came here as a student in the first year of Langdell's administration. His first connection with the faculty was in 1898, when he was made a full professor. In 1908 he was appointed to the Bussey chair, which he held until this year. He has conducted many courses, but his greatest contributions have been in the law of Bills and Notes. No one who has known Professor Brannan latterly but thinks that many years of useful service to the law still lie before him. It is a source of pleasure that the work of preparing a new edition of the work on the Negotiable Instruments Law will keep him much among us.
THE LAW SCHOOL. This year, the first one begun under Dean Pound's administration, is marked by many changes in the Law School catalogue, caused partly by the resignation of Professor Brannan and partly by the School's expanding policy. The change of greatest interest is represented by the new names in the faculty. Professor Albert Martin Kales is a graduate of Harvard College of the class of 1896, and of the Law School of 1899. He comes now to the faculty from the Law School of Northwestern University and the practice of the law in the city of