profits, are disclosed to those entitled to act for the corporation and its members, and their assent obtained, the rule is not so strictly applied, unless the profits or commissions are exorbitant or unconscionable, promoters, therefore, it is universally held, must account to the corporation for all secret profits, commissions, or bonuses which they may receive in connection with the purchase for or the sale of property to the corporation. They may also become liable to the corporation for their acts of a fraudulent nature, or for their misrepresentations under the same circumstances as individuals who are not promoters would be liable. The corporation may, by means of the proper proceedings in a court of equity, by or for its benefit, recover secret profits or commissions, or, at its election, rescind a sale of property to it and recover the consideration paid therefor.

§ 14. Personal Liability of Promoters. The acts of promoters are usually done in furtherance of the organization of a corporation not yet in existence. Their contracts and transactions are made for and in behalf of an artificial person not yet in existence. It may, as a matter of fact, never be fully and completely organized so as to become even a de facto corporation, that is, one existing in fact but not a strictly legal entity or de jure corporation. The question, therefore, frequently arises of the liability of the corporation when it is legally organized, upon the contracts or agreements of the promoters previously made for the benefit of the future corporation. In England, the rule is that in the absence of statutory or charter provisions, a contract made under such circumstances by the promoters is a nullity and that the corporation cannot ratify or adopt it thus making it its own after incorporation, although if it accepts the benefits of such a contract an action quasi ex-contractu (as if on a contract) may be maintained against it. This doctrine is also followed by the Supreme Court of Massachusetts.1 The English doctrine, however, has been substantially repudiated in all the other States. The personal liability of the promoters 1 Abbott v. Hapgood, 150 Mass. 248, 22 N. E. Rep. 907.

on contracts made before incorporation will depend largely upon the question of the intent of the parties to the contract. If it is understood or agreed that the other party shall look to the proposed corporation alone, the promoters are not, as a rule, personally bound by the terms of the contract, but, in the absence of such an understanding, or of such an intent, as shown by the facts and circumstances surrounding the making of the contract, they will be personally obligated. If, however, the corporation, later, upon its formation, assumes or adopts the contract, and the other party to it consents, there is then a novation of the parties and the promoters will be relieved from any personal liability. If such consent is lacking, however, the liability still attaches to the original parties to the contract. If they are personally bound, it follows, necessarily, that they can enforce the terms of the contract in an action thereon in their own name.

§ 15. Liability of the Corporation on Promoters' Contracts. It has already been stated in the preceding section that the rule in England and in Massachusetts relieves the corporation from any liability on the contracts of its promoters, although, if its benefits have been received and accepted by the corporation an action quasi ex-contractu may be maintained by the corporation upon it. The overwhelming weight of authority is, however, that a liability for the obligations of a contract may be and is shifted from the promoters to the corporation, not only by an acceptance of the benefits as above stated, but also if there is an express assumption by the corporation of the contract, in which case there will arise a novation between the parties; or, if the corporation, acting through its proper representatives, formally ratifies the contract. To summarize: it will be seen that the burden of the promoter's contract made before the organization of the corporation, or on behalf of the corporation, in existence but not yet engaged in the transaction of its business, may be shifted from the promoter as one of the parties to the corporation when the corporation accepts the benefits of the contract, formally assumes or

adopts it, or legally ratifies the act of the promoter in making the contract for its benefit. In the latter case, the corporation formally recognizes the promoter as its agent and ratifies his acts on its behalf previously done without authority. It is true that no relation of agency can exist between a promoter and a principal not yet in existence, and subsequent action by the corporation is necessary to make it liable for the private acts of the promoters.

§ 16. Fraudulent Acts of Promoters. Neither the corporation, when it is subsequently formed, nor subscribers for its stock, will be bound by the fraudulent acts of promoters. If the subscriptions are obtained through fraudulent representations made either orally or in writing, the one who is misled may recover the resulting damages from the promoters. This rule does not depend upon the fact that the misrepresentations or untrue statements of material facts may not be made to the subscribers of the stock personally. It is sufficient, in this country, if the statements, the natural tendency of which is to deceive and mislead and to induce those who read them to purchase the stock, are made or contained in circulars, advertisements, prospectuses, or other published matter issued for the purpose of obtaining subscriptions, and on the faith of the statements contained in them the subscriptions were so made.

§ 17. Expenses and Services of Promoters. Promoters, in organizing a corporation not yet formed, frequently incur heavy expenses and render services, payment for which they subsequently seek to recover from the corpora tion. The courts have held that the legitimate expenses of organization and a reasonable value for their services may be recovered, but extravagant claims for services, unnecessary or illegitimate expenses, are usually disallowed. In case of a failure to organize a corporation, the promoters, as a matter of course, are liable, personally, for expenses which they may have incurred, and they are also liable, in addition, for moneys which may have been received from subscribers to the stock of the proposed corporation as a

deposit or a preliminary payment on account of their subscriptions. As to the latter, if there is no understanding between the subscribers and the promoters, the moneys so received must be repaid in full to the original subscribers, and a proportionate part of the expenses of organization can not be retained by the promoters. If, however, there is an understanding or agreement by subscribers that they shall bear their proper share of the expenses of organization, including disbursements and the value of the services of the promoters, these are a proper charge against the moneys so paid in and no action will lie for a recovery of sums so retained.

CHAPTER IV

QUESTION OF LEGAL EXISTENCE
HOW AND BY WHOM RAISED

§ 18. De Jure and De Facto Corporations. The terms de jure and de facto have already been used in a preceding section, and a brief discussion of what is understood by them will be given in this chapter. A corporation, it will be remembered, is a distinct artificial person, a legal entity, created by the sovereign or under its authority, exercising powers and possessing capacities not belonging to a natural person or group of persons other than a corporation. The State, speaking of it as a sovereign power, alone has the authority to create, and by statutory enactment prescribes the conditions and the manner in which a corporation may be organized. When these conditions have been substantially complied with there results a corporation de jure which can successfully defend its right to exist in a corporate capacity even against the State. Those organizing a corporation, on the other hand, may fail to comply with statutory conditions to such an extent as to defeat the legal existence of the corporation not against third persons raising the question, but as against the State in a proper proceeding brought by it for that purpose. Such a corporation is known as one de facto. What is the attitude of the courts in respect to the regularity of corporate organization when the question is raised? There are two doctrines or theories in this respect, the great weight of authority, on the one hand, holding that where a body of men act as a corporation and in the ostensible possession of corporate powers, it will be conclusively presumed that they are a corporation in all cases, except in a direct proceeding against them by the State to vacate their charter. The other doctrine can be stated