Care must be taken in applying these rules not to confound an expression of opinion with a statement of facts. (a) There is a vast difference between words expressing the strongest confidence that a specified enterprise will be successful, and an assertion that profits in a commercial sense had actually been made. It should also be considered whether a person is likely through inexperience to be misled by the prospectus.1 Where the language of the prospectus has a plain and clear meaning, it must be construed by the judge, and not by the jury.2 (3) The rights of third persons against the corporation for the misconduct of its trustees or directors. The party injured may, in certain cases, look to the corporation instead of the directors. As they may be agents for the company, their acts of a wrongful or injurious nature may bind the corporation, on accepted rules of the law of agency. If the corporation had profited by the fraudulent acts of the directors, this participation in the results of the wrong might amount to a confirmation of their acts. (b) In the case now in hand of fraudulent prospectuses, the injured party, instead of proceeding against the directors, may prefer to rescind the contract. This is an accepted remedy by one who has been fraudulently induced to subscribe to original shares. The action would be brought against the company instead of the directors. (c) The contract to purchase in such a case is void 1 Bellairs v. Tucker, L. R. 13 Q. B. D. 562, 577, and cases on the last-named page. 2 Moore v. The Explosives Co., 56 L. J. (Q. B.) 235. believed in good faith to be true, amount to fraud, though it might be evidence of it. This decision is followed in Glasier v. Rolls, L. R. 42 Ch. D. 436, and Angus v. Clifford [1891], 2 Ch. 449, and seems to have led to the passage of the statute known as the Directors' Liability Act, 1890 (53 & 54 Vict. c. 64), establishing the liability of direc tors and promoters for untrue statements made in prospectuses, etc., unless such statements, not purporting to be made on the authority of an expert or of a public official document or statement, are made under the belief that they are true, for which belief there must have been reasonable grounds. The doctrine maintained in Derry v. Peek is criticised by Sir Frederick Pollock in 5 Law Quarterly Review, p. 410 (Oct. 1889). Cf. Wakeman v. Dalley, 51 N. Y. 27, where it is said that an action of deceit cannot be maintained unless the representations were known to be false, or unless there were reasons for 3 Barwick v. English Joint-Stock Bank, L. R. 2 Exch. 259, is a leading case, and frequently cited in later cases. See opinion of WILLES, J. believing them to be so, or unless the impression was intentionally conveyed by the person making the representation that he had actual knowledge of their truth, though conscious he had none. See also Robertson v. Parks, 76 Md. 118. (a) Robertson v. Parks, supra. (b) See Bosley v. National Machine Co., 123 N. Y. 550. (c) Bosley v. National Machine Co., supra; Vail v. Reynolds, 118 N. Y. 297; Scott v. Snyder Dynamite Projectile Company, Limited, 67 L. T. N. s.. 104; Karberg's Case [1892], 3 Ch. D. 1. It has been held that several subscribers, induced by the same fraudulent representations, have such a common interest that they may join in an action as co-complainants to set aside their subscriptions. Bosher v. R. & H. Land Co., 89 Va. 455. Cook on Stock and Stockholders and Corporation Law, § 156. able, and not void. The injured party should, within a reasonascertain the facts, and after ascertaining able time, strive to In the English cases there is a feature of great importance, not usually found here, and which makes the decisions to some extent inapplicable. This is the principle of unlimited liability on the part of the shareholders of many corporations for the debts of the company. The legal effect of this rule is, that a shareholder is deemed to be a partner with the other shareholders. Accordingly, he cannot sue the company for damages for fraud, that remedy not being available as between partners.3 This point received thorough consideration in the great case of the failure of the City of Glasgow Bank in 1878. In American law, the shareholder, in general, is not liable beyond the capital contributed by him, though he may be in special cases. Where he is not so liable, he may, for the purposes of an action against the company, be regarded as a stranger. Under the English theory, "such an action (deceit) is really not against the corporation as an aggregate body, but is against all the members but one," viz., the plaintiff, to throw upon them the plaintiff's share of the corporate liabilities. One defrauded in subscription to stock by the company is accordingly restricted to an action to rescind the subscription. This proceeds upon the ground that the fraud so vitiated the contract that the subscriber is entitled to claim, if he will, that there was no subscription. But the right to rescind may be lost if the rights of innocent third parties have intervened.5 The defrauded subscriber may thus be bereft of all remedy. In some of the States, if a bank become insolvent, the shareholder may not only lose his share, but be liable in addition to an amount equal to the share. This rule is applied to national banks. The same question might apparently then arise as was presented in Houldsworth v. City of Glasgow Bank; that is, whether one who had been induced by fraud to subscribe would have an action against the company, or whether he could resist, by means of rescission, his contribution to the fund to pay crediThere is no reason to doubt that while the corporation is carrying on business ("a going concern") and apparently solvent, the shareholder may sell his share and so escape further liability. tors. 1 Oakes v. Turquand, L. R. 2 H. L. Cas. 325. 2 Wilkinson's Case, L. R. 2 Ch. App. 536. 3 Houldsworth v. City of Glasgow Bank, L. R. 5 App. Cas. 317. Per LORD SELBORNE, in Houldsworth v. City of Glasgow Bank, supra, p. 329. 5 Tennent . City of Glasgow Bank, L. R. 4 App. Cas. 615. 6 Tennent v. City of Glasgow Bank, supra, p. 622. (4) Remedies which the corporation may have against its directors for their negligent or wilful misconduct. The corporation, having been made liable by the fraud and other acts of misconduct of the directors, may have a remedy against them. The stockholders of a corporation may, at least in some cases, ratify the act of a director though guilty of a breach of duty, and such a director may vote a ratification in his character of stockholder, even though he owns a majority of the shares, and thus confirm his own voidable act as director, where he does not act oppressively, and the charter permits him to acquire the stock.1 A director is not a trustee, in the technical sense of that word, unless he has the title to property. He is as between himself and the company an agent or servant.2 He is in a fiduciary position, however, and cannot profit at the expense of the corporation.3 The wrongful act of one director, committed by him without the knowledge or consent of his associates, is not to be imputed to them, but is personal. If a director be excluded from acting as such by his associates, he is entitled to an injunction.5 The court, having jurisdiction over the acts of trustees and directors, considered as a matter of fiduciary obligation is the Court of Chancery.6 In New York the whole subject is reduced to statutory form. The court may compel the directors to account for their official conduct, and to pay over to the corporation itself or to its creditors, as the circumstances of the case may require, any property which they have wrongfully applied to their own use, or have wasted in any manner. At the same time, the director may be suspended from office for abuse of trust, or he may be removed. The court may direct the proper board to supply the vacancy, or if there be no such body in existence, direct the removal to be reported to the governor, who may, with the consent of the Senate, fill the vacancy.7 The court also has a statutory power to set aside unlawful transfers of the corporate property, except as against purchasers in good faith, as well as to restrain such 1 Northwest Transportation Co. v. Beatty, L. R. 12 App. Cas. 589. The court said: "Great confusion would be introduced into the affairs of joint-stock companies if the circumstances of shareholders voting in that character at general meetings were to be examined, and their votes practically nullified if they also stood in some fiduciary relation to the company." p. 600. 2 Per JAMES, L. J., in Smith v. Anderson, L. R. 15 Ch. D. 247. 8 McKay's Case, L. R. 2 Ch. D. 1; Pearson's Case, 5 Id. 336. 4 Cargill v. Bower, 47 L. J. (Ch. D.) 649; Land Credit Co. of Ireland v. Lord Fermoy, L. R. 5 Ch. App. 763. 5 Pulbrook v. Richmond Con. Mining Co., L. R. 9 Ch. D. 610. 6 Needham v. Rivers Pro. & Man. Co., L. R.1 Ch. D. 253. 7 Code of Civ. Pro., § 1781. as are apprehended. An action for the last-named purposes may be brought not only by the attorney-general, but as well by a creditor or some officer of the corporation.1 (a) A joint-stock company, whose directors are appointed for a definite period, has no inherent power to remove them before the expiration of that period.2 There are other restrictions upon directors. An important one is, that they shall not pay dividends upon the stock of the company except from profits. All who participate in such an act are made liable to the corporation or its creditors for the amount unlawfully diverted in this manner. Independent of statute, and on general principles of law, it is contrary to the duty of directors to pay dividends out of capital. Such an act is ultra vires, as it diminishes the funds on which creditors have a right to rely.3 The courts hold a very strict hand over directors in thus making them jointly and severally liable for the amounts paid.1 (b) In some of these cases, stress was laid on the fact that in the constituting instruments, division of profits only was allowed. But there is a broader view. Persons intrusted with capital with a view of using it to make profit, violate their trust when they return the capital to shareholders in the guise of profits, and 1 Code of Civ. Pro., §§ 1781-1782. These rules are subject to some exceptions in the case of religious or charitable corporations, § 1804. L. R. 35 Ch. D. 502; Leeds Estate, &c. 2 Imperial Hyd. Hot. Co. v. Hampson, Ch. App. 104; Flitcroft's Case, L. R. 21 L. R. 23 Ch. D. 1. Ch. D. 519; Evans v. Coventry, 8 De G. 3 Macdougall v. Jersey Imp. Hotel Co., M. & G. 835; In re Nat. Funds Ass. Co., L. R. 10 Ch. D. 118. 2 Hem. & M. 528. In re Oxford Ben. Building Society, (a) Under these sections the attorneygeneral may bring suit, without a relator, and whenever in his opinion the public interest demands it, to remove trustees from office, and to compel them to account for property transferred in violation of their duty. People v. Ballard, 134 N. Y. 269. (b) It is a general rule that stockholders cannot in the first instance sue the directors for a past or threatened breach of duty to the corporation. The corporation is the proper party plaintiff, for in contemplation of law it alone receives the injury. In case the corporation has been dissolved, or is being wound up, the receiver or official liquidator should sue. If, however, a proper demand that suit be brought has been made by the stockholder, and refused by the governing body of the corporation, or if it is apparent that such a demand would be useless, owing to the relation of the guilty officers to those in control, the stockholder may then bring suit in his own behalf and that of all other stockholders similarly situated. Greaves v. Gouge, 69 N. Y. 154; Brinckerhoff v. Bostwick, 88 N. Y. 52; City of Chicago v. Cameron, 120 Ill. 447; Nathan v. Tompkins, 82 Ala. 437; Davis v. Gemmell, 70 Md. 356; Eschweiler v. Stowell, 78 Wis. 316; Pomeroy Eq. Jur. §§ 1091, et seq. thus subvert the purposes of the trust. Such an act manifestly requires the assent of the shareholders. It is not necessary that the directors should intend to commit a fraud. It is enough that they intend to do an act which is in its nature substantially a fraud.1 Moreover, creditors who have naturally looked to the capital as a source from which their claims should be paid, have a right to insist that it should not be dissipated by a direct act of abdication of the trust on which the capital is held. (a) SECTION VI. Dissolution. A corporation, like a natural person, may cease to exist. Its existence may be terminated by the death of its members without filling vacancies. It may also be dissolved by act of the legislature, or by a surrender of corporate rights, or by judicial decree. These various modes will now be considered separately. I. By death or removal of all its members. This is a dissolution because the corporation has ceased to have the power of holding corporate meetings for the purpose of filling vacancies and so continuing its existence.2 A new charter may, however, be granted, which will operate as a revival of the former corporation, so that the new corporation will become the owner of all the former franchises and property. A similar effect, suspending the existence of the corporation, might be produced if so many of the members should die or be removed from office that there would not be a sufficient number to hold a legal meeting. This obstacle could be removed by an act of the legislature authorizing a lesser number to form a quorum and fill the vacancies. II. By act of the legislature. This mode of dissolution has a wide scope in England, as an act of Parliament is said to be boundless in its operations, although in general it would be deemed unjust and impolitic there to dissolve a corporation without good reason. In the United States a constitutional question is involved, owing to the provision in the United States Constitution. that no State shall pass any law impairing the obligation of contracts.4 In applying this rule to cases as they arise, a distinction must be taken between a public or municipal and a private corporation. A municipal corporation is in its essence a mere instrument of local government. Its charter may accordingly be altered at the 1 Rance's Case, opinions of JAMES and MELLISH, L. JJ., L. R. 6 Ch. App. 113-124. Also Remarks of the Master of the Rolls, in L. R. 10 Ch. D. 118, 128; approved in 35 Id. 502, 512. 2 Rex v. Morris, 3 East, 213. Mayor, &c. of Colchester v. Brooke, 7 Q. B. 339. 4 Art. I., § 10, cl. 1. (a) See post, pp. 405, 411, 412. |