132 Iowa 396 | Iowa | 1906
Early in the year 1902 the defendant Petersmeyer and nine others met in Odebolt, Iowa, and there and
It was further resolved by- the board of directors:
That this corporation issue to C. H. Smith, in consideration of said contract, 499,989 shares of capital stock of this corporation on the condition that he surrender back to this corporation 250,989 shares, which may be used by the corporation to be sold at such price as the board of directors may so elect from time to time for the purpose of carrying out further promotions of this company; further, .that 210,-000 shares of the stock so issued to C. II. Smith be his stock, which he is allowed to allot to such parties as assisted him in the purchase of the above contract and on the condition that the balance, 39,000 shares, be turned over to the company for the purpose of being sold by them at a less price than the treasury stock will be sold by the corporation. It is to be understood that the 39,000 shares being sold at a less price than the regular stock will be sold, is for the purpose of getting in some outside assistance if the company sees that it is absolutely necessary. And on the 1st day of August, 1902, whatever amount of the 39,000 shares is not sold or whatever part may be left of it, and still in the hands of the corporation shall revert back to the said O. II. Smith which he may divide among the said parties who assisted him in the purchase of the above said contract. On motion, a*400 of 75,000 shares, of the treasury stock of this corporation shall be placed upon the market to be sold at 25 cents per share subject to the call of the board of directors, On motion, the president and secretary were authorized to prepare suitable subscription blanks as they deem necessary for the business of the corporation.
nine promoters of the company. All but about twenty-five thousand of the two hundred and ten thousand shares were distributed to the promoters gratuitously. While they may have advanced a little money, and given some for the promotion of the company, no' stock was issued in payment thereof. Nor were the advancements made or services rendered wifNa'view to their return or compensation therefor'by the corporation when organized. In these circumstances compensation by the company could not have been enforced. Low v. Connecticut R. Co., 45 N. H. 370; Marchand v. Loan, etc., Ass’n., 26 La. Ann. 389; Perry v. Little Rock, etc., R. Co., 44 Ark. 383; 10 Cyc. 264; Thompson, Corp., section 486. See Bell’s Gap R. Co. v. Christy, 79 Pa. 54 (21 Am. Rep. 39). The portion of Petersmeyer was fifteen thousand one hundred shares. Fifty-six thousand nine hundred shares of treasury stock were disposed of at twenty-five cents a share. Much of this, if not all, was sold by the promoters acting for the company on applications similar to that signed by the plaintiff. It, with part of the printed matter, may be set out:
Original: Money returned unless a gusher is brought in. J. W. Jackson, secretary, Lake City, Iowa. No. 70. I hereby subscribe for 1,000 shares of the capital stock of the Sac Oil & Pipe Line Co., at 25 cents a share, par value $1.00 full paid and nonassessable. In payment therefor I*401 remit $- or deposit $250.00 in the Farmers’ National Bank of Odebolt to be held by said bank until a flowing oil well of 40,000 to 80,000 barrels capacity per day is brought in on the company’s property on Spindle Top Heights near Beaumont, Texas. Should no gusher be' brought in within six months from date this money will be returned. Name: C. J. Hinkley. P. O. address: Odebolt, Iowa.
Accepted June 5, 1902. Sac Oil & Pipe Line Company, J. W. Jackson.
This order should be signed in duplicate. If you remit, one will be returned to you. If you deposit amount in your local bank, we return the duplicate to your bank to be held in trust. When accepted this is an agreement binding the company to deliver the shares or return the money. Stock will be advanced to 50 cents as soon as a gusher is brought in.
In the fore part of June, 1902, satisfactory proof was received that oil had been struck, and that the capacity of the well was from forty to eighty thousand barrels per day, whereupon the plaintiff paid the amount of his subscription and received a certificate of one thousand shares. Prior to this, and on the 6th day of May, the company had contracted for another well at $10,000, of which $1,000 was to be paid when oil was reached and the remaining $9,000 out of the sale of oil to be obtained from the well. By the time proper connections, were made and a vat procured oil ceased to flow from the top, and it was necessary to agitate with air, and later to employ a “ steam head ” and pumps. In this way oil to the value of between. $4,000 and $5,000 was taken out. Then water came in, and the price of oil wells went down, so that one witness declared he now had them for sale at ten cents a piece. This somewhat extended statement of facts has seemed essential to a full understanding of the case. The petition is in three counts, in the first of which recovery of the amount paid by plaintiff for his stock is demanded on the ground that there was a conspiracy to defraud the public, the second because of the fraudulent representations and concealment
5. Gratuitiousissuance of stock: fraud. The increase of the number of shares without a corresponding addition to the assets of the corporation necessarily depreciates the value of each share. The issue of stock gratuitously is therefore vio- . . . . lative oi the rights of existing, nonassessable stockholders, and in fraud of subsequent subscribers and creditors who deal with the corporation on the faith of its capital stock. Purdy’s Beach on Private Corporations, section 290.
"’’’"""’That the sale of stock to subscribers at any price after the promoters and directors had issued one hundred and eighty-five thousand shares to themselves- gratuitously with the purpose indicated without disclosing the fact was a fraud on subsequent subscribers is manifest. Even if the directors believed, as is contended, that all the stock would attain par value in worth, this did not justify their scheme of approthe greater part of the profits to their own use. ^ Nor does the fact that they guarantied the company’s notes relieve them. They proposed that the company should repay and the guaranty was in no manner the payment of the
at one-fourth the par value and although the representation of the comnany in its printed matter and of petersymeyer with respect thereto, if any he made was false he could not have been decieve thereby. Goff v. Hawkeye, P. & W. Co., 62 Iowa, 691.
VI. It is farther contended that plaintiff is estopped from demanding rescission by his laches. That this action •was begun promptly upon the discovery of the cause alleged is not questioned but counsel say that the fraud should have been discovered sooner. That with respect to the claims of subsequent creditors and subscribers for stock a shareholder “ should act diligently to discover fraud ” set up as a ground for rescission is doubtless true. Cedar Rapids Insurance Company v. Butler, 83 Iowa, 124. In such a case each stockholder is interested in the company and is charged with knowledge which by diligence he might have ascertained, and an action to rescind must be brought within a reasonable time after he has ascertained or should have learned of the perpetration of the fraud. This was the conclusion reached in the great case of Oakes v. Turquard, L. R. 2 H. L. 325, and it has been followed since. Thompson on Corporations, section 1323; Possibly, as between the subsequent stockholder or creditor and a shareholder seeking to-have his stock canceled, the latter would be required to examine the books and to avail himself of such information as these might afford. But the relation of the shareholder to the company which has procured his subscription through its agents by fraud is somewhat different. He stands the same as though the fraud had been perpetrated by some individual. He is not required to suspect the promoters and directors of disregarding their obligation to those whom it was their duty to protect. Where all seems fair he is not bound to inquire as though the contrary were true. Of course, where the means of knowledge are at hand, and by ordinary diligence he should have ascertained the facts constituting the fraud, he will be charged with such knowledge. Por the means of knowledge are equivalent to knowledge, and a clue which, if followed up with ordinary diligence, would lead to a discovery, in law
Substantially the same doctrine prevails in this country, the difference being due to the fact tbat there is no public registration of shareholders here such as is required in England. In Martin v. South Salem Land Co., 94 Va. 28 (26 S. E. 591), it was held tbat the shareholder cannot rescind bis subscription on the ground of fraud as against bona fide creditors after the corporation bas stopped payment and become actually insolvent unless be bas been diligent in discovering and repudiating the fraud. But if be bas been diligent in both these respects the insolvency of the company alone will not defeat bis right to rescission. Beal v. Dillon, 5 Kan. App. 27 (47 Pac. 317); Newton National Bank v. Newbegin, 74 Fed. 135 (20 C. C. A. 339, 33 L. R. A. 727). the true rule, as it seems to us, is stated in Fear v. Bartlett, 81 Md. 435 (32 Atl. 322, 33 L. R. A. 721); and tbat is, the right to rescind may be exercised, assuming diligence, unless proceedings of insolvency, voluntary, or involuntary, have been instituted or some act has been committed which is regarded as an act of insolvency. Not until then does the entire property of the corporation, including unpaid subscriptions to its capital stock, become a trust fund for the payment of its debts, and not until then are the creditors entitled to the payment of their debts before there can be any distribution among the stockholders.^ “ So long as the company is a going concern, having the possession and management of its property, contracts made by and with the company, are governed by the same principles of law as a contract between individuals; and such being the case, if one is induced to become a subscriber to its capital stock by the fraud of the company, and within a reasonable time after the discovery of the fraud, there being no laches on his part in discovering the fraud, repudiates bis subscription, and this, too, before the in
The decree is affirmed.