And from this point of view, the fact that the officers of a corporation are innocent of any participation in the wrong done by an agent who has procured subscriptions to its stock by fraudulent representations is no defense to an action by a subscriber to rescind.299 It has been held in several cases that one cannot rescind his subscription for stock on account of false and fraudulent representations made to him by a promoter of the company, at least after the acceptance by the corporation of his subscription, because a new contract is then formed, and because a promoter, before the organization of the company, has no power to bind it by such representations.800 But the general current of authority is the other way.301 It is held that the promoter of a corporation sustains a trust relation to all persons whom he invites or solicits to purchase stock in the company, and his intentional omission to disclose facts to intending subscribers is as much a fraud as a positive misrepresentation.302 And promoters of a corporation, formed to purchase property from another, occupy a fiduciary relation towards those whom they induce to become with them subscribers to the stock, and are bound to declare to their associates any personal interest which they may have in the matter, and without such disclosure they cannot legally profit at the expense of their associates, and where they are guilty of any misrepresentation of facts or suppression of the truth in relation to their personal interest in the proposed purchase, the corporation may set aside or rescind the transaction.3 303 But one who buys stock in a corporation under the influence of fraudulent representations made to him by a stockholder, not an officer or

299 Talmage v. Sanitary Security Co., 31 App. Div. 498, 52 N. Y. Supp. 139.

300 Oldham v. Mt. Sterling Imp. Co., 103 Ky. 529, 45 S. W. 779; Lynde v. Anglo-Italian Co., [1896] 1 Ch. 178; Virginia Land Co. v. Haupt, 90 Va. 533, 19 S. E. 168, 44 Am. St. Rep. 939.

301 Barcus V. Gates, 89 Fed. 783, 32 C. C. A. 337; McCabe v. Burns, 66 Pa. 356; Fred Macey Co. v. Macey, 143 Mich. 138, 106 N. W. 722, 5 L. R. A. (N. S.) 1036; Diel v. Kellogg, 163 Mich. 162, 128 N. W. 420.

302 Wills v. Nehalem Coal Co., 52 Or. 70, 96 Pac. 528.

808 Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 97 Pac. 10, 18 L. R. A. (N. S.) 1106.

a representative of the company, acquires title to the stock and must pay for it, though he has a remedy by an action. of fraud against the stockholder.304 Where the representations proceed from a mere stranger, they furnish no ground for rescinding a contract of subscription; for a representation, in this sense, can be made only by the other party to the contract or by some one acting for him, and if made by a stranger it has no more effect than as a mere expression of opinion. Nor does it alter the case that such stranger was himself a subscriber for stock and interested in geting others to subscribe.805

349. Same; False Statements in Prospectus.-A prospectus issued by a company in process of formation, as the basis on which subscriptions to its stock are invited, must contain a fair and candid statement of the facts which are put forward to influence and persuade the persons addressed. Allowance may be made for the optimistic tone usual in such documents, and even for some measure of exaggeration.300 And all statements as to future prospects or expectations, the future value of the company's property, its probable earnings or dividends, and like matters, are not representations on which a subscríber is entitled to rely, but mere expressions of opinion.307 But as to present existing facts, if the prospectus contains false, misleading, or deceptive representations, and one is thereby induced to subscribe for stock, he may rescind and withdraw his subscription on learning of the fraud.808 Thus, for instance,

And see Cunning

304 Kennedy v. Bender, 104 Tex. 149, 135 S. W. 524. 305 Jewett v. Valley Ry. Co., 34 Ohio St. 601. ham v. Edgefield R. Co., 2 Head (Tenn.) 23.

306 See Jennings v. Broughton, 17 Beav. 234, holding that the prospectus of a corporation, if it states facts or conditions which really exist, is not to be regarded as fraudulent, so as to justify the revocation of a subscription for its stock, merely because it states them in "glowing and exaggerated colors."

307 See, supra, §§ 89, 90, and infra, § 351.

808 Mulholland v. Washington Match Co., 35 Wash. 315, 77 Pac. 497; Manning v. Berdan (C. C.) 135 Fed. 159; Cox v. National Coal & Oil Inv. Co., 61 W. Va. 291, 56 S. E. 494; Bosher v. Richmond & H. Land Co., 89 Va. 455, 16 S. E. 360, 37 Am. St. Rep. 879; Ligon v. Minton (Ky.) 125 S. W. 304; Lehman-Charley v. Bartlett, 135 App. Div. 674, 120 N. Y. Supp. 501; Foix v. Moeller (Tex. Civ. App.) 159

false and fraudulent representations made in a prospectus issued by the promoters of a corporation, respecting the value of property which was to be transferred by them to the corporation when organized, afford ground for equitable relief against the corporation in behalf of one who subscribed for its stock in reliance on such representations. 309 And if the facts set forth in a prospectus are so combined or manipulated as to create a certain impression in the mind of a reader, which impression is false and is fraudulently intended to be deceptive, one who is induced to subscribe for stock on the basis of the prospectus will be entitled to rescind his contract, although no one statement in the document, taken by itself, is untrue.310 So also, the suppression or concealment of material facts, such as, if known, would chill or repel investors, is as much a fraud as willful misstatements of fact, and will equally entitle subscribers to cancel their contracts.311 But an intending subscriber for stock is under the duty of examining with due care and attention all the matter that is furnished him for his information or to influence his decision. Where several documents are handed to him for his perusal, he cannot complain of false or misleading statements in one of them which are contradicted or explained in the others, the whole combined making a fair presentation of the facts.312 But if a prospectus is issued, setting forth the whole case for the proposed corporation, it seems that the subscriber is justified in relying on it without further investigation, and he is not bound to examine documents which are merely mentioned or referred to in the prospectus, although, if he had

S. W. 1048; Oakes v. Turquand, L. R. 2 H. L. 325; Ross v. Estates Inv. Co., L. R. 3 Ch. App. 682; Reese River Silver Min. Co. v. Smith, L. R. 4 H. L. 64; Central Ry. Co. of Venezuela v. Kisch, L. R. 2 H. L. 99; In re Metropolitan Coal Consumers' Ass'n, [1892] 3 Ch. 1; Jennings v. Broughton, 17 Beav. 234; Neff v. Mattern (Cal. App.) 151 Pac. 382.

309 Manning v. Berdan (C. C.) 135 Fed. 159.

310 Aaron's Reefs v. Twiss, [1896] A. C. 273.

311 Central Ry. Co. of Venezuela v. Kisch, L. R. 2 H. L. 99, 113; Oakes v. Turquand, L. R. 2 H. L. 325, 342; New Brunswick & Canada Ry. & Land Co. v. Muggeridge, 1 Dr. & Sm. 363.

812 Scholey v. Central Ry. Co. of Venezuela, L. R. 9 Eq. 266, note.

done so, he would have discovered that the statements of the prospectus were false. 318 And statements printed in small type in an order for the purchase of corporate stock do not estop the purchaser to rescind, on account of false representations made as to the corporation's affairs, although they may technically admit facts which are contrary to those represented.314 It should also be observed that a defrauded subscriber or shareholder, in order to obtain relief, must be able to trace the documents by which he was deceived directly to the promoters or officers of the company. There is a presumption that a prospectus shown to an investor by an agent of the company was authorized by its directors, but this cannot be accepted in place of actual evidence of fraud.315

§ 350. Same; False Statements as to Other Subscriptions. Fictitious or colorable subscriptions to the stock of a corporation, made and used with the intent to induce other persons to subscribe, and with a secret understanding that no liability shall attach to the pretended subscribers by reason of the use of their names, and that they shall thereafter be allowed to withdraw, operate as a fraud upon the bona fide subscribers, justifying the rescission of their subscriptions, since each subscriber to such a purpose may be presumed to be influenced by the others, and there is an implied representation that all are genuine.316 Thus, a person may cancel his subscription for stock in a corporation, where the person soliciting his subscription, and to induce him to give it, represented that a person named and who

313 Central Ry. Co. of Venezuela v. Kisch, L. R. 2 H. L. 99. 314 Cunningham v. Morris, 56 Wash. 341, 105 Pac. 839.

815 Kelly v. Clements, 175 Mich. 98, 140 N. W. 1006.

316 Sawyer v. Prickett, 19 Wall, 146, 22 L. Ed. 105; State Bank of Indiana v. Cook, 125 Iowa, 111, 100 N. W. 72; Zabel v. New State Tel. Co., 127 Mich. 402, 86 N. W. 949; Talmage v. Sanity Security Co., 31 App. Div. 498, 52 N. Y. Supp. 139; Luetzke v. Roberts, 130 Wis. 97, 109 N. W. 949; Middlebury College v. Loomis' Adm'rs, 1 Vt. 189; Southern Ins. Co. v. Milligan, 154 Ky. 216, 157 S. W. 37; Huster v. Newkirk Creamery & Ice Co., 42 Okl. 440, 141 Pac. 790, L. R. A. 1915A, 390; Gast v. King, 27 Okl. 554, 112 Pac. 997; Coles v. Kennedy, 81 Iowa, 360, 46 N. W. 1088, 25 Am. St. Rep. 503; Ross v. Estates Inv. Co., L. R. 3 Ch. App. 682. Contra, Wilson v. Hundley, 96 Va. 96, 30 S. E. 492, 70 Am. St. Rep. 837.

was well known in the community as a successful business man of wide experience and capacity, and whose example in such a matter would be likely to influence others, had subscribed for a large amount of the stock, without disclosing the fact that such stock was given to such person as a gratuity for the use of his name. 317 So, "a secret agreement entered into between the directors of a corporation and a subscriber for shares of its capital stock, that he may within a specified time reduce the number of shares thus subscribed for, the subscription being held out as bona fide for the full amount, in order to induce others to become subscribers, is void, as a fraud upon the other subscribers." 318 So, also, where it is a condition that all of the proposed issue of stock shall be subscribed for, before any individual subscription shall be binding, each subscriber has a right to rely, not only on the genuineness of the other subscriptions, but also on their being made in good faith, in the sense of being made by persons who are financially responsible and who intend to take and pay for their stock; and the subscription of a person whose apparent financial ability is not such as a person of ordinary prudence would deem reasonably sufficient to meet the assessments on the stock as they may be expected to be made, is not made in good faith, though not instigated by any fraudulent purpose.319 But the setting forth, in the prospectus of a corporation, of plans which would require that the whole amount of a proposed issue of preferred stock should be subscribed and paid for, is not a representation, to one subscribing for such stock, that none will be issued until it is all taken, nor of any existing fact which would invalidate the contract of subscription if all the stock is not taken.320 But an untrue representation that all or a certain amount of the stock has already been subscribed is a different matter. This is a representation regarding an existing matter of fact, and of such

317 Coles v. Kennedy, 81 Iowa, 360, 46 N. W. 1088, 25 Am. St. Rep. 503.

318 White Mountains R. Co. v. Eastman, 34 N. H. 124.

319 Stone v. Monticello Const. Co., 135 Ky. 659, 117 S. W. 369, 40

L. R. A. (N. S.) 978, 21 Ann. Cas. 640.

320 Bartol v. Walton & Whann Co. (C. C.) 92 Fed. 13.