given credit on the faith of his being a shareholder;1 and it is upon this ground, as we shall hereafter see, that he is bound to disaffirm the contract at the earliest opportunity after notice of the fraud practiced upon him.2 § 1376. Waiver of the Fraud by the Subscriber. The principle hinted at in the preceding section, and more fully developed in the next section, is, that one induced by fraud to purchase shares of stock in a corporation cannot avoid his purchase if, after becoming aware of the fraud, he acts as a shareholder or derives a benefit from his shares. Nor can a stockholder set up, by way of defence, fraud practised by the corporation on him in its acts or organization, where he has stood by and interposed no objection while the corporation has contracted debts. And while it is in general true that where a corporate charter has been obtained by means of fictitious subscriptions for a part of the stock, and fraud has been committed on a real subscriber by which he has sustained or might sustain damage, — no action can be maintained against him by the corporation for the amount of his subscription, yet it is different where such subscriber has accepted the charter and by his own acts assisted in putting it into operation. In such a case he cannot avail himself, when sued by the corporation in respect of his subscription, of the defence that a part of such stock was fictitious.5 § 1377. Acts of Ratification or Estoppel. The underlying principle of the preceding section has already been stated: it is that a contract to take shares induced by fraudulent misrepresentations or concealments is not only valid until rescinded, but it may become absolutely binding by acts of ratification. 1 See Oakes v. Turquand, L. R. 2 H. L. 325; Reese River Mining Co. v. Smith, L. R. 4 H. L. 64; Saffold v. Barnes, 39 Miss. 399; National Park Bank v. Nichols, 2 Biss. (U. S.) 146; 8. c. Myer Fed. Dec. §§ 211, 212. 2 Post, § 1438, et seq. City Bank v. Bartlett, 71 Ga. 797; National Park Bank v. Nichols, 2 Biss. And here it may be stated, generally, that if a person who has been thus entrapped into the purchase of shares, after discovering the fraud, acts in a manner inconsistent with an intention to disaffirm the contract, this will preclude him from disaffirming afterward.1 This was held to be the effect of the following acts: after discovering the real facts, placing his shares in the hands of a broker and instructing him to sell them; after coming to the knowledge of the alleged fraudulent representations, paying a call and receiving a dividend;3 knowingly suffering his name to appear on the books of the company as a stockholder so long that the rights of creditors would be prejudiced in case of withdrawal ; participating in the meetings of the company,5 but not where he merely appeared for the purpose of demanding a rescission of his contract; voting his shares by proxy; paying calls; serving as a director, and participating generally in the business of the company; demanding and suing for dividends; 10 promising to pay the installments due on his shares ;" and receiving dividends, where the question arose as between the shareholder and creditors.12 But the fact that a subscriber to stock 8 4 6 9 1 Scholey v. Central Railway Co. of Venezuela, L. R. 9 Eq. 266, n. 2 Ex parte Briggs, L. R. 1 Eq. 483, per Lord Romilly, M. R. 3 Scholey v. Central Railway Co. of Venzuela, L. R. 9 Eq. 266, n. 4 Matter of Reciprocity Bank, 22 N. Y. 17; McHose v. Wheeler, 45 Pa. St. 32; Philadelphia &c. R. Co. v. Cowell, 28 Id. 329; s. c. 70 Am. Dec. 128. Otherwise, where one is so held out without his knowledge. Fox v. Clifton, 6 Bing. 776. 5 Dayton, &c. R. Co. v. Hatch, 1 Disney, (Oh.), 84; Harrison v. Heathorn, 6 Man. & G. 81, 84; Chaffin v. Cummings, 37 Me. 76. 6 Woutner v. Shairp, 4 C. B. 404. 7 Greenville &c. R. Co. v. Coleman, 5 Rich. L (S. C.) 118; McCully v. Pittsburgh &c. R. Co., 32 Pa. St. 25. 8 Graff v. Pittsburgh &c. R. Co., 31 Pa. St. 489; Cromford &c. R. Co. v. Lacey, 3 You. & J. 80; Frost v. Walker, 60 Me. 468; Hall v. U. S. Ins. 11 Co., 5 Gill (Md.), 484; Mississippi &c. R. Co. v. Harris, 36 Miss. 17. But failing to pay calls does not, of course, imply that one is not a shareholder. Schaeffer v. Missouri Home Ins. Co., 46 Mo. 248; McHose v. Wheeler, 45 Pa. St. 32. But see Fiser v. Mississippi R. Co., 32 Miss. 359; Hayne ". Beauchamp, 5 Smedes & M. (Miss.) 537; Lewis v. Robertson, 13 Id. 558. 9 Hays v. Pittsburgh &c. R. Co., 38 Pa. St. 81; Hager v. Cleveland, 36 Md. 476; Ruggles v. Brock, 6 Hun (N. Y.), 164. 10 Philadelphia &c. R. Co. v. Cowell, 28 Pa. St. 329; s. c. 70 Am. Dec. 128. 11 Mississippi &c. R. Co. v. Harris, 36 Miss. 17. 12 Hoare's Case, 2 John. & H. 229; Gouthwaite's Case, 3 De G. & Sm. 258; Philadelphia &c. R. Co. v. Cowell, 28 Pa. St. 329; s. c. 70 Am. Dec. 128. And see Grace v. Smith, 2 W. Black. 998; Waugh v. Carver, 2 H. Black. 235; s. c. 1 Smith's Ld. Cas. 968; Pott v. in a company has sold some of the shares taken by him, does not deprive him of the right to have the contract, it being severable, rescinded as to the remainder, for fraudulent misrepresentations in the company's prospectus, if he parted with the shares sold before discovering the fraud.1 § 1378. Rule where Subscription is Settled by Negotiable Instrument. If the subscription is settled by the giving of a negotiable instrument, e. g., a negotiable promissory note secured by a mortgage, and this is negotiated by the corporation to an innocent third party before maturity, on a rule of public policy which upholds the confidence of the business community in dealing in commercial paper, he takes it discharged of equities subsisting between the maker and the payee, and the maker cannot defend against his liability on it by showing that he was induced to subscribe for the shares by false and fraudulent representations of the corporation or its agents.2 § 1379. Subscriptions Given in Consequence of Mistake. The grounds upon which courts of equity proceed in reforming contracts in consequence of mistake are familiar. The mistake must be mutual; and the courts, in reforming the contract and enforcing it as reformed, do no more than bring about the result which the contracting parties themselves intended. It has been held that where individuals, having a design to be incorporated for the purpose of creating a water-power, cause surveys and estimates to be made of the water-power which can be created, and thereupon represent it to be greater than it really is, but Eyton, 3 C. B. 32; Wightman v. Town- 508. But when a husband receives dividends for his wife (Ness v. Angas, 3 Exch. 805), or a trustee for his cestui que trust (Ness v. Armstrong, 4 Ex. 21), the rule may be otherwise. See also Bosanquet v. Shortridge, 4 Exch. 698. 1 Ex Parte West, 56 Law Times (N. S.) 622. 2 Andrews v. Hart, 17 Wis. 297. Bishop on Con., § 236. without any intention to deceive, persons who subscribe for stock in the corporation on the faith of such representations, and agree to be personally liable for assessments, cannot avoid the contract on the ground of the mistake. But it is said, in a Tennessee case, that if a person is induced to take stock in a railway company by false representations which are not fraudulent, and which form no part of the contract of subscription, he is not entitled to be relieved from the payment of the amount of his subscription. If, however, he acts on such representations, to his injury, he is entitled to relief, although they may have been innocently made.? Both of these cases, however, arose between the company and the shareholders. § 1382. Statement of the General Rule by Lord Romilly, M. R. Concerning the general nature of the concealments and misrepresentations which will avoid such a contract, there is perhaps no better expression of opinion to be found than that of Sir John Romilly, M. R., in Pulsford v. Richards :2 "The ground on which relief is asked is that principle of equity which declares that the wilful misrepresentation of one contracting party which draws another into a contract, shall at the option of a person deceived, enable him to avoid or enforce that contract. It will be convenient in the present case, to state my view of this principle before applying it to the facts, as they appear to be established on the evidence. The basis of this, as well as of most of the great principles on which the system of equity is founded, is the enforcement of a careful adherence to truth in all the dealings of mankind. This principle is universal in its application to cases of contract. It affects not merely the parties to the agreement, but also those who induce others to enter into it. It applies not merely to cases where the statements were known to be false by those who made them, but to cases where statements, false in fact, were made by parties who believed them to be true, if in the due discharge of their duty they ought to have known, or if they had formerly known and ought to have remembered, the fact which negatived the representation made; a strong illustration of which is to be found in Burrowes v. Lock.3 And I held the same in Money v. Jorden. This principle applies to all representations made on 1 22 L. J. (Ch.) 562; s. c. 47 Jur. 865. 222 L. J. (Ch.) 569; s. c. 17 Jur. 865; 19 Eng. L. & Eq. 387, 391. 3 10 Ves. 470. * 21 L. J. (Ch.) 631; s. c. 11 Eng. L. & Eq. 182; 21 L. J. (Ch.) 893; 13 Eng. L. & Eq. 245. |