Caseflicks

Supreme Court of the United States • 1908

Old Dominion Copper Mining & Smelting Co. v. Lewisohn

210 U.S. 206 | 28 S. Ct. 634 | 52 L. Ed. 1025 | 1908 U.S. LEXIS 1504

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Takeaway

In short, this case holds that later innocent investors cannot use the corporation to undo a promoter transaction that the already-existing corporation knowingly approved while all of its shareholders were participants in the scheme.

Background

Bigelow and Lewisohn acquired mining property and the stock of the Old Dominion Copper Company of Baltimore through options and a syndicate. They then organized the plaintiff corporation, initially using nominees and syndicate members as its only shareholders. After the corporation was fully organized, it accepted an offer to acquire the Baltimore company’s property for 100,000 shares and accepted Lewisohn’s offer to convey additional land for 30,000 shares. The corporation thus assented to the transactions while all of its outstanding shares were held by people involved in, and aware of, the promoters’ plan.

Soon afterward, the corporation offered its remaining 20,000 shares to the public. Those outside subscribers allegedly did not know that Bigelow, Lewisohn, and the syndicate had purchased the properties for far less than the stock consideration they received from the corporation. The corporation alleged that the land conveyed by Lewisohn was worth no more than $5,000, although it was exchanged for 30,000 shares, and it sought rescission or damages from Lewisohn’s estate.

The federal trial court sustained demurrers to the bill as originally filed and as amended, then dismissed the suit. The Circuit Court of Appeals affirmed. The Supreme Court likewise affirmed, notwithstanding a Massachusetts decision permitting recovery against Bigelow on substantially similar allegations.

Issues

Issue #1

Whether a corporation may rescind or recover damages for a promoter’s undisclosed profit on a sale when the corporation, at the time of the sale, was controlled entirely by promoters and syndicate members who knew and approved of the transaction, but later issued shares to innocent public subscribers.

Holding

No. The corporation was bound by its informed assent to the sale, and the subsequent admission of innocent shareholders did not give it a new corporate claim against Lewisohn’s estate.

Reasoning

At the time the contracts were made and the mining property was delivered, Bigelow, Lewisohn, and other syndicate members held all outstanding shares of the plaintiff corporation. They were on both sides of the transaction and had full knowledge of the promoters’ profit. A corporation that genuinely exists and assents through all of its then-members cannot later treat that same assent as invalid merely because its membership changes.

The Court treated any potential wrong to outside investors as arising when the public was invited to subscribe without disclosure, not retroactively when the corporation bought the property. The later subscriptions did not transform a transaction that was valid as to the corporation when made into a prior breach of duty owed to the corporation.

Corporate identity does not change when new capital is raised or new shareholders enter. Although the corporation’s internal membership changed after the public offering, it remained the same legal entity that had knowingly accepted the sale. Permitting the corporation to revive its claim would contradict the foundational rule that a corporation remains legally continuous despite changes in its shareholders.

The practical equities reinforced the legal conclusion. Recovery by the corporation would benefit all shareholders, including the syndicate members who had participated in the allegedly improper scheme. Thus, 20,000 shares held by innocent public subscribers would use the corporate name to obtain a recovery that would substantially benefit the 130,000 shares held by persons implicated in the transaction. The Court regarded that result as an injustice rather than substantial justice.

The English promoter case, Erlanger v. New Sombrero Phosphate Co., did not compel a different result. In Erlanger, the company’s formation and the sale were effectively contingent on shares being taken by outside subscribers who were ignorant of the promoters’ profit; there was never a point at which a fully existing company had assented with informed membership. Here, by contrast, the corporation was fully organized and had knowingly approved the sale before any outsider became a shareholder.