Davis v. Las Ovas Co.
Headline: Court upholds company’s right to recover secret promoter profits and cancel promoters’ shares after promoters secretly bought Cuban land and caused the company to overpay, protecting deceived stock subscribers.
Holding: The Court affirmed the company’s right to recover secret profits and cancel promoters’ shares because innocent investors were misled when promoters secretly bought the land and caused the company to overpay.
- Allows companies to recover secret profits taken by promoters.
- Gives courts authority to cancel shares issued for dishonest promotion.
- Protects innocent stock subscribers who were misled in purchase deals.
Summary
Background
A group of men organized to buy part of the Las Ovas plantation in Cuba and to form a company to hold the land. The promoters agreed to buy the property for $34,000 and later added another parcel for $1,000. They planned a corporation with $150,000 capital, issuing 40% of the shares to the promoters for their promoter services while the rest would be subscribed by the same group. Unknown to some associates, the promoters had a prior option to buy the land for $20,000 and arranged transfers through a third party to hide the true price. The property was conveyed into the company and paid for with funds from the subscribed stock. A lower court ordered the promoters to account for the secret $15,000 profit and to surrender the promotion shares.
Reasoning
The key question was whether the company could sue to recover the secret profit and cancel the promoter shares when some company members had been deceived. The Court explained that where promoters secretly profit and some associates were unaware, the deceit infects the corporate acquisition. Because innocent subscribers and directors were misled into approving the purchase on false grounds, the corporation has the right to seek relief. The Court also held that recovery may benefit both innocent and guilty parties and that not suing every person who shared in the profits does not defeat the corporate claim. The Court affirmed the decree.
Real world impact
This decision protects investors and companies from promoter schemes that hide true purchase prices. Corporations can recover undisclosed profits and cancel shares issued for dishonest promotion. The ruling allows a company to sue some promoters even if others are not before the court.
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