Procedure.

Sect. 38 of the
Act of 1867.

Construction.

Remedy of party deceived.

M. R., said, "If the shareholders had gone to see it (and I think in a Court of Justice they cannot complain that they did not see it, but must be treated as having notice of its contents) they would have found a recital of the contract from C. to E. omitting the price. . . ." New Sombrero Co. v. Erlanger, 5 C. Div. 111.

But when there is misrepresentation, this rule does not apply, “for when men issue a prospectus in which they make false statements of the contracts made before the formation of a company, and then say that the contracts themselves may be inspected at the offices of the solicitors, it has always been held that those who accepted those false statements as true were not deprived of their remedy merely because they neglected to go and look at the contracts." Per Jessel, M. R., Redgrave v. Hurd, 20 C. Div. 14. And at any rate, where fraudulent intent is established, it would seem that offering a contract for inspection does not amount to notice.

Accordingly, when promoters intend to obtain a profit, or there are other facts which ought to be disclosed, it is expedient to disclose them by the prospectus and also by the articles. If it is impossible to state them fully in the prospectus, they should be disclosed in the articles, or at any rate in some contract therein referred to and offered by the prospectus for inspection. And it may also be expedient, both in the prospectus and articles, to state that applicants are to be deemed to have notice of the contents of the contract. But each case must be separately considered, and regard being had to the manifold dangers of non-disclosures it is well to be on the safe side.

As to s. 38 of the Companies Act, 1867: The section is as follows:Every prospectus of a company, and every notice inviting persons to subscribe for shares in any joint-stock company, shall specify the dates and the names of the parties to any contract entered into by the company, or the promoters, directors, or trustees thereof, before the issue of such prospectus or notice, whether subject to adoption by the directors, or the company, or otherwise, and any prospectus or notice not specifying the same shall be deemed fraudulent on the part of the promoters, directors and officers of the company knowingly issuing the same, as regards any person taking shares in the company on the faith of such prospectus unless he shall have had notice of such contract.

Much difference of opinion exists as to what contracts, regard being had to this enactment, must be specified in the prospectus; but the balance of authority is in favour of a construction which would render it necessary to specify every contract by a promoter, director, or trustee, which might reasonably be expected to influence persons reading the prospectus in making up their minds whether or not they will apply for shares; and further that the contracts must be specified, whether made before or after the person becomes a promoter, director, or trustee, and whether they relate directly or indirectly to the affairs of the company.

The remedy of a person who has taken shares on the faith of a prospectus offending against this section, is to sue the promoters, directors, or officers issuing the same for the damages he has sustained. Gover's

case, 1 C. Div. 182; Twycross v. Grant, 2 C. P. Div. 503; Sullivan v. Mitcalfe, 5 C. P. Div. 455.

sections.

Accordingly in preparing a prospectus it is essential to bear this Application of section in mind, and to ascertain what contracts have been made, and to consider carefully which of them ought to be specified. In many cases there is little or no difficulty in deciding the matter, but occasionally questions of great nicety arise. It has not yet been settled whether a verbal contract is within the section, and many persons have acted on the assumption that it is not necessary to specify such a contract. But there is nothing in the section to exclude a verbal contract, and it seems more than probable that this assumption is not warranted. See Arkwright v. Newbold, 17 C. Div. 301; 28 W. R. 829.

As to the meaning of the word "promoter," see supra, p. 237, et seq. The words "knowingly issue," in s. 38, mean neither more nor less than issuing with a knowledge of the existence of contracts within the section, and the intentional omission of them from the prospectus. Per Cockburn, C. J., Twycross v. Grant, 2 C. P. Div. 542. This being so, a grave responsibility is cast on those who have to advise on the section.

As to the measure of damages in such an action, see Twycross v. Grant, ubi supra; Arkwright v. Newbold, ubi supra.

beneft of the

section.

Occasionally, e.g., where a company has been in existence for some Waiving time and has entered into many contracts or where doubt exists as to whether some contracts that have been made are or are not within the section, it is deemed expedient to insert in the prospectus a clause providing for a more or less qualified waiver of the benefit of s. 38, e.g.

"The directors are advised [and believe] that the above are the only contracts the dates of and parties to which are required by section 38 of the Companies Act, 1867, to be specified, but in order to prevent any question, applicants for shares shall be deemed to waive any further compliance with that enactment." Or,

"Other contracts have been made, but as the above is the only contract to which the company is a party, applicants shall be deemed to waive the publication in accordance with section 38 of the Companies Act, 1867, of any further particulars as to such contracts."

Where this is done the form of application for shares should specifically refer to the prospectus, and the application should be for shares on the terms thereof, or it may be deemed expedient to embody the waiver in the application. There seems no reason to doubt the validity of such a waiver, and it appears probable that, in the absence of fraud, it protects the directors.

It may here be mentioned that s. 38 is applicable for the protection of S. 38 only applies to shareholders only. Accordingly it is not applicable in the case of a shareholders. bondholder. Cornell v. Hay, L. R. 8 C. P. 228. Nor does it enable the company to sue. New Sombrero Co. v. Erlanger, 3 App. Cas. 1218. Nor does it confer the right on a shareholder to repudiate his shares. Gover's case, 1 C. Div. 182.

The fact that s. 38 does not apply to bondholders and the like some

Care requisite in framing prospectus.

Opinion of promoters.

As to stating source of information.

Wrongful

advertisement of persons as directors.

times induces the promoters of a company, where it is desired to apply to the public for capital but difficulties are apprehended in regard to s. 38, to raise the capital on debentures. In such case there may perhaps be no shares taken up except by the subscribers of the memorandum of association and any issued as paid up to the vendor. Anderson's case, 3 C. Div. 75. Sometimes, however, bonus shares are issued to the debenture holders. See Firmstone's case, 20 Eq. 524; Uruguay, &c., Ry. Co., 11 C. D. 372, and supra, p. 39, but it may be doubted whether a prospectus offering debentures for subscriptions, with a right to bonus shares attached, is not "a prospectus inviting persons to subscribe for shares" within the meaning of s. 38.

From what has been said the extreme importance of framing the prospectus with the utmost care, sufficiently appears. Some high colouring may be used [supra, p. 230], but if a scheme or undertaking is promising, a moderate tone is generally found to be the most

attractive.

The prospectus may state the opinion of those who issue it, e.g., as to the value of the company's property, and if those persons are of character and position their opinion may carry great weight, but care should be taken that they have reasonable grounds for the opinion.

Where a prospectus is to contain statements which the directors believe to be true but cannot verify, they should refer to the source of their information, e.g., "M. A. has examined the property and reports, &c. M. A.'s report lies for inspection, &c." Thus in Smith's case, 2 Ch. 604, the prospectus falsely stated that the mines were valuable and in operation. The directors had issued the prospectus on the faith of representations made by the vendor and without knowledge of their untruth, and it was held that Smith was entitled to have his contract to take shares rescinded. Turner, L. J., said that "if a company will take upon itself to assume the authenticity of, and give credit to, the reports which are made to it, and represent as facts the matters stated in those reports, it must take the consequences. If the company had confined themselves to saying, 'We have received reports from which we believe, and have reason to believe, that these mines are in full operation, and are making daily large returns,' it might, and no doubt would have been very difficult for Mr. Smith to be relieved from the contract; but the company, instead of thus referring to the information received, stated the circumstances as facts."

Care should of course be taken not to advertise in the prospectus the name of any person as a director or officer of the company unless he has been duly appointed and has consented to accept office. A person whose name is advertised without authority may obtain an injunction to restrain the company from advertising his name. Routh v. Webster, 10 Beav. 563. And a mis-statement as to the directors may enable an allottee to repudiate his shares. Munster's case, 14 W. R. 957; Blake's

case, 34 Beav. 639; Anderson's case, 17 C. D. 301; Scottish Petroleum Co., 23 C. Div. 413.

Where the prospectus is issued before the company has been regis- Statement of objects. tered, great care should be taken in stating the objects of the proposed company; for if the objects of the company when registered exceed or differ materially from those stated in the prospectus, applicants may be able to refuse an allotment or to repudiate their shares after allotment, provided they are not guilty of undue delay. Downes v. Ship, L. R. 3 H. L. 343; Peel's case, 2 Ch. 674, 684; Lawrence's case, 2 Ch. 412.

In order to avoid any risk of this, the objects should be finally settled before the prospectus is issued, and applicants should be given an opportunity of inspecting the draft memorandum of association. But, as already mentioned [supra, p. 228], the present practice is to issue the prospectus after the formation of the company.

Where the prospectus is not issued until after the formation of the company, the risk above mentioned does not exist, for applicants are bound to look at the memorandum and articles of the company before applying for shares. Peel's case, 2 Ch. 674, approved in Oakes v. Turquand, L. R. 2 H. L. 352.

The prospectus should state where copies of the memorandum and Inspection of documents. articles of association and of any contracts and other documents [supra, p. 241], mentioned in the prospectus can be inspected.

Where it is intended to apply to the Stock Exchange for a settlement As to Stock and quotation of the shares offered for subscription in the prospectus, it Exchange rules. is necessary to include in the prospectus a copy of the memorandum of association of the co. It is usually printed within the fold of the prospectus, but without the association clause or the names of the subscribers. For extract from the Rules of the Stock Exchange, see infra, p. 247.

FORMS.

The following is the outline of a prospectus :

The - Co, Limtd.

Form 208.

Incorporated under the Companies Acts, 1862 to 1883 [whereby the liability Skeleton proof a shareholder is limited to the amount of his shares].

The words in brackets are very commonly inserted.

Capital 100,0007. divided into 10,000 shares of 107. each. Payable

as follows: 17. on applicon, 27. on allotmt, and 27. on the

and the balance when called for.

of

spectus.

Directors.

[Names, addresses, and descriptions.]

Form 209.

Application for shares.

Auditors.

Secretary.

Office.

This co has been formed for the ppose, &c.

[Here will follow a statement of the objects and prospects of the company.

Applicons for shares should be made upon the accompanying form, and forwarded to the bankers of the co, together with the amount payable on applicon. If no allotmt is made, the deposit will be returned without deduction, and where the number of shares allotted is less than the number applied for, the surplus will be credited in reduction of the amount payable on allotmt.

The following contracts have been made, namely:

Forms of applicon for shares may be obtained from the co's secretary and bankers.

Copies of the memorandum and articles of association of the co, and of the contracts above-mentioned, may be inspected at the office of the co's solors.

The form of application for shares is usually annexed to the prospectus. It may be as follows:

Having pd to the co's bankers, Messrs., the sum of £ being a deposit of £

per share on

-shares in the above-named

co, I request you to allot me that number of shares upon the terms of the co's prospectus dated the of and I hby agree to accept

the same or any smaller number that may be allotted to me, and to pay the balance of £ per share on allotmt as provided by the sd prospectus, and I authorise you to register me as the holder of the sd shares.

Name in full.

Address.

Description.
Date.
Signature.

As to conditional applications, see Elkington's case, 2 Ch. 511; Pellatt's case, 2 Ch. 527; Simpson's case, 4 Ch. 184; Buckley, 60.