c. Allottees and Applicants.
i. Of Fully Paid-up Shares.
a. Payment, 727.

B. Registration of Contract
in Writing, 733.

ii. Applications, 739.
iii. Allotment, 745.

iv. In other Cases, 748.

d. Liability of Directors.

i. For Shares, 750.

ii. For other Payments, 765. e. Transferees and Nominees, 774. f. Trustees.

i. Liability of, 784.

ii. Indemnity to, 789.

9. Executors, 790.

h. Bankrupts, 792.

i. Past Members, 794.

2 L. R., H. L. 99; 36 L. J., Ch. 849; 16 L. T. 500; 15 W. R. 821.

Persons Deceived.]-The proper purpose of a prospectus of an intended company is to invite persons to become allottees of the shares, or original shareholders in the company. When it has performed this office it is exhausted. Peek v. Gurney, 6 L. R., H. L. 377; 43 L. J., Ch. 19; 22 W. R. 29.

A prospectus of an intended company ought not to misrepresent actual and material facts, or to conceal facts material to be known, the misrepresentation or concealment of which may improperly influence and mislead the mind of the reader, for if he is thereby deceived into becoming an allottee of shares, and, in consequence, suffers loss, he is entitled to proceed against those who have thus misled him. Ib.

Contract Voidable.]-The contract between a shareholder who has been deceived by a fraudulent prospectus and the company is voidable, not void, and can only be avoided subject to the rights of creditors. Oakes v. Turquand, 2 L. R., H. L. 325; 36 L. J., Ch. 949; 16 L. T. 808.

Reliance upon Statement.]-In an action for deceit, if it is proved that the plaintiff did not rely upon the false statement complained of, he cannot maintain the action. Smith v. Chadwick, 20 Ch. D. 27; 51 L. J., Ch. 597; 46 L. T. 702; 30 W. R. 661-C. A.

Trivial Statements.]-If a statement, although untrue to the knowledge of the defendant, is so trivial that it could not in the opinion of the court have influenced the conduct of the plaintiff,

j. Forfeiture and Cancellation of it will not support an action for deceit. Ib.

Shares, 799.

k. Removal of Name, 803.

7. Liability in other Cases, 805.
m. Nature of Liability and Proceed-
ings.

i. Liability, 807.
ii. Proceedings, 809.

12. Calls, 810.

13. Reconstruction of Company, 813.

I. FORMATION, CONSTITUTION, AND

INCORPORATION.

1. PROSPECTUS.

a. General Principles.

Contents of.]-Semble, a prospectus should disclose the whole prospect of the enterprise to which it relates. Arkwright v. Newbold, 49 L. J., Ch. 684; 42 L. T. 759; 28 W. R. 828.

Misstatements or Concealments.]-In a prospectus for a new adventure, though allowance must be made for exaggerations, in which all sanguine projectors indulge, yet no material misstatement or concealment ought to be permitted. The public should have the same opportunity of judging of everything which has a material bearing on the true character of the project as the promoters themselves possess. The suppression of a fact will often amount to a misrepresentation. Central Railway Company of Venezuela v. Kisch,

Ambiguous Representations.]-If a statement; by which the plaintiff says he has been deceived, is ambiguous, the plaintiff is bound to state the meaning which he attached to it, and cannot leave the court to put a meaning on it. Ib.

The prospectus of a company stated that the present value of the turnover or output of the entire works was more than a million sterling per annum. The plaintiff complained that that was untrue, but declined to state the meaning which he attached to the words, "turnover or output," except that he understood them in their ordinary meaning:-Held, that the expression was ambiguous, and that as the plaintiff did not state in what sense he understood it, he could not rely upon the misstatement as a ground of action. Ib.

b. Misstatements, when Material.

Valuation of Property.]-A misstatement of the valuation of the property of a company to the amount of 3,000l. out of 301,000l. held not to be a material misstatement. Smith v. Chadwick, 20 Ch. D. 27; 51 L. J., Ch. 597; 46 L. T. 702; 30 W. R. 661—C. A.

Name of Director.]-If the name of a person is improperly placed on the list of directors in the prospectus of a company, it must depend upon the circumstances of the case whether it is a material misstatement. Ib.

Mode of Payment.]-The prospectus of an

iron working company stated that the purchasemoney for the works was to be paid by instalments, the amount of which was mentioned, but it did not state, according to the fact, that interest was to be paid on the instalments :Held, that the omission of mention of the interest was not a material misstatement. Ib.

up the company :-Held, that, notwithstanding the general objects stated in the prospectus, the misrepresentation as to the primary one was sufficient ground for the rescission of the contract by S.; that directors are bound to ascertain the truth of the representations of facts contained in their prospectus, and are responsible if those assertions are false, whether they know Contemporaneous Documents.] - The defen- them to be so or not, and that S. ought to be dants sent to the plaintiff the prospectus of a removed from the list of contributories. Reese company, for whom they acted as agents, on the | River Silver Mining Company v. Smith, 4 L. R., faith of which the plaintiff took shares in the H. L. 64 ; 39 L. J., Ch. 849. company. A few days afterwards the defendants sent the plaintiff a circular containing other statements concerning the company, but the plaintiff did not receive it till after he had | taken the shares :-Held, that the circular could not be taken as a contemporaneous document with the prospectus, and could not be read for the purpose of explaining it. Ib.

Description of Contract.]-A company, already carrying the intercolonial mails under contracts with the government of New Zealand, issued a prospectus that they were "prepared to receive applications for new shares in order to enable the company to perform the contract recently entered into with the government of New Zealand, for a monthly mail service between Sydney, New Zealand and Panama, in correspondence with the West Indian Mail Company's steamers between Southampton and Panama." A person, induced by this statement, applied for and obtained some of the new shares. The contract alluded to in the prospectus had been made by the company with the agent of the New Zealand government, both parties bonâ fide believing that they had authority to make it; but it turned out that they had no such authority, and the government refused to ratify the contract :Held, that the prospectus by implication alleged that there was a binding contract, but being an innocent misrepresentation it did not entitle him to rescind the contract under which he became a shareholder, as it did not affect the substance of the matter, he having got shares in the very company for which he had applied, and which shares were of considerable value. Kennedy v. Panama, New Zealand, and Australian Royal Mail Company, 2 L. R., Q. B. 580; 36 L. J., Q. B. 260; 17 L. T. 62; 15 W. R. 1039; 8 B. & S. 571.

Primary Object-Rescission of Contract.]-The prospectus of a limited mining company stated its object to be the working of a mine of great value in Nevada. The articles of association spoke also of mining generally on other lands to be acquired. The directors issued the prospectus in good faith, relying on the representation of the vendor as to the vast wealth of the mine therein referred to, and which they had contracted to purchase. S., on the faith of the prospectus, applied for 100 shares. A deputation sent out to survey the mine contracted for, reported that it was valueless. The directors, in a circular, having communicated to the share holders the report, and also stated that under the advice of the deputation they had broken off the contract, and were about to purchase other mines, S., after a short delay, filed a bill to have his name removed from the list of shareholders. After it was filed, but before it came to a hearing, an order was made to wind

What not a Misrepresentation.]- The pro-. spectus of a company stated that the Crédit Foncier, in conjunction with Agra and Masterman's and the National Banks, would receive applications for the capital of the company. And on the back of the prospectus was printed, "issued by the Crédit Foncier in conjunction with Agra and Masterman's and the National Banks." Agra and Masterman's had no connexion with the company except as its bankers: -Held, that there was no misrepresentation in the prospectus, nor anything to induce a reasonable man to think that Agra and Masterman's were shareholders in the company. Imperial Land Company of Marseilles, In re, Parbury's case, 19 W. R. 584.

Material Facts-Suppression of.]-A company was formed for the purpose of making and working a railway in Switzerland under a concession vested in a contractor, and transferred by him to the company under an agreement by which he obtained the contract for making the line, the terms of the contract being stated in the articles of association. Before the formation of the company the contractor agreed to give S., who afterwards became the chairman of the board of directors, 2,000l. worth of paid-up shares, and after the company was formed he paid the deposit and allotment moneys on the shares taken by S. and several other directors, and gave to C. and W., who afterwards became directors, bills for 10,0007., in consideration of their procuring a credit company to bring out the company. The directors issued a prospectus, which contained no misrepresentations, but did not mention the transactions between the contractor and the directors :-Held, that there was no such suppression of material facts in the prospectus, as to entitle a person who had been induced by it to take shares in the company, to be relieved of his shares. Heymann v. European Central Railway Company, 7 L. R., Eq. 154.

Statement that no Promotion-money payable to Directors.]-The prospectus of a company formed for taking over a business, after mentioning the price to be paid by the company for the business, stated that the remuneration of the directors would be fixed by the shareholders, and that it was proposed that they should be paid only by a commission on the profits made, and that no promotion-money would be paid to them by the company. The vendors of the business, who became directors, received part payment in 3,000 fully paid-up shares of the company, and an agreement for such part payment was disclosed in the prospectus. Shortly after the formation of the company the vendors transferred 800 of these shares (being of the nominal amount of 4,0007.), as to 350 to the solicitors

c. Disclosure of Contracts.

i. General Principles.

who had acted in the formation of the company, mentioned as directors when the prospectus is and as to the remaining 450 to the directors first issued refuse to act, it is bound to issue a other than the vendors. The plaintiff took new prospectus containing other names, and to shares on the faith of the prospectus and paid inform those who have applied for shares that, them up in full. Some time afterwards the before the allotment was made, other directors shareholders discovered the transfer of the 800 had been appointed. Anderson's case, per V.-C. shares and removed the directors. A claim was M., 17 Ch. D. 373; 50 L. J., Ch. 269; 43 L. T. made on behalf of the company against the 723; 29 W. R. 372. directors who had received the 450 shares, and A prospectus issued early in May stated that they by way of compromise surrendered those more than half the capital had been subscribed shares to the company. The plaintiff retained for. On the 28th of May S. applied for shares, his shares, and nearly two years after the trans- which were allotted to him on the 1st of June. fer to the directors had been discovered he com- At the time when the prospectus was issued half menced an action against the old directors and the shares had not been applied for; but before the solicitors, alleging that the defendants other the 28th of May applications for more than half than the vendors had agreed to become pro- the capital had been received, and before the 1st moters on the terms of receiving as remunera- of June for more than the whole :-Held, that tion 4,000l. in fully paid-up shares or money, there was no misrepresentation for which the out of the shares or money to be received by the applicant was entitled to relief. Ship v. Crossvendors that the nominal purchase-money in-kill, 10 L. R., Eq. 73; 39 L. J., Ch. 550 ; 22 L. T. cluded this promotion-money of 4,000l. as well 315; 18 W. R. 618. as the real purchase-money; that the value of the property was not so much as the nominal purchase-money, less 4,000l.; and that the statements in the prospectus were false; and he claimed as damages the whole nominal amount of his shares, on the ground that they had become utterly worthless. It appeared in evidence that at the time when the prospectus was issued, or at least before the plaintiff took his shares, there was an understanding between the vendors and the other directors that the other directors should receive from the vendors some remuneration, and that on the day when the plaintiff's application was accepted the transfer of the 450 shares to the other directors was agreed to; but there was no evidence of there having been any understanding for remuneration at the time of the contract for sale to the company, and it appeared that the price agreed to be given by the company was a fair one :-Held, by Fry, J., that although the understanding that the directors should receive remuneration was not such a contract as is required to be specified in the prospectus by s. 38 of the Companies Act, 1867, the concealment of the arrangement was a material misrepresentation, and made the prospectus fraudulent irrespectively of the statute; and that the plaintiff was entitled to recover by way of damages the excess of the money paid for his shares over the real value of them at the time when he took them. But held, on appeal, that the case was to be decided, not according to the principles applicable to an action to rescind the agreement by the plaintiff to take shares, but according to the principles applicable to a common law action for deceit; that, there being no arrangement for the directors to receive any promotion-money from the company, the prospectus did not contain any misstatement on which an action for deceit could be grounded; and that the action must be dismissed, Arkwright v. Newbold, 17 Ch. D. 301; 50 L. J., Ch. 372; 44 L. T. 393; 29 W. R. 455.

Mention of Fact known before Allotment which falsifies Prospectus.]-We cannot accede to the suggestion that the persons issuing a prospectus are liable to an action for deceit because they do not mention a fact coming to their knowledge before the allotment of shares which falsifies a statement in the prospectus. Ib., per James and Cotton, L. JJ.

When a company finds that the gentlemen

The

Disposal of Purchase-money-Concealment.]— B. and C., being possessed of a patent, agreed to sell it to a company for 56,000l., but by a series of contracts it was arranged that only 2,000l. out of that sum should be retained by them for their own use, and that 54,0007. should be divided between the promoters of the company. prospectus, issued on behalf of the company, did not mention the contracts relating to the disposal of the purchase-money of the patent. The defendants were promoters and directors of the company. The plaintiff subscribed for shares, but he afterwards sued the defendants to recover the price of the shares subscribed for by him :Held, upon demurrer, by Baggallay and Thesiger, L. JJ. (Bramwell, L. J., dissenting), that the contracts as to the disposal of the purchase-money of the patent ought to have been specified in the prospectus pursuant to the Companies Act, 1867, s. 38, and that the defendants were liable to the plaintiff for the price of his shares. Gover's case (1 Ch. D. 182) and Twycross v. Grant (2 C. P. D. 469) discussed. Sullivan v. Mitcalfe, 3 C. P. D. 455; 49 L. J., C. P. 815; 44 L. T. 8; 29 W. R. 181-C. A.

Per Baggallay, L. J. :-Every contract which, upon a reasonable construction of its purport and effect, would assist a person in determining whether he would become a shareholder in the company, is a contract within the meaning of the 38th section of the Companies Act, 1867. Ib.

Per Thesiger, L. J. :-Every contract relating to the formation of a company, or to its capital, property or business when formed, or to the position, pecuniary or otherwise, in regard to the company, or its promoters or vendors, of the directors or other officers of the company, and which is material to be made known to persons invited to take shares, in order to enable them to form a judgment as to the policy of so doing, is a contract within the meaning of s. 38 of the Companies Act, 1867. Ib.

Per Bramwell, L. J.-The contracts mentioned in s. 38 of the Companies Act, 1867, must be limited to those which bind the company, or which may be adopted or assumed by the company, and which affect it when formed. Ib.

afterwards, with knowledge fraudulently and with intention to induce persons to take shares. published a prospectus without specifying any of these contracts; and the plaintiff, on the faith of the prospectus, without notice of the contracts, took shares in the company, and lost money thereby :-Held, that these contracts, especially the last, were such as are required to be specified in a prospectus by the Companies Act, 1867, s. 38; and that the declaration disclosed a good cause of action. Charlton v. Hay, 31 L. T. 437; 23 W. R. 129.

Fraudulent Statement Contract within s. 38 of Companies Act of 1867.]-J., being the owner of mills in Cork, subject to a mortgage for 3,000l., and indebted to a bank in 5,0007., with the view of forming a company to purchase and carry on the business of the mills, contracted with S. and another-merchants of influence and positionto allow their names to be put forward as directors, in consideration of 150 paid-up 57. shares of the company to S. and 100 to the other. A deed was executed between trustees for the bank (who had agreed to purchase the mortgage), J. and S., and C., as trustees for the projected company, whereby the trustees for the bank agreed to sell and con-panies Act, 1867, s. 38, to recover the amount vey the mill premises to the company, when formed, for 8,000l., to be paid by debentures of the company; and that J., on the formation of the company, should assign to it all his stock-intrade, book debts, &c., and all his interest in the mill premises, in consideration of 2,500 paid-up shares of 51. each. The company was formed, and J. and S. were two of the directors; and the articles of association declared the above agreement binding on the company, and directed the allotment of 2,500 paid-up shares to J. for the purchase of the goodwill and stock-in-trade. The prospectus stated that the company had acquired the very valuable concern," viz., the mill premises, goodwill, &c., describing them, “on exceptionally favourable terms, viz., for the small sum of 8,0007., payable in debentures, &c., and 1,000 paid-up shares, in addition to which the vendor will purchase 1,500 shares fully paid up, thus putting a cash capital of 7,500 into the concern. The company was wound up, and the plaintiff, a shareholder, sued J. and S. for damages to him for a false representation in the prospectus as to the capital of the company, and a suppression of the contract between J. and S. under which S. became a director. Upon the trial of issues of fact before a jury they found that there was a contract between J. and S., that the 150 shares were to be paid out of the shares of J., and that the plaintiff had no notice of the contract : -Held, first, that the statement in the prospectus as to the capital of the company was false and fraudulent, and that J. and S. were answerable to the plaintiff for it. Jury v. Stoker, 9 L. R., Ir. 385. Affirmed in C. A., 8 L. R., Ir. 404.

Held, secondly, following Sullivan v. Mitcalfe (5 C. P. D. 455), that the contract was within s. 38 of the Companies Act, 1867, and the suppression of it from the prospectus was fraudulent under that section. Ib.

Held, thirdly, that J. and S. should pay the plaintiff the sum paid by him for his shares. Ib. -C. A.

ii. Necessary Contracts.

Disposal of Purchase-money, &c.]-A declaration alleged that the promoters of a company entered into certain contracts with the defendants, as directors, to register shares of nominal value in their names, to pay a salary for allowing their names to be used as trustees, and to appoint a particular person managing director who might nominate another person to vote in his absence; also that the promoters had entered into a contract with the owner of the property which the company was to purchase that he should receive only part of the purchase-money, the remainder to be divided amongst the promoters. The declaration proceeded to state that the defendants

Action brought by a plaintiff under the Compaid by him on shares taken by him in a company on the ground of the fraud of the promoters of the company, in omitting from the prospectus two contracts entered into by them as promoters, the one a contract between C. & P. and S., for the purchase of certain foreign concessions for the construction of tramways which the company was afterwards incorporated to make and work; the other a contract between C. & P. and G., as to certain payments to be made by C. & P. to G. in consideration of his obtaining for them a contract from the company for the construction of the tramways, by means of which fraud the plaintiff had been induced to take shares, which proved worthless. The jury found that these contracts were material to be made known to the intended shareholders of the company :-Held, that the contracts ought to have been specified in the prospectus, and that the defendants were liable. Twycross v. Grant, 2 C. P. D. 469; 46 L. J., C. P. 636; 36 L. T. 812; 25 W. R. 701—C. A. Affirming the judgment of the Common Pleas Division, 25 W. R. 586.

Knowingly Issuing."]-Held, that the words "knowingly issuing" in s. 38 mean intentionally issuing a prospectus without inserting the contracts which are required by that section to be specified, although they are omitted under the bonâ fide belief that it is unnecessary to specify them. Ib.

Contracts with Promoters-Retention of Profits.]-A company was formed for the purpose of purchasing and working a colliery and ironworks formerly the property of B. deceased. Before the company was formed B.'s trustees entered into negotiations with R., a financial agent, to get up a company for the purchase of the property for about 300,000l. R. applied to C., and C. made an arrangement with G. upon the terms afterwards stated. Two contemporaneous agreements were signed, by one of which the trustees agreed to sell the property to a trustee for the company for 300,000l.; and by the other, which was called a secret agreement, the trustees agreed with C. that he should bring out the company or forfeit 20,0007.; and that they should pay 85,000l. for commission and risk. On the same day C. agreed with G. that G. should take the whole risk of bringing out the company, and should receive 60,000l. and C. 25,000l. of this bonus. D. & Co., the vendors' solicitors, were to receive 1,5001. from the tenant for life of the property if the purchase was completed. The company was established, the first directors being found by R.; and D. & Co. became the solicitors of the new company. The prospectus and articles referred to the agreement