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EVERY company which appeals to the public for subscription to its share capital has of necessity to issue a prospectus of some kind or another. The usual form of prospectus is too well known to need description here. The form generally adopted is that which expediency suggests as the most convenient, and as being the clearest and most comprehensive. The prospectus, however, may take any form desired.
Of the component parts of a prospectus only one is a statutory requisite that relating to contracts, which will be dealt with further on.
It is almost superfluous to state that the inducements held out in the prospectus must be founded on well-ascertained facts. For a prospectus to contain a highly-coloured picture of anticipated profits is not in itself delusive [Denton v. Macneill 2 Eq. 352], but any misrepresentation of material facts will entitle the shareholder subscribing on the faith of the prospectus to rescission of his contract with the company, and to have a return of his money.
A prospectus being addressed to the whole public, any one may take up the prospectus and appropriate to himself its representations by applying for an allotment of shares. Mere non-disclosure of facts, unless such non-disclosure has the effect of making the disclosed facts absolutely false, will not be sufficient to sustain an action for misrepresentation. [Peek v. Gurney, 13 Eq. 79; 6 H. L. 377.]
The following are amongst the instances in which shareholders subscribing on the faith of the prospectus have obtained rescission of contract on the ground of misrepresentation.
Where persons were falsely named as directors in the prospectus. [Munster's Case, 14 W. R. 957; Blake's Case, 34 Beav. 639.]
Where, inter alia, a Government guarantee of dividend was falsely held out.
2 H. L. 99.]
[Central Railway of Venezuela v. Kisch,
Where there was an untrue statement that a certain large number of shares had been subscribed. [Ross v. Estates Investment Co., 3 Eq. 122; 6 Ch. 682. Wright's Case, 12 Eq. 331; 7 Ch. 55.]
Where the value of mines to be purchased by the company was misrepresented, though without fraud. [Smith's Case, 2 Ch. 604; 4 H. L. 64.]
Misrepresentation entitles the shareholder subscribing on faith of the prospectus not only to rescission of his contract as against the company, but also to an action for deceit against the directors, promoters, and other persons issuing the prospectus, to recover any damage he may have suffered thereby.
The law on this subject has been well laid down by the Master of the Rolls in the recent case of Smith v. Chadwick [20 Ch. D. 44].
"I think the law on this subject is clear. A man may issue a prospectus or make any other statement to make another enter into a contract, believing that his statement is true and not intending to deceive; but he may, through carelessness, have made statements which are not true, and which he ought to have known were not true, and if he does so he is liable in an action for deceit. He cannot be allowed to escape merely because he had good intentions and did not intend to defraud. Again, on the question of the materiality of the statement, it the Court sees on the face of it that it is of such a nature as would induce a person to enter into the contract, or would tend to induce him to do so, or that it would be a part of the inducement to enter into the contract, the inference is, if he entered into the contract, that he acted on the inducement so
held out, and you want no evidence that he did so act, but even then you may shew that in fact he did not so act, in one of two ways, either by shewing that he knew the truth before he entered into the contract, and therefore could not rely on the mis-statements, or else by shewing that he avowedly did not rely upon them, whether he knew the facts or not. He may by contract have bound himself not to rely upon them, that is, to take the matter at his own risk, whether they were true or false (which was the conclusion to which the House of Lords came in the recent case of Brownlie v. Campbell [5 App. Cas. 925]), or he may state that he did not rely upon them in the witness-box. But unless it is shewn in one way or the other that he did not rely on the statement, the inference follows.
"We now come to another class of cases, in which it is not obvious to the Court that the statement is material; and there
may be several ways in which it may not be obvious. In the first place the statement may be ambiguous; it may have one of two meanings, and the Court cannot decide which meaning it has. In that case the plaintiff must tell us what he relied on. It is for him to say, "I relied on the statement in this meaning, that is the meaning I took; if it is ambiguous it is the fault of the defendant, and relying on that I entered into the contract." But if the plaintiff will not tell us what he relied on, if he says to the Court, "Please to find out the meaning; I relied on the statements in the prospectus, and I relied upon them according to their meaning, whatever that meaning is." Surely that will not do. How can the Court find out that he has been deceived at all? The Court may think it means the very thing the plaintiff did not think it meant, and then are they to say he has been deceived because he took it in the wrong sense? That of course is impossible.
'Again in an action of deceit, even though the statement may be untrue, yet if it was made in good faith and the defendant
had reasonable ground for believing it to be true, the defendant will succeed.
Finally, it is not every mis-statement, although untrue, and although untrue in a sense to the defendant's knowledge, that will do. It may be that the mis-statement is trivial, so trivial as that the Court will be of opinion that it could not have affected the plaintiff's mind at all, or induced him to enter into the contract; or it may be that although the means of knowledge were in the hands of the defendant, yet the matter was minute and required a careful examination, and there may have been reasonable grounds for the defendant to believe that this statement was true, although he had those means of knowledge in his possession. In that way, also, he would be entitled to succeed...
"I have arrived at the conclusion that the defendants were honest men. . . . That, in my opinion, has a material bearing in construing the documents, because if you once arrive at the conviction that the persons who made the representation intended to act honestly, I think if you have any doubt or hesitation as to the meaning of the terms, the rule prevails that you presume things were done rightly."
If, therefore, in an action of deceit it is proved that the plaintiff did not rely upon the false statement complained of, he cannot maintain the action.
A mis-statement of the valuation of the property of a company to the amount of £3000 out of £301,000 was held, from its trivial nature, not to be a material mis-statement. [Smith v. Chadwick, 20 Ch. D. 27.]
Where purchase-money was to be paid by instalments and no mention made in the prospectus of interest being payable, held not a material misrepresentation. [Smith v. Chadwick, 20 Ch. D. 27.]
Where the promoters of a company fraudulently declared by their prospectus that they did not hesitate to guarantee a minimum annual dividend of 33 per cent. on the shares it was
held that a shareholder who had relied on the false representation was entitled to recover against the promoters damages in respect of the loss he had so incurred. [Gerhard v. Bates, 17 Jur. 1097; Taylor v. Ashton, 11 M. & W. 401.]
When the allotment of shares is complete the office of the prospectus is exhausted. A purchaser of shares in the market cannot recover against those who issued the prospectus any losses he may incur through his purchase. The original allottees alone are entitled to rely upon the false representations contained in a prospectus for rescission of their contract with the company and for damages against the promoters. [Peek v. Gurney, 13 Eq. 79; 6 H. L. 377.]
To obtain rescission of contract on the ground of misrepresentation the allottee must not be guilty of laches. Delay will be fatal to his claim. To entitle him to the assistance of the Court he must act promptly; the rule established by decisions being that a longer delay than three months, after discovery by the allottee of the fraud, forfeits his right to relief. [Heyman v. European Ry. Co., 7 Eq. 154.]
The right of the allottee to relief is lost if, subsequently to such discovery, he acts in a manner inconsistent with the repudiation of the contract, as, for example, if he instructs his broker to sell his shares. [Ex parte Briggs, 1 Eq. 483.]
The right to relief is also lost if not claimed and the shares repudiated before the company winds up. For allottees are not entitled in an action commenced after a winding-up has begun to have their names struck off the register as against creditors [Oakes v. Turquand, 3 Eq. 576; 2 H. L. 325; Kent v. Freehold Land Co., 4 Eq. 588; 3 Ch. 493], or even if the assets are sufficient to pay all liabilities and costs. [Hull and County Bank, Burgess' Case, 15 Ch. D. 507.]
If a prospectus states that the articles of association may be seen at a certain place, a person taking shares on the faith of the prospectus and without inspecting the articles must be held to do so with notice of the contents of such articles, provided