The Articles of Association shall be signed by each subscriber in the presence of and be attested by one witness at the least (Sec. 24 (3) of 1903). See note to par. 3, p. 14, supra. The shares subscribed for in the Memorandum need not be stated in the Articles. CHAPTER IV. Prospectus. Preliminary Contracts. Contracts for the Issue of Paid-up Shares. Part I. Prospectus. Prospectus. WHEN it is proposed to form a public company or to offer to the public shares in a company already formed, or to offer debentures or debenture stock of a company to the public, it is usual to issue what is called a "prospectus," which is intended to be a statement of the company's objects, position and prospects. The earliest statutory provision as to the contents of a prospectus was Sec. 38 of the E. Act of 1867, with which Sec. 23 of 1882 (N.Z.) was identical. That section which was repealed by Sec. 15 (9) of 1901 is as follows :— 66 Every prospectus of a company and every notice inviting persons to subscribe for shares in any joint-stock company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 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 the adoption of the directors of 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." The Act of 1901 (for the first time) defined Prospectus, as follows: "Prospectus " means any prospectus, notice, circular, advertisement, or other invitation offering to the public for subscription or purchase any shares or debentures of a company." This definition is re-enacted in Sec. 2 of 1903. It will be seen that the definition limits the application of the Act to prospectuses offering to the public for subscription shares or debentures of a company. The limitation has reference to the distinction between what were, prior to the passing of the Act of 1903, known as private companies (referred to in these pages as quasi-private companies) and ordinary public companies. The first question to be considered is: Prospectus. What is the meaning of the words " offering to the public Part I. for subscription"? There was, prior to the Act of 1903, Chap. 4. no hard and fast definition of "private company." To take a simple case, a merchant, wishing to turn his business into a limited liability company, communicates with some of his friends, shows them his position, and agrees to sell them shares in his business; sometimes the members of his intended company, other than himself, are the members of his own family. only, or some of his employees. The company is formed and registered in the same way as a public company, the proprietor of the business holding most of the shares, and the other shareholders holding very few shares, or it may be only a single share, each. A company of this kind is known as a one- Private man company," and prior to the Act of 1903, would be properly under the old termed "a private company"; see Salomon v Salomon & Co., Acts. 1897, A.C. 22. It is quite plain that in such a case there is no offer of shares to the public. In Salomon's case ut sup, Lord Macnaghten said (p. 48): "The company was intended from the first to be a private company; it remained a private company to the end. No prospectus was issued; no invitation to take shares was ever addressed to the public." company Again, the field of operations may be wider. A number of persons may form a syndicate, meet and arrange for the purchase of a property, and subscribe the necessary capital to buy and work it, and for that purpose may form themselves into a company. Here again the company would be formed on the basis that only selected and approved persons should be shareholders, and such a company would also prior to the Act of 1903 be properly termed a private company. It is conceived that even circulars might be issued to selected and approved persons giving particulars of the property to be acquired and the prospects of working it, and yet it could not be said that there had been any invitation to the public to subscribe for shares. The What is an difficulty lies in laying down a limit, as to invitations to join invitation to in the formation of a company, beyond which, when a company is formed in this way, it loses the character of a quasi-private company and becomes a public company, and the invitation. becomes really an invitation to the public, though it may profess to be issued to selected and approved persons only-as in the case of a circular issued to say 500 probable investors. The question is one of fact, or, perhaps, more accurately a matter of opinion, and different persons equally competent to judge might Part I. Objection to prospectus and issue before registration. Prospectus. form opposite opinions on the same set of facts. The usual method of floating a company, in which it is desired to induce the public to invest, is to issue a prospectus either before or after registration, employing brokers to advertise and offer shares without discrimination to any persons wishing to take and pay for the same. There is no difficulty as to the extreme cases, the difficulty is in laying down the line between invitations to the public, and invitations within a sphere so limited as to exclude the idea that the company is other than a quasi-private company. The question in each case will probably be-was the invitation bona fide to persons selected and approved by the promoters of the company, or was the invitation really an invitation to the public issued in the guise of an invitation to join in forming a quasi-private company? The writer does not profess to be able to carry the matter further. A private company proper incorporated under Part IV. of 1903 is disabled from issuing a prospectus. (See chapter on Private Companies infra.) An offer of shares in a new company (formed for the purpose of acquiring the undertaking of an existing company) by the liquidator of the existing company to its members, is not an offer of shares to the public: Booth v. New Afrikander &c., 1903, 1 Ch. 295. The distinction between companies which have offered shares to the public and companies which have not. is recognised in Secs. 70 (3), 95 (1) and (6), and 99 (6) and (7) of 1903; see notes, p. 9 et seq., supra. The responsibilities thrown on promoters and directors who fail to observe the provisions of the Act of 1903 in regard to prospectuses are so great as to justify the prediction that whenever a company can be floated without the issue of a prospectus as defined by the Act, that course will be followed. Nevertheless, when the provisions of Sec. 75 are examined in the light of the decisions on the effect of omissions to state material facts in prospectuses, instances will be found prior to the English Act of 1900 (from which these provisions are taken) of relief having been given to shareholders in some form in respect of the omission of almost every matter now expressly required to be stated in the prospectus. It is also obvious, on a perusal of the Act, that the procedure is simplified and complications are avoided if a company is registered prior to the issue of a prospectus. Where it is doubtful if a proposed company will "float," and the cost of registration is a consideration to the Prospectus. promoters, the prospectus will in some instances be issued before Part I. registration. This, however, has not been the general practice Chap. 4. in England since the passing of the Act of 1862, mainly by reason of the possibility of material discrepancies between the prospectus and the Memorandum or Articles ultimately registered, and the opportunity thus afforded to allottees of shares to repudiate; see Ship's case, 12 L.T. 256; Downes v. Ship, L.R. 3 H.L. 343; Auckland Co-operative Co., N.Z. 5 S.C. 59; North N.Z. Woollen Co. v. Cairns, N.Z. 6 S.C. 12. requirement of Sec. 75 (1) (a) of 1903 in effect removes this objection as regards the Memorandum of Association. The ' As to the issue of a prospectus, different considerations Circumarise stances affecting the issue 1. Where a prospectus is issued before registration of an of a prosintended company. 2. Where a company is registered without the issue of a prospectus and a prospectus is issued within three years after registration, or the date on which the company is entitled to commence business. 3. Where a prospectus is issued more than three years after the date on which the company is entitled to commence business; see Sec. 70 (3) and 75 (4) of 1903. 4. Where a prospectus is issued by a company registered prior to 8th November, 1901. 1.—Where a Prospectus is issued before Registration. pectus. pectus before registration. It has already been pointed out that Sec. 75 (1) (a) of Issue of pros1903 precludes the possibility of variance between the prospectus and Memorandum, and thus one objection to the issue of a prospectus before registration is removed, but the "social contract" is not the Memorandum alone, but the Memorandum and Articles: Welton v. Saffery, 1897, A.C. 299, per Lord Herschell p. 315, per Lord Davey p. 329, and see Ship's case, 12 L.T. 256; and a substantial discrepancy between the prospectus and the Articles would be sufficient to warrant a shareholder in repudiating. Then there is a possible difficulty as to complying with Sec. 70 (1) (b) of 1903, as to the contract by the directors to take from the company their qualification shares (see par 4, p. 17 supra), and as to the effect of a failure to comply with this section on the validity of the appointment of first directors |