When pro moters responsible for prospectus. Interest of promoters. forward by them, or with the company, and does not stipulate for or take any part in the formation or floating of the company is not, it is conceived, a promoter. The solicitor of the promoters is not a promoter if he confines himself to purely professional business upon the usual terms; but if he goes beyond this--e.g., undertakes to push the company, or is to receive special fees or benefits dependent on its being successfully floated, or agrees to look to the company for payment-he is probably a promoter. Those, however, who take part in the formation or floating of a company merely as the agents or servants of promoters, and without any special personal interest in the formation or floating of the company, are not, it is conceived, promoters. Thus, the solicitor's clerk who tenders the memorandum of association for registration is not a promoter; nor is the printer who prints the prospectus; nor the advertising agent who procures the insertion of the prospectus in the newspapers. But even these persons, it is conceived, may become promoters-e.g., if in consideration of a commission to be paid by a promoter they undertake to push the company, or agree to act for remuneration altogether or in part contingent on the floating of the company. A person is not the less a promoter because he keeps his own name in the background and puts others forward as the ostensible promoters. Phosphate Sewage Co. v. Hartmont, 5 C. Div. 452; Bagnall v. Carlton, 6 C. Div. 371. A person may become a promoter either before or after the formation of the company. Emma Silver Mining Co. v. Lewis, 4 C. P. D. 407. Generally there is very little difficulty in determining whether a person is or is not a promoter, for in most cases a person who takes part in the formation or floating of a company does not confine himself to some isolated act of promotion, but does a great many things which leave little room for doubt. The question whether a person is or is not a promoter is a question of fact for the jury or the judge sitting as a jury. Emma Silver Mining Co. v. Lewis, 4 C. P. D. 396; Same Co. v. Grant, 11 C. D. 91; and Twycross v. Grant, 2 C. P. Div. 469. In many cases the prospectus is issued by the promoters, or some of them, and in other cases, though nominally issued by the directors, it may be considered as constructively issued by the promoters. Thus, in New Sombrero Co. v. Erlanger, 5 C. Div. 111, Jessel, M. R., said, "Now, this prospectus was issued, in my view of the case, by the promoters. It was actually prepared by them, and was brought ready printed to the meeting. It was nominally adopted by the directors; but, as I before said, I look upon two out of three directors as merely agents of the promoters, and their adoption would not make it more or less the act of the promoters. It was, in fact, the prospectus of the promoters." Whenever the prospectus can by possibility be deemed the prospectus of the promoters, it should be seen in their interests (a) That it is free from misrepresentation, otherwise the promoters will be liable to be sued in the same way as directors are liable. Supra, p. 171. (b) That it complies with section 38 of the Act of 1867, infra, p. 179, otherwise the promoters will be liable to proceedings as below mentioned. Moreover, it must be borne in mind that a promoter stands in a fidu- Fiduciary ciary position towards the company he promotes, and accordingly is not position. permitted to make any profit out of his position without the fullest dis closure to the company. If, in defiance of this rule a promoter makes a secret profit-e.g., by accepting a commission in cash or shares from a person who sells property to the company-he is accountable to the company, and can be compelled to surrender the profit. Phosphate Sewage Co. v. Hartmont, 5 C. D. 394; New Sombrero Co. v. Erlanger, 3 App. Cas. 1218; Bagnall v. Carlton, 6 C. Div. 371; Emma Silver Mining Co. v. Grant, 11 C. D. 918; Emma Silver Mining Co. v. Lewis, 4 C. P. Div. 396; Whaley Bridge Co. v. Green, 5 Q. B. D. 109. Nor, having regard to Section 49 of the Bankruptcy Act, 1869, will bankruptcy or liquidation in all cases relieve him. Thus in Emma Mining Co. v. Grant, the defendant, who was a promoter of the plaintiff company, and had accepted a secret commission from the vendor, was ordered personally to pay the amount of his profit although he had taken proceedings for the liquidation of his affairs and had obtained hist discharge. See note to Form 200, infra, and also Ex parte Hemming, 13 C. D. 163. essential. Now, the promoters of a company generally propose to obtain some Disclosure benefit at the company's expense, and in every such case it is, in their interests, necessary in settling the prospectus, to see that the requisite disclosure is made. See further, as to the mode of making disclosure, infra, p. 178. liability. Promoters may also render themselves liable to criminal proceedings- Criminal e.g., for conspiracy to defraud. The Queen v. Aspinall, 2 Q. B. Div. 48; In re Gold Co., 11 C. Div. 723. And see supra, p. 174. AS TO THE INTERESTS OF THE VENDOR. As already observed (supra, p. 1), a company is generally formed to Interests of purchase some particular property or right. In many cases the vendor is a promoter of the company, and where this is so, the observations above (p. 175 et seq.) apply. vendor. But in settling the prospectus in the interests of the vendor, the fol- Special points. lowing matters should, in particular, be borne in mind :— (a) Where a company is promoted by a person or persons whose property the company is intended to purchase, the real ownership of the property should be disclosed to the company by the con- N How disclosure should be made. Examples. (b) Where a person having recently acquired a property is about to sell it to a company which he promotes, it may be necessary, at any rate in some cases (e.g., where the difference in price is great), to disclose to the company the price at which he purchased. S. C. (c) Where a vendor (whether a promoter or not) is to give a commission or benefit to any promoter, director, or other person standing in a fiduciary position to the company, the fact should be disclosed to the company. (d) Where a vendor is in any way a party to the issue of the prospectus, it should be seen that the prospectus is free from misrepresentation, and makes due disclosure of all material facts. Unless the above rules are observed, the company may be entitled to have the contract with the vendor set aside, and to recover any purchase money paid to him. New Sombrero Co. v. Erlanger, 3 App. Cas. 1236; Bagnall v. Carlton, 6 C. Div. 371; Lindsay Petroleum Co. v. Hurd, L. R. 5 P. C. 243; In re Hereford & S. Wales Co., 2 C. Div. 621; Panama Co. v. India Rubber Co., 10 Ch. 515; Smith v. Sorby, 3 Q. B. D. 552, n. And see Forms 195, et seq., infra. Moreover, if the vendor is a party to the issue of the prospectus, it should be seen in his interest that section 38 of the Act of 1867 is com plied with as below mentioned. The mode in which disclosure should be made by promoters, directors, and others to the company and to applicants for shares therein, must of course depend on the circumstances of the case, but it will be borne in mind 1. That every member of the company is deemed to have notice of the contents of the memorandum and articles of association, and also, as it would seem, of any contracts thereby adopted or referred to. Ernest v. Nicholls, 6 H. L. Cas. 401; Dixon's case, 15 W. R. 480; 15 L. T. 651; Ex parte Williams, 2 Eq. 218; Bank of Turkey v. Ottoman Co., 2 Eq. 369; Peel's case, 2 Ch. 674; Madrid Bank v. Pelly, 7 Eq. 447 ; Griffith v. Paget, 6 C. D. 517; Anderson's case, 7 C. Div. 75. 2. That every person who takes shares on the footing of a particular prospectus is deemed to have notice of the contents of any contract or other document thereby offered for inspection--at any rate, so far as not inconsistent with the facts stated or implied by the prospectus. New Sombrero Phosphate Co. v. Erlanger, 5 C. Div. 111; S. C. 3 App. Cas. 1262; Anderson's case, 7 C. D. 102; Hallows v. Fernie, 3 Ch. 477. Accordingly, the following are examples of the mode in which disclosure is sometimes made : Suppose that the promoters or directors are to receive a commission from the vendor: one mode of making disclosure is to insert a clause in the articles declaring that they shall be at liberty to accept the commission as remuneration for their services in forming the company. Another mode is (a) to insert a clause in the agreement with the vendor providing that he shall be at liberty to pay and the promoters or direc tors to receive the commission; (b) By the articles to adopt, or authorise the directors to adopt, the agreement, or set it out in a schedule to the articles; (c) Refer to the agreement in the prospectus, and offer it for inspection. Again, suppose that the promoters are going to sell a property to the company at an advance, and it is considered [supra, p. 178] desirable to disclose the price paid by them: Let the agreement with the company recite the purchase by the promoters, and disclose the price paid by them, and then refer to the agreement in the articles and prospectus as above. Sometimes it is possible to state the facts on the face of the prospectus; but even where this can be done, it may be well also to make disclosure by the articles, so as to fix all the members with notice, whether they see the prospectus or not. 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. Sect. 38 of the Much difference of opinion exists as to what contracts, regard being Construction. 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 pro- Remedy of spectus offending against this section, is to sue the promoters, directors, party deceived. 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, W. N. 1880, 132. 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 sections. 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 How disclosure should be ma le. Examples. (b) Where a person having recently acquired a property is about to sell it to a company which he promotes, it may be necessary, at any rate in some cases (e.g., where the difference in price is great), to disclose to the company the price at which he purchased. S. C. (c) Where a vendor (whether a promoter or not) is to give a commission or benefit to any promoter, director, or other person standing in a fiduciary position to the company, the fact should be disclosed to the company. (d) Where a vendor is in any way a party to the issue of the prospectus, it should be seen that the prospectus is free from misrepresentation, and makes due disclosure of all material facts. Unless the above rules are observed, the company may be entitled to have the contract with the vendor set aside, and to recover any purchase money paid to him. New Sombrero Co. v. Erlanger, 3 App. Cas. 1236; Bagnall v. Carlton, 6 C. Div. 371; Lindsay Petroleum Co. v. Hurd, L. R. 5 P. C. 243; In re Hereford & S. Wales Co., 2 C. Div. 621; Panama Co. v. India Rubber Co., 10 Ch. 515; Smith v. Sorby, 3 Q. B. D. 552, n. And see Forms 195, et seq., infra. Moreover, if the vendor is a party to the issue of the prospectus, it should be seen in his interest that section 38 of the Act of 1867 is com plied with as below mentioned. The mode in which disclosure should be made by promoters, directors, and others to the company and to applicants for shares therein, must of course depend on the circumstances of the case, but it will be borne in mind 1. That every member of the company is deemed to have notice of the contents of the memorandum and articles of association, and also, as it would seem, of any contracts thereby adopted or referred to. Ernest v. Nicholls, 6 H. L. Cas. 401; Dixon's case, 15 W. R. 480; 15 L. T. 651; Ex parte Williams, 2 Eq. 218; Bank of Turkey v. Ottoman Co., 2 Eq. 369; Peel's case, 2 Ch. 674; Madrid Bank v. Pelly, 7 Eq. 447 ; Griffith v. Paget, 6 C. D. 517; Anderson's case, 7 C. Div. 75. 2. That every person who takes shares on the footing of a particular prospectus is deemed to have notice of the contents of any contract or other document thereby offered for inspection--at any rate, so far as not inconsistent with the facts stated or implied by the prospectus. New Sombrero Phosphate Co. v. Erlanger, 5 C. Div. 111; S. C. 3 App. Cas. 1262; Anderson's case, 7 C. D. 102; Hallows v. Fernie, 3 Ch. 477. Accordingly, the following are examples of the mode in which disclosure is sometimes made :- Suppose that the promoters or directors are to receive a commission from the vendor: one mode of making disclosure is to insert a clause in the articles declaring that they shall be at liberty to accept the commission as remuneration for their services in forming the company. Another mode is (a) to insert a clause in the agreement with the vendor providing that he shall be at liberty to pay and the promoters or direc |