60. Requirements as to statements in lieu of prospectus Flashcards
- Requirements as to statements in lieu of prospectus
General overview
[60.01] This section sets out the particulars of the information that must be disclosed in the statement in lieu of prospectus. These particulars are detailed in the Sixth Schedule. Generally speaking, the particulars which must, inter alia, be disclosed are the property, if any, acquired or proposed to be acquired by the company, the costs and expenses incurred by the company for subscribing shares, any material contracts and the direct and indirect interest of the directors and experts.
Particulars to be stated in the statement in lieu of prospectus
[60.02] Section 60 provides that the statement in lieu of prospectus shall contain the particulars stated in the Sixth Schedule.
Property acquired or proposed
[60.03] The Sixth Schedule provides that the names of vendors of any property to be acquired or proposed to be acquired by the company and the amount paid for the property shall be disclosed in the statement in lieu of prospectus. Short particulars of any transaction affecting such property within the preceding two years in to be acquired by the company which the vendor was or is a promoter or director or proposed director of the said company shall be disclosed.
Commission and expenses for subscribing shares
[60.04] Commission payable in the form of shares allotted to the underwriter which was not disclosed was invalid and an injunction was granted to restrain its payment
“material contract”
[60.05] A “material contract” is one which an intending investor ought to have an opportunity of considering in order to decide whether to apply for shares or not
Direct or indirect interest of directors and experts
[60.06] Such direct or indirect interest of every director or expert as described by Part I of the Sixth Schedule shall be disclosed in the statement in lieu of prospectus. This refers to the secret profits or gains that the director or expert will profit out of the promotion of the company or the property which the company proposed to acquire, or which will be paid to the director or expert to induce them to be a director or otherwise to be derived out of the services rendered by such persons who is a partner in a partnership or limited liability partnership or holder of shares or debenture in a corporation. For the meaning of a “promoter”
[60.07] For the joint and severable liability of partners in a firm who were promoters of a company for secret profits, see Re Kent County Gas Light and Coke Co Ltd [1913] 1 Ch 92, Ch D .
“secrets profits and gains”
[60.08] This area of the law is governed by the law on promoters’ liability or a fiduciary’s liability to the company: see Re Cape Breton (1887) 12 App Cas 652 ; Re Leeds and Hanley Theatres of Varieties Ltd [1902] 2 Ch 809 ; Jacobson Marler Estates Ltd v Marler (1913) 114 LT 640. Shareholders are not entitled to rescission of the contract for the purchase of an overvalued mine company from its promoters arising from misrepresentation of material facts in the contract and prospectus where the company had worked on the mine: Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392, CA . Full disclosure must be made by the promoters in the prospectus of the profits they made in selling the property to the company: Gluckstein v Barnes [1900] AC 240, HL . Disclosure has to be made to an independent board of directors: Erlanger v New Sombrero Phosphate (1878) 3 App Cas 1218, HL . Non-disclosure of the interest of the promoter entitles the company to rescind the contract: Habib Abdul Rahman v Abdul Cader (1886) 4 Ky 193, HC.
[60.09] A gift by a promoter of a company to a director must be accounted for by the director to the company, and the company has the option of claiming the thing given or its highest value whilst held by the director: Eden v Ridsdales Rly Lamp and Lighting Co Ltd (1889) 23 QBD 368, CA ; Nant-y-glo and Blaina Ironworks Co v Grave (1878) 12 Ch D 738 . A director has to account to the company the amount of indemnity he received from a promoter when he resigned as director pursuant to a secret agreement with the promoter which he did not disclose to his co-directors: Re North Australian Territory Co [1892] 1 Ch 322, CA . A promoter of a club (an unincorporated association) owes fiduciary duties to its members
Remedies
[60.10] Where the property belonged to the company in equity, the company may only recover damages or take the promoter’s profits; cf where the promoter is selling his property to the company, the company cannot insist on taking the property at its original price. The choice is either paying what the promoter asks or rescinding: Tracy v Mandaly Pty Ltd (1953) 88 CLR 215, HC. No rescission is allowed where the vendors were not promoters or in fiduciary position of the company at the time of sale to the company
Untrue statement or wilful non-disclosure
[60.11] Where there is any untrue statement or wilful non-disclosure in the statement in lieu of prospectus, any director who signed the statement shall be guilty of an offence under subsection (3) unless he proves that the untrue statement or wilful non-disclosure was immaterial or that he had reasonable ground to believe and did believe right up to the time of lodgment of the statement for registration that the untrue statement or wilful non-disclosure was immaterial. Material variances between the prospectus and the memorandum were grounds for repudiation of the shares allotted
Fraudulent misrepresentation in the statement in lieu of prospectus or in the prospectus
[60.12] For false and deceptive misrepresentations in the prospectus, see Derry v Peek (1889) 14 App Cas 337 ; The Directors, etc. of the Central Rly Co of Venezuela v Joseph Kisch (1867) LR 2 HL 99, HL ; Phosphate Sewage Co v Hartmont (1877) 5 Ch D 394, CA ; applied Lindsay Petroleum Co v Hurd (1873-74) LR 5 PC 221 . No fraud if the company honestly believed the representations to be true: Baron Uno Carl Samuel Akerhielm v Rolf de Mare & Ors [1959] 3 WLR 108, PC . Persons who have been induced to take shares and become members by reason of such concealment or misrepresentation were not entitled to any relief as against creditors in a winding up of the company: Re Overend, Gurney, and Co; Ex p Oakes and Peek (1866-67) LR 3 Eq 576 , Equity.
[60.13] The principle of Oakes v Turquand and Harding (1867) LR 2 HL 325, HL extends to the voluntary winding up of a company formed under the Companies Act 1862 and 1867 (UK). A shareholder who has been induced to take up shares by the fraudulent representation of the directors cannot repudiate his shares, nor seek to rescind a contract in respect of them, nor can he recover back from the company money paid by him for the shares in a voluntary insolvent winding up: Stone v The City and County Bank Ltd; and Collins v The City and County Bank Ltd (1877) 3 CPD 282, CA . Where a person is induced by a fraudulent prospectus to apply for an allotment of shares, and his shares are afterwards forfeited by his failure to pay calls, he ceases to be a shareholder and becomes a mere debtor to the company, and if he has done nothing to affirm the contract he may repudiate it and defend an action for calls on the ground of the fraud: Aaron’s Reefs Ltd v Twiss [1896] 1 AC 273, HL. Untrue statement in the prospectus which induced the allottees to enter into the contract shall entitle the allottees to damages: Arnison v Smith (1889) 41 Ch D 348, CA . Inaccuracy of certain facts in the prospectus is not a misrepresentation: Hallows v Fernie (1867-68) 3 Ch App 467, CA. If a statement in lieu of prospectus has been filed pursuant to s 82 of the Companies (Consolidation) Act 1908 (UK), and the registrar has given a certificate under the said s 87(2), the company can proceed to allotment notwithstanding that the statement contains misstatements and omissions
Negligent misstatements
[60.14] The misrepresentation must be made by the company: Lynde v Anglo-Italian Hemp Spinning Co [1896] 1 Ch 178 ; Oakes v Turquand and Harding (1867) LR 2 HL 325, HL . The different remedies are (a) rescission against the company, and the contract of allotment and consequential rectification of the share register; (b) damages for deceit; (c) damages under the Misrepresentation Act (Cap 390) or damages in lieu; and (d) against the company for breach of contract when the misstatement has become incorporated into the contract as a term of the contract. For tortious misrepresentation arising out of the statement in lieu of prospectus
