tion was made as a result of such misstatement.56 A subscription cannot be rescinded because of a mere misunderstanding on the part of the subscriber,57 because of a subsequent improvident issue of shares,58 because of mismanagement in the organization of the corporation,59 or because the enterprise does not fulfil the hopes entertained for it.60 It has been held that a subscription induced by a statement which was false when made, may be rescinded in spite of the fact that such statement subsequently became true.61 § 210. Fraud by concealment. That fraud may be committed by the suppression, as well as by the misstatement of a material fact, is not open to doubt.62 "It appears to me," said Vice Chancellor Kindersley in New Brunswick and Canada Railway Co. v. Muggeridge,63 "that it is quite As to the effect of substituting a new sheet in the articles of incorporation signed by the complaining subscriber, see Felgate's Case, 2 DeG. J. & S. 456. 56. Weems v. Georgia M. & G. R. R. Co., 88 Ga. 303, 14 S. E. 503; Wenstrom Consol. Dynamo & Motor Co. v. Purnell, 75 Md. 113, 120, 23 Atl. 134, and cases cited; Walker v. Mobile & Ohio R. R. Co., 34 Miss. 245, 256; Jennings v. Broughton, 17 Beav. 234, affirmed, 5 DeG. M. & G. 126. 57. Kelsey v. Northern Light Oil Co., 54 Barb. 111, affirmed, 45 N. Y. 505. 58. Hornaday v. Ind. & Ill. Cent. Ry. Co., 9 Ind. 263. 59. Runkle v. Burrage, 202 Mass. 89, 88 N. E. 573. 60. Salem Mill Dam Corporation v. Ropes, 9 Pick. (Mass.) 187, 197, 19 Am. Dec. 363. 61. Lehman-Charley v. Bartlett, 135 N. Y. App. Div. 674, 683, 120 Supp. 501, affirmed, 202 N. Y. 524, 95 N. E. 1125. As to the validity of this defense in an action for damages, see McConnell v. Wright, 1903, 1 Ch. Div. 546; cf. Ship v. Crosskill, L. R. 10 Eq. 73. See post, § 226. 62. Pulsford V. Richards, 17 Beav. 87. See note to Fear v. Bartlett, 33 L. R. A. 721, 735-736, and note to Lomita Land & Water Co. v. Robinson, 18 L. R. A. N. S. 1106, 1109. As to fraudulent concealments generally see 14 Am. & Eng. Encyc. of Law (2nd Ed.) 66, et seq. See also cases cited in succeeding notes. And see post, §§ 232 and 233. 63. 1 Drewry & Smale, 363, 381382, (see also page 367), quoted in Directors of Central Railway of Venezuela v. Kisch, L. R. 2 H. L. necessary to uphold this as a principle: that those who issue a prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as facts that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature, or extent, or quality of the privileges and advantages which the prospectus holds out as inducements to take shares." 64 In Directors of Central Railway Co. of Venezuela v. Kisch, Chelmsford, L. C., said, "Although, in its introduction to the public, some high colouring, and even exaggeration, in the description of the advantages which are likely to be enjoyed by the subscribers to an undertaking, may be expected, yet no misstatement or concealment of any material facts of circumstances ought to be permitted. In my opinion, the public, who are invited by a prospectus to join in any new adventure, ought to have the same opportunity of judging of everything which has a material bearing on its true character, as the promoters themselves possess. It cannot be too frequently or too strongly impressed upon those who, having projected any undertaking, are desirous of obtaining the co-operation of persons who have no other information on the subject than that which they choose to convey, that the utmost candour and honesty ought to characterize their published statements." In Aaron's Reefs v. Broadhurst,65 Wright, J., is said to have remarked that the strict rule of Muggeridge's case would be fatal to most prospectuses of the day. The answer to this, said Lord 99, 113, 16 L. T. N. S. 500, also in Components Tube Co. v. Naylor, 1900, 2 Ir. R. 1, 26-27, 39, 80, and approved in Henderson v. Lacon, L. R. 5 Eq. 249, 262, 17 L. T. N. S. 527. 64. L. R. 2 H. L. 99, 113, 16 L. T. N. S. 500. 65. Unreported. Justice Fitz Gibbon in Aaron's Reefs v. Twiss 66 is-" So much the better. If the company cannot float if the whole truth be disclosed by its prospectus, it cannot be honestly launched at all.” Some authorities make a distinction between a concealment that may be made the basis of the rescission of a subscription to the company's shares, and a concealment that gives rise to an action for fraud and deceit. In Peek v. Gurney,67 Lord Cairns said, "Mere non-disclosure of material facts, however morally censurable, however that non-disclosure might be a ground in a proper proceeding at a proper time for setting aside an allotment or a purchase of shares, would in my opinion form no ground for an action in the nature of an action for misrepresentations. There must, in my opinion, be some active misstatement of fact, or, at all events, such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false." In Components Tube Co. v. Naylor,68 Palles, C. B., after an exhaustive review of the authorities, stated his conclusions as follows: "1. That where the circumstances are such that there can be rescission, and restitutio in integrum, the rule as to disclosure is 66. 1895, 2 Ir. 207, 269, (affirmed, 1896, App. Cas. 273). Quoted in Components Tube Co. v. Naylor, 1900, 2 Ir. 1, 42. 67. L. R. 6 H. L. 377, 403; Smith v. Chadwick, L. R. 20 Ch. Div. 27, 36, 58, 46 L. T. N. S. 702, affirmed, L. R. 9 App. Cas. 187, 5 Am. & Eng. Corp. Cas. 23; see also Aaron's Reefs v. Twiss, 1895, 2 Ir. 207, 248, (affirmed, 1896, App. Cas. 273); Components Tube Co. v. Naylor, 1900, 2 Ir. R. 1, 44; Arkwright v. Newbold, L. R. 17 Ch. Div. 301, 317, 320. Some authorities, overlooking this distinction, lay down the rule that there can be no rescission because of the omission of material facts unless the effect of such omissions is to make the statements affirmatively made misleading. McKeown v. Boudard-Peveril Gear Co., 65 L. J. Ch. N. S. 735; In re Christineville Rubber Estates, Ltd., 106 L. T. N. S. 260, 81 L. J. Ch. N. S. 63; Aaron's Reefs v. Twiss, 1895, 2 Ir. 207, 248, 249. (See, however, pages 282 and 269 of same case), affirmed, 1896, App. Cas. 273; Gover's Case, L. R. 1 Ch. Div. 182, 199. 68. 1900, 2 Ir. R. 1. that laid down in The New Brunswick and Canada Railway Company v. Muggeridge, and The Central Railway Company of Venezuela v. Kisch; 70 but 2. That, where the question is not the right of rescission, but is the right to damages for deceit, evidence must be given of active fraudulent misrepresentation, and that mere concealment, although fraudulent, is not sufficient; but― 3. That this second rule, as applicable to an action for deceit, is subject to this explanation, that omissions may, upon the construction of the entire document, render false a statement which would have been true had the omitted statement been contained in the document; and that, where the omission is of this character, the deceived party has a right not only to rescind the contract, which he would have been entitled to do even had the representation not been of this character, but in addition he can treat it as active misrepresentation, as distinguished from mere concealment, and therefore make it the ground of an action for damages for deceit- -an action which mere concealment would not be sufficient to maintain." This is no doubt a correct statement of the result of the English cases. It is, however, suggested that a broader rule of liability for fraudulent concealment should be enforced against promoters of corporations. The difficulty of imposing a liability for fraud and deceit because of a failure to disclose material facts, where the parties deal at arm's length, is that a party under no obligation to speak cannot be held liable because of his silence. A promoter stands, however, in a fiduciary relation to the subscribers for the shares of the corporation, and it is his duty to disclose every fact within his knowledge the existence of which may in any degree affect the extent or quality of the advantages held out as an inducement,"1 and there is no reason why he should 69. See note 63. Co. V. Thannhauser, 45 Fed. Rep. 730, 739, and cases cited; Dickerman V. Northern Trust Co., 176 U. S. 181, not be held liable in an action for damages for fraud and deceit in any case in which it appears, either by direct proof or by fair inference, that material facts within his knowledge were concealed with intent to deceive-that is, with intent that the subscription should be made in ignorance thereof and that the subscriber was, by the failure to disclose the facts, deceived to his damage. This is probably the rule in some jurisdictions.72 204, 20 Sup. Ct. 311, 44 L. Ed. 423, quoting from Morawetz on Corporations, (2nd Ed.), § 546; Wiser v. Lawler, 189 U. S. 260, 264-265, 47 L. Ed. 802, 23 S. C. 624; DeKlotz v. Broussard, 203 Fed. Rep. 942, 122 C. C. A. 244; Hitchcock v. Hustace, 14 Hawaii 232, 242. Illinois.-Goodwin v. Wilbur, 104 Ill. App. 45, 52. Maryland.-Findlay v. Baltimore Trust & Guarantee Co., 97 Md. 716, 55 Atl. 379; Hambleton v. Rhind, 84 Md. 456, 488, 36 Atl. 597, 40 L. R. A. 216, 231. Michigan.-Torrey V. Toledo Portland Cement Co., 158 Mich. 348, 122 N. W. 614. New York.-Morgan v. Skiddy, 62 N. Y. 319, 326. Virginia.-Virginia Land Co. v. Haupt, 90 Va. 533, 19 S. E. 168, 44 Am. St. Rep. 939. Washington.-Johns v. Coffee, 74 Wash. 189, 198, 133 Pac. 4, affirmed on reargument, 77 Wash. 700, 137 Pac. 808. United Kingdom and Colonies.— Lagunas Nitrate Co. v. Lagunas Syndicate, 1899, 2 Ch. Div. 392, 409; Bagnall v. Carlton, L. R. 6 Ch. Div. 371, 383; Directors of Central Ry. Co. of Venezuela v. Kisch, L. R. 2 H. L. 99, 113, 16 L. T. N. S. 500; Askew's Case, 22 Weekly Rep. 762, reversed on other grounds, L. R. 9 Ch. App. 664; New Brunswick & Can. Ry., etc., Co. v. Muggeridge, I Dr. & Sm. 363, 381-382. 72. Federal.-Wiser V. Lawler, 189 U. S. 260, 264-265, 47 L. Ed. 802, 23 S. C. 624. Illinois.-Goodwin v. Wilbur, 104 Ill. App. 45, 52. Iowa.-Caffee V. Berkley, 141 Iowa 344, 349, 118 N. W. 267, 269. Michigan.-Fred Macey Co. V. Macey, 143 Mich. 138, 153, 106 N. W. 722, 727-728, 5 L. R. A. N. S. 1036; Torrey v. Toledo Portland Cement Co., 158 Mich. 348, 122 N. W. 614. New York.-Downey v. Finucane, 205 N. Y. 251, 98 N. E. 391, 40 L. R. A. N. S. 307; Walker v. Anglo Am. Mtge. & Trust Co., 72 Hun 334, 341, 55 St. Rep. 54, 25 Supp. 432. And see Morgan v. Skiddy, 62 N. Y. 319, 326. Oregon.-Wills v. Nehalem Coal Co., 52 Or. 70, 77, 96 Pac. 528, 531, citing 14 Am. & Eng. Encyc. of Law (2nd Ed.) 78. See post, §§ 232-233. See note to Cottrill v. Krum, 18 Am. St. Rep. 549, 556. The cases there cited are, however, of doubtful authority. |