A statement that certain reports in regard to the property to be purchased by the corporation, had been prepared for the directors by named engineers of eminence and reputation, when such report had actually been prepared for the owner of the property or his agents, cannot be held a misstatement of a material fact in the absence of proof that the report was actually untrue.98 If a report had been made years before and the situation had in the meantime substantially changed, the statement that the report had been made for the directors, conveying an impression that the report was of recent date, would constitute a misrepresentations of a material fact.99

§ 217. Materiality of representations in regard to directors.

A misrepresentation as to the personnel of the board of directors is generally held to be a misrepresentation of a material fact.1

98. Angus v. Clifford, 1891, 2 Ch. Div. 449, 468-469, 480-481.

99. See Aaron's Reefs v. Twiss, 1896, App. Cas. 273, 282, 288.

1. DuPuy v. Transportation Co., 82 Md. 408, 33 Atl. 889, 34 Atl. 910; Wenstrom Consol. D. & M. Co. v. Purnell, 75 Md. 113, 122, 23 Atl. 134.

Walker v. Anglo-Am. Mortgage & Trust Co., 72 Hun (N. Y.) 334, 55 St. R. 54, 25 Supp. 432.

Smith v. Chadwick, L. R. 9 App. Cas. 187, 194, 5 Am. & Eng. Corp. Cas. 23, affirming, L. R. 20 Ch. Div. 27, 50, 68-69, 46 L. T. N. S. 702; Ex parte Edwards, 64 L. T. N. S. 561; Re The Land Credit Co. of Ireland, 14 W. R. 957; Carew's Case, 7 DeG. M. & G. 43, 49-50; Re The Life Association of England, Ltd., (Blake's Case), 34 Beav. 639, 34 L. J. Ch. N. S. 278, 13 W. R. 486; In re Scottish Petroleum Co., L. R. 23 Ch. Div. 413, 49 L. T. N. S. 348, 31 W.

R. 846; In re Metropolitan Coal Consumers' Association, (Wainwright's Case), 62 L. T. N. S. 30, 59 L. J. Ch. N. S. 281, affirmed, 63 L. T. N. S. 429; Blain v. Agar, 1 Sim. 37, 5 L. J. Ch. 1; In re Dunlop-Truffault C. & T. Mfg. Co., Ltd., 13 Times Law Rep. 33; Woolmer v. Toby, 10 Q. B. 691; Re Johannesburg Hotel Co., Ltd., 8 Ry. & Corp. L. J. 197; cf. Mathew's Case, 14 Jur. 928, 3 DeG. & S. 234.

See note to Fear v. Bartlett, 33 L R. A. 721, 733.

In re Metropolitan Coal Consumers' Association, (Karberg's Case), 1892, 3 Ch. Div. 1, 13, 16, 66 L. T. N. S. 700, it was held that the inclusion in the list of the members of the council of administration of the names of Lord Brabourne and Admiral Mayne was a misrepresentation, these gentlemen having before any prospectus was issued, and

This is, however, not necessarily so in every case. A misstatement as to the persons who are to constitute the board of directors cannot be considered a misstatement of a material fact unless the persons named were known to the plaintiff, either personally or by reputation, in such manner that their presence upon the board of directors actually affected his determination to subscribe for shares.2

The board of directors of every company is at all times subject to change, and the fact that some of the persons upon the faith of whose presence on the board a subscription was entered resigned shortly after the formation of the company, is no ground for rescission. It has, however, been held that if the change in the directorate is made before the allotment a dissatisfied subscriber may withdraw his subscription.3

before any articles of association existed, and at a time when many matters were still to be settled, expressed their willingness to become members of the council, but not having authorized the publication of their names as such members, and subsequently refusing to serve. See also Wainwright's Case, 62 L. T. N. S. 30, 59 L. J. Ch. N. S. 281, affirmed, 63 L. T. N. S. 429.

As to the effect of misrepresentations regarding the existence of an advisory board, see American Building and Loan Assoc. v. Rainbolt, 48 Neb. 434, 67 N. W. 493; same v. Bear, 48 Neb. 455, 67 N. W. 500.

2. Smith v. Chadwick, L. R. 9 App. Cas. 187, 194, 5 Am. & Eng. Corp. Cas. 23, affirming, L. R. 20 Ch. Div. 27, 50-51, 68-69, 46 L. T. N. S. 702.

In Carew's Case, 7 DeGex. M. &

G. 43, 49-50, Lord Justice Knight Bruce seems to have held that a false statement as to the persons who are to be directors of the company is a material misrepresentation, because it is impossible to be certain how far the judgment of the subscribers may have been influenced by the fact of particular persons being named as directors.

3. In re Scottish Petroleum Co., (Anderson's Case), L. R. 17 Ch. Div. 373, 50 L. J. Ch. N. S. 269, 43 L. T. N. S. 723; In re Scottish Petroleum Co., (Wallace's Case), L. R. 23 Ch. Div. 413, 49 L. T. N. S. 348, 31 W. R. 846; Ex parte Brown, 95 L. T. N. S. 756.

Cf. Hallows v. Fernie, L. R. 3 Ch. App. 467, 472-473; Ross v. Estates Investment Co., L. R. 3 Eq. 122, 133, affirmed, L. R. 3 Ch. App. 682; Mathew's Case, 14 Jur. 928, 3 DeG. & S. 234.

The fact that the board of directors is not independent, but subject to the domination of the promoters or of persons selling property to the corporation, is a material fact that should be disclosed to the subscribers. A false statement that the directors are themselves taking and paying for shares is a misstatement of a material fact, as is likewise any misstatement in regard to the compensation received by the directors in consideration of their agreeing to act as such.

6

It was held in Cackett v. Keswick that where a well-known firm of merchants had agreed to act as commercial agents, and one of its members as chairman of the board of directors, of the company, there should in fairness have been disclosed to the intending subscribers, the fact that this firm was receiving a large block of stock for the use in the prospectus of its name and that of the member who was to act as chairman.

§ 218. Materiality of representations in regard to subscriptions.

A false statement as to the number of shares subscribed or paid for is a misrepresentation of a material fact. A representation

4. Erlanger V. New Sombrero Phosphate Co., L. R. 3 App. Cas. 1218, 6 Eng. Rul. Cas. 777, 39 L. T. N. S. 269, 27 W. R. 65, affirming, New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73, 25 W. R. 436; Jury v. Stoker, L. R. 9 Ir. 385, 400-401.

5. Henderson v. Lacon, L. R. 5 Eq. 249, 17 L. T. N. S. 527; Ex parte Storey, 62 L. T. N. S. 791.

6. Arkwright v. Newbold, L. R. 17 Ch. Div. 301, 309, reversed, on appeal, p. 316, et seq.; Cornell v. Hay, L. R. 8 C. P. 328; Heymann v. European Central Ry. Co., L. R. 7 Eq. 154.

8

Missouri.-Ramsey v. Thompson Mfg. Co., 116 Mo. 313, 22 S. W. 719.

New York.-Talmadge v. Sanitary Security Co., 31 N. Y. App. Div. 498, 52 Supp. 139.

Ohio.-Nugent v. Cincinnati H. & I. S. L. R. R. Co., 2 Disney 302.

Texas. Commonwealth Bonding & Casualty Ins. Co. v. Cator, Tex. Civ. App. -, 175 S. W. 1074.

Wisconsin.-Luetzke v. Roberts, 130 Wis. 97, 109 N. W. 949.

that a certain portion of the share capital has been subscribed for, is fraudulent if the subscription referred to was in fact made by one of the promoters upon the understanding that he should not be called upon to take any shares, and that the shares nominally subscribed for by him should be allotted to such persons as might apply to the company for shares. A statement that a certain number of shares have been subscribed for, may be materially false if the shares mentioned are to be paid for, not in cash, but by the transfer of property, or franchises, or by labor to be performed.10

It was held in Downey v. Finucane,11 that it was a question for the jury whether a statement that 413,030 shares of the stock of the company had been issued, or contracted to be issued, was fraudulent in view of the fact that 410,000 of these shares of a par

United Kingdom and Colonies.Wright's Case, L. R. 7 Ch. App. 55, 41 L. J. Ch. N. S. 1; rev'g Wright's Case, L. R. 12 Eq. 331; Wainwright's Case, 63 L. T. N. S. 429; Cridland v. DeMauley, 1 DeG. & Sm. 459; Ross v. Estates Investment Co., L. R. 3 Eq. 122, affirmed, L. R. 3 Ch. App. 682; Wilson v. Hotchkiss, 2 Ont. L. R. 261, affirmed, sub nom. Milburn v. Wilson, 31 Can. S. C. 481; Wontner v. Shairp, 4 C. B. 404. And see note to Fear v. Bartlett, 33 L. R. A. 721, 734.

Whether a false statement that the London share list had been closed would make the resulting subscriptions voidable, query. Blake's Case, 34 Beav. 639, 643, 34 L. J. Ch. N. S. 278, 13 W. R. 486. It has been held that a statement that a certain number of shares have been subscribed for, is not rendered false by the fact that all of the deposits thereon have not been

paid. Vane v. Cobbold, 1 Exch. 798; cf. Bevan v. Adams, 22 L. T. N. S. 795.

It has been held that a misrepresentation as to the number of shares subscribed for must, to justify a rescission, be substantially false. A statement only slightly false is not sufficient. National Leather Co. v. Roberts, 221 Fed. Rep. 922, 137 C. C. A. 492.

9. Ross v. Estates Investment Co., L. R. 3 Eq. 122, affirmed, L. R. 3 Ch. App. 682.

10. Arnison v. Smith, L. R. 41 Ch. Div 348, and see State v. Jefferson Turnpike Co., 3 Humph. (Tenn.) 305.

Parol evidence is not admissible to show that a subscription unconditional upon its face was to be paid by a transfer of property. Merrick v. Consumers Heat & Elec. Co., 111 Ill. App. 153.

11. 205 N. Y. 251, 262, 263, 98 N. E. 391, 40 L. R. A. N. S. 307.

value of $41,000,000 had been issued to the promoters in payment for property purchased by them for $250,000.

A misrepresentation as to the number of shares remaining in the treasury is a misrepresentation of a material fact.12

§ 219. The same subject.-Sham subscriptions.

It frequently happens that promoters, in order to influence those whom they subsequently solicit, obtain the first signatures to the subscription agreement by secret promises that the parties so signing shall receive their shares without payment, that their subscriptions shall not be enforced against them, or by promises of collateral benefits not appearing upon the face of the subscription agreement. Secret promises of this character constitute a fraud upon the other subscribers, are contrary to public policy and void, and the subscription agreement is enforceable according to its terms.1 13

12. Hamilton v. American Hulled Bean Co., 156 Mich. 609, 121 N. W. 731; same case on demurrer, 143 Mich. 277, 106 N. W. 731.

13. Federal.-Morgan v. Struthers, 131 U. S. 246, 254-255, 33 L. Ed. 132, 9 Sup. Ct. 726.

Connecticut.-Litchfield Bank v. Church, 29 Conn. 137.

Idaho.-Meholin v. Carlson, 17 Idaho 742, 107 Pac. 755, 134 Am. St. Rep. 286.

Illinois.-Merrick V. Consumers H. & E. Co., 111 Ill. App. 153; Melvin v. Lamar Ins. Co., 80 Ill. 446, 22 Am. St. R. 199, and cases cited; Jewell v. Rock River Paper Co., 101 Ill. 57; Galena & Southern Wisconsin R. R. Co. v. Ennor, 116 Ill. 55, 4 N. E. 762; Great Western Telegraph Co. v. Haight, 49 Ill. App. 633.

Massachusetts.-Nickerson v.

English, 142 Mass. 267, 8 N. E. 45.

Michigan.-Zabel v. New State Tel. Co., 127 Mich. 402, 86 N. W. 949.

Missouri. Ollesheimer v. Thompson Mfg. Co., 44 Mo. App. 172, 182, and cases cited; Haskell v. Sells, 14 Mo. App. 91, 101; Newland Hotel Co. v. Wright, 73 Mo. App. 240.

Nebraska.-York Park Bldg. Assoc. v. Barnes, 39 Neb. 834, 58 N. W. 440.

New Hampshire.-White Mts. R. R. v. Eastman, 34 N. H. 124, 139, et seq.

New York.-Meyer v. Blair, 109 N. Y. 600, 605, 17 N. E. 228, 4 Am. St. R. 500; Yonkers Gazette Co. v. Jones, 30 App. Div. 316, 51 Supp. 973; Phoenix Warehousing Co. v. Badger, 6 Hun 293, affirmed, 67 N. Y. 294.