House of Lords was handed down in 1889 and in the following year parliament enacted the Directors Liability Act.69 In Greenwood v. Leather Shod Wheel Co.,70 Lindley, M. R., said that a statement, in a prospectus might be untrue within the meaning of the Directors Liability Act though not untrue in the sense in which it was used by those who issued the prospectus. "Considering the object of a prospectus, and the object of the Directors Liability Act, the meaning which is important is the meaning which the prospectus conveys to those who read it. The meaning of those who issue it becomes all-important when such persons are charged with fraud; for, if a statement is ambiguous, it may be misunderstood without any fraud on the part of the person who makes it. The object of the Directors Liability Act, 1890, was to remove the defect in the law brought to light by the decision of the House of Lords in Derry v. Peek, and to impose upon those who issue prospectuses the duty to take reasonable care not to make untrue statements. This object would be very inadequately attained if the court held that a grossly misleading statement was not untrue' within the meaning of the Act in question." 6 The question must in this country be determined without the aid of statute and there is little assistance to be gained from the cases. It would, no doubt, be a salutary rule to make promoters answerable for the truth of the statements contained in the prospectus in any sense in which their words might reasonably be read; in other words, to compel them to frame their prospectus so carefully that no one could reasonably be misled thereby. A subscriber who has taken shares upon the faith of a prospectus, which, while true as intended by its framers, is false as read v. Chadwick, L. R. 20 Ch. Div. 27, 79-80, 46 L. T. N. S. 702, affirmed, L. R. 9 App. Cas. 187, 5 Am. & Eng. Corp. Cas. 23; Cleveland Iron Co. v. Stephenson, 4 F. & F. 428, and see Hallows v. Fernie, L. R. 3 Ch. App. 467, 475. 69. Stat. 53 and 54, Victoria Ch. 64, now contained in $ 84 of the Companies Act of 1908, (Stat. 8, Edw. VII, Chap. 69). See ante, § 207. 70. 1900, 1 Ch. Div. 421, 434. by him may be permitted to rescind his subscription. To sustain an action for damages for fraud and deceit a fraudulent intent must, however, be shown, and no fraudulent intent can be charged to a promoter whose representations were true in the sense in which he made them, if he did not realize that his words were susceptible of another interpretation.71 A different rule can be established only by statute, but courts and juries will, in any event, be slow to believe that a promoter who issued an ambiguous prospectus was quite unconscious that his representations might be read in any other than their truthful meaning.72 § 231. Interpretation of particular statements. In Milwaukee Cold Storage Co. v. Dexter," a statement in a prospectus "Cost of ground $40,000" was held to mean not that $40,000 was the price to be paid for the ground by the promoter under his contract for the purchase thereof, but that the sum stated was to be the cost of the ground to the company. In Simons v. Vulcan Oil & Mining Co.,74 the court held that a statement that the properties of the corporation had been "deeded direct from original owners to the stockholders " meant that no profits had been added on account of any intermediate buyer; that the import of the words "original owners" was plain and that evidence to explain their meaning was not admissible. 71. Slater Trust Co. v. Gardiner, 183 Fed. Rep. 268. See Nash v. Minnesota Title Insurance & Trust Co., 163 Mass. 574, 40 N. E. 1039, 47 Am. St. R. 489, 28 L. R. A. 753, and cases cited. See also the cases cited in note 68, supra. 72. The defendants should be permitted to testify in regard to the sense in which they used the language complained of. Nash v. Minnesota Title Insurance & Trust Co., 163 Mass. 574, 580, 40 N. E. 1039, In Arkwright v. Newbold,75 the court held that a statement that "the remuneration of the directors will be fixed by the shareholders, and it is proposed that they should be paid only by a commission on the profits made, no promotion money whatever being paid to them by the company, and all formation expenses being paid by the vendors" was not rendered fraudulent by the fact that the vendors had paid a large sum of money to the directors. In Hayward v. Leeson,76 the prospectus contained the following statement, "The capital stock of this company represents actual value without inflation, but does not approximate the entire value of the properties on which it is based. It was the intention of the projectors and incorporators to shape this enterprise so that its stock should be as solid as that of a national bank." This statement was held to be misleading, in view of the fact that of the $2,000,000 of the outstanding capital stock of the company, $700,000 had been issued to the promoters as remuneration for their services, or as their profit upon the sale, to the company, of certain options. In Bellairs v. Tucker," the prospectus of a company organized to take over a French patent owned by one Henley stated" From the success attending the company formed for the working of Henley's English patent the directors feel justified in stating they confidently believe the profits of this company will be more than sufficient to pay dividends of at least 50 per cent on the nominal capital, and will exceed those of the company working the English patent, which, having only been formed a little over twelve months, has entered into a contract which will yield the return by way of annual dividends of a sum equal to the whole paid-up capital of the company." It was held that this, under all the circumstances, did not amount to a state 75. L. R. 17 Ch. Div. 301. 76. 176 Mass. 310, 320-321, 57 N. E. 656, 49 L. R. A. 725. 77. L. R. 13 Q. B. D. 562, 572, et seq. ment that the English company had at the time of the publication of the prospectus already had a trading success in the sense of having divided profits, but merely expressed a confident belief that the English company would make dividends of a certain amount, and that the French company, by reason of more favorable conditions, would make even larger dividends. A representation that a corporation taken into the new company has paid dividends, fairly implies that such dividends have been earned.78 In Tinker v. Kier,79 it was held that a representation that the company was free from debt was misleading in view of the fact that the sole asset of the corporation was subject to a mortgage though the corporation was not liable for the debt. It was held in Bentinck v. Fenn 80 that the production of a contract for the sale of property between the legal owner on the one hand and the corporation on the other, making no mention of the beneficial owners, did not amount to a representation that the vendor mentioned in the contract was the sole owner of the property and that the party producing the contract had no interest therein. It was said in New Sombrero Phosphate Co. v. Erlanger 81 that a statement that "the directors" had entered into a provisional contract for the purchase of property, meant that a contract had been entered into, or at least approved, by all the five directors of the company. The decision was correct upon the particular facts as, of the three directors who had acted, two were subject to the 78. Downey v. Finucane, 205 N. Y. 251, 98 N. E. 391, 40 L. R. A. N. S. 307; Ottinger v. Bennett, 203 N. Y. 554, 96 N. E. 1123, reversing, 144 N. Y. App. Div. 525, 129 Supp. 819. See also Burnes v. Pennell, 2 H. L. Cas. 497, 525. 79. 195 Mo. 183, 94 S. W. 501; cf. § 213, ante. 80. L. R. 12 App. Cas. 652, 663, 666. Cf. § 215, ante. 81. L. R. 5 Ch. Div. 73, 112, 25 W. R. 436, affirmed, sub nom. 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. control of the promoters, but a statement that a contract had been made by the directors would not ordinarily mean that it had been made with the unanimous approval of the entire board. Other cases involving the interpretation of particular statements are cited in the foot note.82 § 232. Secret profits of promoter as fraud upon subscribers. A question arises as to whether the concealment from the subscribers of a profit made by the promoters may be made the basis of an action for fraud and deceit. A promoter is under an obligation to disclose to the subscribers any profits made by him upon the promotion,88 and the subscribers are, in the absence of notice to the contrary, entitled to assume that no such profits were taken.84 If the promoter induces the subscribers to take shares by intentionally concealing his profits, he is guilty of a fraudulent concealment which may be made the basis of an action of fraud and deceit.85 82. Lehman-Charley v. Bartlett, 135 N. Y. App. Div. 674, 120 Supp. 501, affirmed, 202 N. Y. 524, 95 N. E. 1125; Wakeman v. Dalley, 51 N. Y. 27; Downey v. Finucane, 205 N. Y. 251, 98 N. E. 391, 40 L. R. A. N. S. 307; Smith v. Chadwick, L. R. 9 App. Cas. 187, 198, et seq., 5 Am. & Eng. Corp. Cas. 23, affirming, L. R. 20 Ch. Div. 27, 46 L. T. N. S. 702; Hallows v. Fernie, L. R. 3 Ch. App. 467; New Brunswick & Canada Ry. Co. v. Conybeare, 9 H. L. Cas. 711; Glasier v. Rolls, L. R. 42 Ch. Div. 436; Green v. Gen'l Prov. Ass. Co., Ltd., 18 L. T. N. S. 500; Aaron's Reefs v. Twiss, 1896, App. Cas. 273; Greenwood v. Leather Shod Wheel Co., 1900, 1 Ch. Div. 421; Parbury's Case, 19 Weekly Rep. 584. See note to Lomita Land & Water Co. v. Robinson, 18 L. R. A. N. S. 85. The authorities, while not wholly satisfactory, strongly tend to sustain the action for fraud. De Klotz v. Broussard, 203 Fed. Rep. 942, 944, 122 C. C. A. 244; Coulter v. Clark, 160 Ind. 311, 66 N. E. 739; Hinkley v. Sac Oil & Pipe Line Co., 132 Iowa 396, 405-406, 107 N. W. 629, 633, 119 Am. St. Rep. 564; Downey v. Finucane, 205 N. Y. 251, 262, 98 N. E. 391, 40 L. R. A. N. S. 307; Getty v. Donelly, 9 Hun (N. Y.) 603, affirmed, sub nom. Getty v. Devlin, 70 N. Y. 504; Brewster v. Hatch, 122 N. Y. 349, 25 N. E. 505, 33 N. Y. St. Rep. 527; Wills v. Nehalem Coal Co., 52 Or. 70, 76–77, |