PART I.

CONSTITUTION AND INCORPORATION OF COMPANIES

AND ASSOCIATIONS UNDER THIS ACT.

Memorandum of Association.

company (a).

6. Any seven or more persons associated for any Mode of lawful purpose may, by subscribing their names to forming a memorandum of association, and otherwise complying with the requisitions of this act in respect of registration, form an incorporated company, with or without limited liability (b).

(a) This section is the same as the 3rd section of the 19 & 20 Vict. c. 47.

company.

(b) The course which has hitherto been pursued when it Prospectus was proposed to establish a company was, to issue a pro- of proposed spectus, containing a statement of the objects of the company, of the proposed amount of capital to be subscribed, and of the number of shares into which it will be divided, with a short sketch of the proposed constitution of the company in material particulars. In order to allow a deviation from the prospectus, a clause is sometimes introduced, that the directors shall have the power of making alterations or modifications in the particulars of the prospectus. There have been various cases at law establishing the principle, that where there has been fraud on the part of those who have issued a prospectus or advertisement of the company, persons who have subscribed on the faith of such prospectus or advertisement are entitled to recover back what they have so subscribed against the parties to the fraud or misrepresentation. Fox v. Clifton, 6 Bing. 776; Pitchford v. Davis, 5 Mees. & W. 2; Wontner v. Shairp, 4 Railw. C. 542; Nockels v. Crosby, 3 B. & C. 814. But subscribers may lose such right by acquiescing in a departure from the terms of the prospectus. Braithwaite v. Skofield, 9 B. & C. 401; Tredwen v. Bourne, 6 Mees. & W. 461; Steinberger v. Carr, 3 Scott, N. R. 466.

The allotment of shares, which must be read as an allotment Allotment of of a right to shares, is in the form of a circular or letter sent shares.

by the directors to the person who has applied for shares, and

is to be taken in conjunction with the prospectus issued by the company inviting parties to apply for shares and the letter of application itself.

After the prospectus has been issued, a meeting will be held for the appointment of a managing committee, and for passing resolutions authorizing such committee to allot shares, and to apply the deposits to be paid thereon in payment of the preliminary expenses for bringing the company into ope..

What

amounts to take shares.

contract to

ration. It is important that authority should be given to the provisional directors to apply the deposits on shares in payment of the expenses, and that the subscribers should sanction such application either expressly, or that the letter of application for shares should be so framed as to make it, with the letter of allotment, amount to an agreement authorizing the expenditure. Jones v. Harrison, 2 Exch. 52; 12 Jur. 122; Clements v. Todd, 1 Exch. 268. This was done in Garwood v. Ede, 1 Exch. 264; 5 Railw. C. 134, where the allottee signed an agreement authorizing the provisional directors to apply the monies which should come to their hands, by deposit or otherwise, in payment of the preliminary expenses of the undertaking, and the scheme having proved abortive, it was held, that the allottee was precluded by such agreement from recovering back the deposit. It is to be observed, that in the absence of an express authority, the managing committee have no power to expend the deposits received by them in payment of the preliminary expenses, but upon failure of the scheme are under an obligation to return the whole deposits to the allottees of shares. Pitchford v. Davis, 5 M. & W. 2; Tredwen v. Bourne, 6 M. & W. 461; Walstab v. Spottiswoode, 15 M. & W. 501; Chaplin v. Clark, 4 Exch. 403; Wontner v. Shairp, 4 C. B. 404; 4 Railw. C. 542; Watts v. Salter, 10 C. B. 477; Jarrett v. Kennedy, 6 C. B. 319; Ashpitel v. Sercombe, 5 Exch. 147; Shelford on the Law of Railways, pp. 670686, 3rd ed.

Whether or not a contract has been entered into by a party applying for shares depends upon the construction to be put upon the prospectus, the letter of application for shares, and the answer thereto. In most cases the letter of allotment appears to amount to nothing more than a proposal, and no contract is made until payment of the deposit therein required to be made. Wontner v. Shairp, 4 C. B. 542; Walstab v. Spottiswoode, 15 M. & W. 501; Vollans v. Fletcher, 1 Exch. 20; 5 Railw. C. 73; Willey v. Parratt, 3 Exch. 211; Moore v. Garwood, L. J. 1850, Exch. 15. A parol contract for the sale of shares is binding, not being within the Statute of Frauds. 29 Car. 2, c. 3, s. 17; Tempest v. Kilner, 3 C. B. 249; Shelford on Railways, p. 105, 3rd ed.

The defendants, having applied to a railway company for an allotment of one hundred shares, undertaking to accept the same, or any less number, and to pay the deposit thereon, received a letter of allotment from the company, allotting him sixty shares, headed by the words "Not transferable:" it was held, in an action by the company against the defendant to recover the deposit, that the contract was not binding on him, inasmuch as his proposal was absolute, whereas the acceptance in the letter of allotment was conditional, as it contained a qualification that the contract was not transferable." Duke v. Andrews, 5 Railw. C. 496; L. J. 1848, Exch. 231; 2 Exch. 290. It was said by Parke, B., “A

party who purchased this letter of allotment might have bought it thinking it was transferable, whereas the company say they will not recognize his transferee as the holder of the shares. The two stipulations are not ad idem, and therefore there is no valid contract." Ib. See Vollans v. Fletcher, 5 Railw. C. 73; 1 Exch. 20; 11 Jur. 416.

If a contract be founded on fraudulent misrepresentations, Fraudulent such as would in a court of law be sufficient to support an representaaction on the case, it may in a court of equity be rescinded. tions. The fraud may consist in the misrepresentation of a fact material to the contract, where the truth of that is known to the one party and unknown to the other, and the misrepresentation is intentionally made with a view of procuring a more advantageous contract than the real facts, if truly stated, would have warranted. Lovell v. Hicks, 2 Y. & Coll. 51.

Where a party by misrepresentation draws another into a contract, such party may be compelled to make good the representation if that be possible, but if it be impossible the person deceived may avoid the contract. The same principle applies, although the party at the time believed the statement to be true, if in the due discharge of his duty he ought to have then known otherwise. Pulsford v. Richards, 17 Beav. 87; 17 Jur. 865; 22 L. J., Ch. 559. Third parties, who, by false representation induced others to enter into contracts, are estopped from afterwards falsifying their statement, and if necessary may be compelled to make them good. But the false statement of one not a party to the agreement entered into on the faith of it, is not a ground for avoiding it. Ib. Misrepresentations may be either by a suppression of the truth, or an assertion of what is false; but, to be the ground for avoiding the contract, the representation must be " dans locum contractui," or such that it is reasonable to infer that, in its absence, the party deceived would not have entered into the contract. Ib.

Where there was no evidence that the misrepresentations alleged to have been made by the defendants to the purchaser of shares were untrue, and which if taken as true would have increased the value; nor that such representations were merely conjectural, the Court of Chancery would not grant relief, but dismissed the plaintiff's bill, without prejudice to any action which he might be advised to bring. Jennings v. Broughton, 23 L. J., Ch. 999.

The defendant and others forming the board of management of a company, for the purpose of getting the shares of the company inserted in the official list of the Stock Exchange, through their secretary, untruly represented that twothirds of the scrip had been paid upon the shares, the shares being in consequence of that representation inserted in the official list; the plaintiff knowing the requirements of the Stock Exchange, on the faith that two-thirds of the scrip had been paid up purchased shares in the company. The

jury having found that the representation was made falsely, it was held, that the defendant was liable to the damages sustained by the plaintiff, although the representation was not made to him directly. Bedford v. Bagshaw, 4 H. & N. 538 ; 29 L. J., Exch. 59.

Where the director of a joint stock banking company circulated deceitful representations for the purpose of raising the value of the shares in the market, and benefiting himself by the sale of his own shares, it was held, that the court might give relief to a purchaser, although he should have taken a transfer of the shares, and have become one of the company. Stainbank v. Fernley, 8 Jur. 262; 9 Sim. 556. No other parties were necessary besides the purchaser of the shares, the director who sold the shares, and the agent whose name was substituted for the real owner.

Ib.

A joint stock marine insurance company had declared dividends, which, as it afterwards appeared, were not warranted by the real condition of the company. The law agent of the company, who was also a member of it, when applied to for information, mentioned these dividends as proofs of the flourishing state of the company. The person to whom he so mentioned them became afterwards a purchaser of shares: it was held, that he could not relieve himself from an action for calls nor rescind his contract on account of these representations: it was held, also, that the law agent of the company was not its agent to bind it in such matters; nor could he bind it as a partner, for a joint stock company is not, like an ordinary partnership, bound by the acts of any individual member of it. Burnes v. Pennell, 2 H. L. Cas. 497; 13 Jur. 897.

If the directors of a company agree to publish false statements of the affairs of the company, under such circumstances as show a fraudulent attempt to deceive, they are not only civilly liable to those whom they have deceived and injured, but may be criminally prosecuted and punished. Ib.

In this case it was said, "If directors have made false representations for the purpose of fictitiously enhancing the price of shares for their own benefit, and a party has thereby been deceived, and induced to purchase shares greatly beyond their value, the transfer of the shares, although executed, ought to be set aside." Ib.

"Dividends are supposed to be paid out of profits only, and when directors order a dividend to be paid where no such profits have been made, without expressly saying so, a gross fraud is practised; and the directors are not only civilly liable to those whom they have deceived and injured, but are guilty of a conspiracy, for which they are liable to be prosecuted and punished." Per Lords Campbell and Brougham. See 24 & 25 Vict. c. 96, s. 84, post, as to the criminal responsibility for publishing false statements.

A party who enters into a contract is not liable to an action for making a false representation to another, by which that party is damaged, unless the representation be made under such circumstances as will render it morally fraudulent. But when a party making an untrue representation to another for a fraudulent purpose, intending to induce the latter to do an act which he afterwards does to his prejudice, an action on the case for deceit lies, and it is not necessary to show in addition the defendant's knowledge of the untruth of the representation, if it was communicated for a deceitful purpose. The representation must, however, be fraudulently made; and where directors of a joint stock banking company published a report representing the flourishing state of the bank, which was calculated to induce parties to purchase shares, such representation being false, but not false within the knowledge of the directors, who published it without any intention to deceive, it was held, that they were not liable for loss sustained by the purchase and retention of the shares on the faith of the report, though the jury found them guilty of gross negligence. Taylor v. Ashton, 11 M. & W. 401; 12 L. J., N. S., Exch. 363; 7 Jur. 978.

Where a prospectus of a mining company purported to guarantee to the holders of certain shares a minimum dividend of 331. per cent., it was held, that a party who took shares upon the faith of such guarantee, which failed, could maintain an action against one of the promoters for the loss which he sustained by such false representation in the prospectus. Gerhard v. Bates, 2 Ell. & Bl. 476; 17 Jur. 1097.

false state

An action for a false representation (contained in a pro- Personal spectus of a company) is maintainable against a director, al- liability of though such representation may be susceptible of a meaning directors for in which it would not be literally false. In such a case it is ments. for the jury to say, whether the representation was made in the sense necessary to maintain the action. Clarke v. Dickson, 5 Jur. N. S. 1027; 28 L. J., C. P. 225; 6 C. B., N. S. 453. In order to maintain such action it is not necessary that there should have been any direct personal representation made by the defendant to the plaintiff, it is sufficient if the defendant authorized the circulation of the prospectus to the public, knowing it to contain false statements. Ib. The fact that other inducements were held out by other parties, in addition to such false representations, by which the plaintiff was also partially influenced, is, in itself, no defence. Ib.

The principle of the law of Scotland and that of England is the same, that an action may be maintained against the directors of a company in respect of any transaction which the body of shareholders could not sanction; but in respect of any transaction which they could sanction, although the directors might not have been justified in what they were doing,