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Rh may sell his property to the company, but he must first see that the company is furnished with an independent board of directors to protect its interests and he must make full and fair disclosure of his interest in order that the company may determine whether it will or will not authorize its trustee or agent (for such the promoter in equity is) to make a profit out of the sale. It is not a sufficient disclosure in such a case for the promoter merely to refer in the prospectus to a contract which, if read by the shareholders, would inform them of his interest. They are under no obligation to inquire. It is for the promoter to bring home notice, not constructive but actual, to the shareholders.

When a company is promoted for acquiring property—to work a mine or patent, for instance, or carry on a going business—the usual course is for the promoter to frame a draft agreement for the sale of the property to the company or to a trustee on its behalf. The memorandum and articles of the intended company are then prepared, and an article is inserted authorizing or requiring the directors to adopt the draft agreement for sale. In pursuance of this authority the directors at the first meeting after incorporation take the draft agreement into consideration; and if they approve, adopt it. Where they do so in the exercise of an honest and independent judgment, no exception can be taken to the transaction; but where the directors happen to be nominees of the promoter, perhaps qualified by him and acting in his interest, the situation is obviously open to grave abuse. It is not too much, indeed, to say that the fastening of an onerous or improvident contract on a company at its start, by interested promoters acting in collusion with the directors, has been the principal cause of the scandals associated with company promotion.

Concurrently with the adoption of the contract for the acquisition of the property which is the company’s raison d’être, the directors have to consider how they will best get the company’s capital subscribed. Down to the passing of the Companies Act 1900 the usual mode of doing this was to issue a prospectus inviting the public to subscribe for shares. After the act of 1900 the prospectus fell into general disuse. In the year 1903, out of a total of 3596 companies which registered, only 358 issued a prospectus, the directors preferring, it would seem, to place the share capital through the medium of brokers, financial agents and other intermediaries rather than run the risk of incurring, personally, liability under the stringent provisions for disclosure contained in the act (s. 10). Of late the prospectus has, however, returned into favour. Under the act of 1907, incorporated in the Consolidation Act 1908 (s. 82), a company, if it does not issue a prospectus, must file a statement of all the material facts relating to the company.

A prospectus is an invitation to the public to take shares on the faith of the statements therein contained, and is thus the basis of the agreement to take the shares; there therefore rests on those who are responsible for its

issue an obligation to act with the most perfect good faith—uberrima fides—and this obligation has been repeatedly emphasized by judges of the highest eminence. (See the observations of Kindersley, V.C., in New Brunswick Railway Co. v. Muggeridge, 1860, 1 Dr. & Sm. 383, and of Lord Herschell in Derry v. Peek, 1889, 14 A. C. 376.) Directors must be perfectly candid with the public; they must not only state what they do state with strict and scrupulous accuracy, but they must not omit any fact which, if disclosed, would falsify the statements made. This is the general obligation of directors when issuing a prospectus; but on this general obligation the legislature has engrafted special requirements. By the Companies Act 1867, it required the dates and names of the parties to any contract entered into by the company or its promoters or directors before the issue of the prospectus, to be disclosed in the prospectus; otherwise the prospectus was to be deemed fraudulent. This enactment was repealed by the Companies Act 1900, but only in favour of more stringent provisions incorporated in the Consolidation Act of 1908. Now, not only is every prospectus to be signed and filed with the registrar of Joint Stock Companies before it can be issued, but the prospectus must set forth a long and elaborate series of particulars about the company—the contents of the Memorandum of Association, with the names of the signatories, the share qualification (if any) of the directors, the minimum subscription on which the directors may proceed to allotment, the shares and debentures issued otherwise than for cash, the names and addresses of the vendors, the amount paid for underwriting the company, the amount of preliminary expenses, of promotion money (if any), and the interest (if any) of every director in the promotion or in property to be acquired by the company. Neglect of this statutory duty of disclosure will expose directors to personal liability. For false or fraudulent statements—as distinguished from non-disclosure—in a prospectus directors are liable in an action of deceit or under the Directors’ Liability Act 1890, now incorporated in the act of 1908. This act was passed to meet the decision of the House of Lords in Peek v. Derry (12 A. C. 337), that a director could not be made liable in an action of deceit for an untrue statement in a prospectus, unless the plaintiff could prove that the director had made the untrue statement fraudulently. The Directors’ Liability Act enacted in substance that when once a prospectus is proved to contain a material statement of fact which is untrue, the persons responsible for the prospectus are to be liable to pay compensation to any one who has subscribed on the faith of the prospectus, unless they can prove that they had reasonable ground to believe, and did in fact believe, the statement to be true. Actions under this act have been rare, but their rarity may be due to the act having had the effect of making directors more careful in their statements.

Before the passing of the Companies Act 1900, it was a matter for directors’ discretion on what subscription they should go to allotment. They often did so on a scandalously inadequate subscription. To remedy this abuse the

Companies Act 1900 (Companies (Consolidation) Act 1908, s. 85) provided that no allotment of any share capital offered to the public for subscription is to be made unless the amount fixed by the memorandum and articles of association and named in the prospectus as “the minimum subscription” upon which the directors may proceed to allotment has been subscribed and the application moneys—which must not be less than 5% of the nominal amount of the share—paid to and received by the company. If no minimum is fixed the whole amount of the share capital offered for subscription must have been subscribed before the directors can go to allotment. The “minimum subscription” is to be reckoned exclusively of any amount payable otherwise than in cash. If these conditions are not complied with within forty days the application moneys must be returned. Any “waiver clause” or contract to waive compliance with the section is to be void.

An allotment of shares made in contravention of these provisions is irregular and voidable at the option of the applicant for shares within one month after the first or statutory meeting of the company (Companies (Consolidation) Act, s. 86). Even when a company has got what under the name of the “minimum subscription” the directors deem enough capital for its enterprise, it cannot now commence business or make any binding contract or exercise any borrowing powers until it has obtained a certificate entitling it to commence business (Companies (Consolidation) Act 1908, s. 87). To obtain this certificate the company must have fulfilled certain statutory conditions, which are briefly these:—

These conditions fulfilled, the company gets its certificate and starts on its business career, carrying on its business through the agency of directors, as to whose powers and duties see .

The Companies Act as consolidated in the act of 1908, and