Scottish Court of Session Decisions

The Companies Act 1862 enacts (section 35)—“If the name of any person is without sufficient cause entered in or omitted from the register of members of any company under this Act … the person or member aggrieved, or any member of the company, or the company itself, may … as respects companies registered in Scotland, by summary petition to the Court of Session, or in such other manner as the said Courts may direct, apply for an order of the Court that the register may be rectified, and the Court may … if satisfied of the justice of the case, make an order for the rectification of the register, and may direct the company to pay all the costs of such motion, application, or petition, and any damages the party aggrieved may have sustained. The Court may in any proceeding under this section decide on any question relating to the title of any person who is a party to such proceeding to have his name entered in or omitted from the register, whether such question arise between two or more members or alleged members or between any member or alleged member and the company, and generally the Court may in any such proceeding decide any question that it may be necessary or expedient to decide for the rectification of the register.” …

The Companies Act 1900 enacts (section 30)—“In this Act, unless the context otherwise require … the expression ‘prospectus’ means any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription or purchase any shares or debentures of a company.”

Section 10 (1)—“Every prospectus issued by or on behalf of a company, or by or on behalf of any person who is or has been engaged or interested in the formation of the company, must state … ( d) The minimum subscription on which the directors may proceed to allotment, and the amount payable on application and allotment on each share… . ( m) Full particulars of the nature and extent of the interest (if any) of every director in the promotion of or in the property proposed to be acquired by the company, with a statement of all sums paid or agreed to be paid to him in cash or shares by any person, either to qualify him as a director or otherwise for services rendered by him in connection with the formation of the company.”

This was a petition presented on August 30th 1902 by Charles William Sleigh, factor, Blackwood Estates Office, Lesmahagow, under the provisions of section 35 of the Companies Act 1862 (quoted supra), praying (1) for the rectification of the register of a company known as the Glasgow and Transvaal Options, Limited, by removing therefrom the name of the petitioner as holder of 100 shares, (2) for due notice of such rectification to the Registrar of Joint-Stock Companies in Scotland, and (3) to direct the said company to pay to the petitioner the sum of £50, being the

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sum paid by him as consideration for the said shares.

A similar petition was presented by William Augustus Scott Mackirdy of Birkwood, Lesmahagow, another shareholder. The averments in the two petitions were of a similar character, and they were heard together.

The material averments made by Sleigh were as follows:—“In or about the month of January or in the beginning of February 1902 there was projected and promoted in Glasgow a company for the purpose of acquiring blocks of mineral-bearing lands in the Transvaal. For the purpose of obtaining subscribers among the public for shares in the said proposed company, and as an offer to the public of shares for subscription or purchase, the promoters drew up and issued a prospectus in the following terms:—‘ Glasgow and Transvaal Options, Limited.—MrDavid Fraser of Pretoria is now in this country for a short period, and is forming a company to handle about 100 Options in the Transvaal. Mr Fraser has been in South Africa for over forty years, and is well known there and much respected. The nominal capital of the company is to be the very small one of £15,000 with working capital of £5000. Mr Fraser is not taking any cash for the right to his options, but is accepting payment of 10,000 fully paid shares, thereby showing his absolute confidence in the scheme. The company will be a private one, and the following gentlemen have agreed to become directors:—Mr James Shaw, coal exporter, 57 Hope Street, Glasgow; Mr George Gray, solicitor, Edinburgh; Mr James M. Webster, merchant, Glasgow; Mr J. B. Dalzell, coalmaster, Larkhall; Mr David Fraser, Pretoria; Mr W. Keith Webster, accountant, Glasgow. The shares of this company should in a very short time become of very great value indeed. Messrs Lindsay, Meldrum, & Oatts are the solicitors, and the National Bank of Scotland, Crosshill Branch, will be the bankers in this country, and the Natal Bank, Pretoria, in South Africa. The registered offices of the company will be situated at 55 West Regent Street, Glasgow, and Mr W. Keith Webster, who has had a large experience in matters of this kind, will be the managing director. Before the company has been incorporated urgent demands have been made to obtain control over certain options, and arrangements are already being made to hand over certain properties.’ Copies of the said prospectus, notice, or circular accompanied by forms of application for shares in the said company were widely circulated in Glasgow and the surrounding district both by post and by distribution from Mr Keith Webster's office at 55 West Regent Street. The promoters also distributed personally and by post numerous copies among people likely to take shares, accompanied by written or verbal invitations to the said persons to apply for shares. On or about 22nd February 1902 the petitioner received from the said Mr Dalzell a letter dated 21st February 1902 enclosing a copy of the said prospectus along with the prospectus of a company then in course of formation called the Glasgow Mexican Options, Limited. There were also enclosed forms of application for shares in the said companies. Relying upon the statements made in the said prospectus the petitioner on 26th February 1902 applied for 100 shares in the Glasgow and Transvaal Options, Limited, and sent his cheque for £12, 10s., being the sum payable on application for said shares. On 18th March 1902 there were allotted to him 100 shares in the said company, numbered 558 to 657 inclusive. Since the said date the petitioner has paid three further sums of £12, 10s. upon calls in the said shares, making in all a payment of £50. On 7th March 1902 the company was incorporated and registered under the Companies Acts 1862 to 1900 under the name of the Glasgow and Transvaal Options, Limited. The registered office of the company is the office of Mr Keith Webster at 55 West Regent Street, Glasgow. After the incorporation of the company the said prospectus was approved of and adopted by the company and was issued by the company to members of the public from the offices of the company, and by the directors on behalf of the company. The said directors, or one or more of them, acting on behalf of the company in making the said allotment of shares to the petitioner on 18th March were well aware that the petitioner had received a copy of the said prospectus, and that his application for shares was made upon the basis of the said prospectus. The petitioner has recently ascertained that several of the representations made in the said prospectus were inaccurate and untrue. In particufar, the said prospectus represents, and it was intended to represent, that Mr Fraser was, at the date of the issuing of the prospectus, in possession of ‘about 100 options in the Transvaal,’ in return for a transfer of which by Mr Fraser to the company £10,000 was to be paid to Mr Fraser in shares of the company. In point of fact Mr Fraser had not acquired any such options at that time, and although he has not yet transferred any options to the company there has been issued to him by the directors a certificate for 10,000 of the company's shares… . Had the petitioner been aware that Mr Fraser was only in course of acquiring the said options, and that he was to receive 10,000 shares from the company for merely undertaking to acquire the said options within no fixed period, he would not have applied for shares in the said company. Upon receiving the said 10,000 shares Mr Fraser immediately transferred 5300 of them for nominal sums to the said J. M. Webster, James Shaw, W. K. Webster, George Gray, J. B. Dalzell, and others, the consideration for the said transfers in each case being ten shillings. It is believed and averred by the petitioner that the transfers of the said shares to the said parties formed part of their interest in the promotion of the company, and that they were granted

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for services rendered in the said promotion. In violation of the Companies Act 1900, section 10, sub-section 1 ( m), the said interest on the part of the said directors in the promotion of the company was not disclosed in the prospectus. Had the petitioner been aware of the said undisclosed interests on the part of the said directors he would not have applied for any shares. Further, in addition to the instances already given the provisions of the Companies Act 1900 were violated by the issue of the said prospectus in numerous other ways, and in particular attention is drawn to the fact that it has not been filed; (2) the probable amount of the preliminary expenses of the company is not stated in it; (3) the date of the contract with Mr Fraser, and the place where it may be inspected, are omitted from it; (4) the qualification of directors is not mentioned in it; (5) the minimum subscription upon which the directors might proceed to allotment was not stated in it.”

There were other averments of misrepresentation and failure to comply with the requirements of section 10 of the Companies Act 1900, but these in the view taken by the Court it is unnecessary to detail.

Sleigh stated his contention as follows:—“The petitioner contends that his name was entered upon the register of the said company without sufficient cause, in respect that he was induced to take shares in the company (1) by misrepresentations in a prospectus issued by the company, or by the directors or one or more of them on behalf of the company, or by the pcomoters thereof: and (2) through the omission of material facts from the said prospectus amounting to misrepresentation. He further maintains that since the said prospectus does not conform with the statutory requirements, the allotment to him upon the basis of the said prospectus is void and and of no effect.”

Answers were lodged for the Glasgow and Transvaal Options, Limited, in which, besides a general denial of the averments of misrepresentation, they made the following statements with regard to the document of 6th February 1902 quoted above—“It is denied that said memo. is a prospectus or was ever intended to serve the purpose of a prospectus, nor was it used for the purpose of inviting or offering to the public shares in the said company. Mr Fraser asked the Messrs Webster to use their influence to obtain directors for the company of which he was the promoter, and the Messrs Webster introduced him to the gentlemen forming the present board. Said memo. was drawn up by Mr Fraser and Mr Keith Webster for the purpose of giving the directors a rough outline of Mr Fraser's proposals, and some typewritten copies of it were given to each of the directors. The directors had nothing to do either with the composition of this memo. or its distribution, and they at no time put it forward either to the petitioner or any other member of the public as a prospectus or as a document intended to serve the purposes of a prospectus… . Explained that the directors in order to further Mr Fraser's scheme mentioned it to some of their friends and they became subscribers, but the memorandum before mentioned never was transformed into a prospectus. It never was adopted by the company or its directors, nor was it issued to the public by the company.”

They submitted that the petition ought to be refused in respect—“(1) The petitioner's statements are irrelevant; (2) his allegations of misrepresentations are wholly unfounded in fact.”

Proof was allowed, and led before Lord Adam, and by him reported to the Court.

The import of the evidence, in so far as relating to the alleged misrepresentations to the reasons inducing Sleigh to apply for shares, and to the circulation of the document alleged to be a prospectus, is fully stated in the opinion of the Lord President, infra.

Argued for the petitioners—(1) The document here was a prospectus. It implied an invitation to take shares, and the evidence showed that it had been issued to members of the public, i.e., to persons who were not private friends of the promoters — Drincqbier v. Wood [1899], 1 Ch. 393, per Byrne, J., p. 403; Burrows v. Matabele Gold Reef, &c., Co. [1901], 2 Ch. 23. If so, it could not be questioned that it failed to conform to the requirements of section 10 of the 1900 Act. That gave persons who had taken shares on the faith of the prospectus a right to have their names removed from the register. (2) Even assuming that this document was not technically a prospectus in the sense of the Companies Act 1900, it was a representation on the faith of which the petitioners applied for shares. That representation, as the evidence showed, contained serious misstatements and concealment of material facts. It was no answer, in an action for rescission of the contract, to say that the applicant was referred to documents which would show the truth of the facts misstated in the original statement put before him— Aaron's Reef, Limited, v. Twiss [1896], A.C. 273. Nor was the petitioner bound to show the particular misstatement which induced him to take shares, if as a whole the representation was false— Hallows v. Fernie, 1868, L.R., 3 Ch. 467; Greenwood v. Leather Shod Wheel Co. [1900], 1 Ch. 421, per Lindley, M.R., at p. 434. The company was responsible for the act of the promoters, to the extent that it could not insist on retaining the shareholder on the register— Karberg's Case [1892], 3 Ch. 1; Tamplin's Case, W.N. (1892), 94, 146. These cases established the propositions (1) that if A sells to B in the knowledge that B contracts in reliance on misrepresentations made by C, B can rescind his contract with A; and (2) that where a prospectus is issued by the promoters and an application is made for shares prior to the incorporation of the company, the company in allotting shares is affected with knowledge of the prospectus. In Lynde v. Anglo Italian Hemp Spinning Co. [1896], 1 Ch. 178, the opposite result was arrived at, but there all that was averred was a verbal statement by a promoter who became

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a director— Derry v. Peck [1887], 14 A.C. 337, and M'Connell v. Wright [1903], 1 Ch. 546, were also cited.

Argued for the respondents—If this document was a prospectus in the sense of the 1900 Act, it was not disputed that it did not comply with the requirements of that Act. Even taking the case on that footing, the remedy was not rescission of the contract, but an action of damages against the persons who issued the prospectus— Gover's Case 1875, 1 Ch. Div. 182. But it was not a prospectus. The two points requisite to make a document a prospectus within the meaning of that Act were—under the definition given in section 30 (quoted supra)—that it should contain an invitation to apply for shares, and that it should be issued to the public. The present case satisfied neither condition. (2) On the facts there was no misrepresentation. At the most, certain statements were ambiguous, but where a document is ambiguous, and reference is given to the means of clearing up the ambiguity, no one is entitled to say that he contracted on the faith of the words taken in the sense which was not true, and claim therefore that he was entitled to the rescission of his contract— Hallows v. Fernie, 1868, L.R., 3 Ch. 467. If the petitioner relied on concealment, that would not justify rescission of the contract unless what was concealed made what was stated untrue, and unless the concealment was fraudulent— Gillespie v. Russell, February 28, 1856, 18 D. 677; New Brunswick Co. v. Conybeare, 1862, 9 Clark, H.L.C., 711. Again, a person who applies for shares is bound to satisfy himself within a reasonable time of the contents of the articles and memorandum of association, and if he fails to do so he cannot afterwards claim rescission on the ground of misrepresentation by the promoters. Buckley, Companies Act, 8th ed., pp. 125–127— Oakes v. Turquhand, L.R., 2 HL 325; Peel's Case, L.R., 2 Ch. 674; Lawrence's Case, L.R. 2 Ch. 412; Scholey v. Central Railway Co. of Venezuela, L.R., 9 Eq. 266, note. (3) Even if there were misrepresentations by the promoters, that gave the shareholder no right to have his name removed from the register. Karberg's Case [1892], 3 Ch. 1, was not an authority for the propositions which the petitioner deduced from it. It was explained in Lindley on Companies, 6th ed., i., pp. 95, 96; Buckley, Companies Acts, 8th ed., p. 118; Lord Lurgan's Case [1902], 1 Ch. 707. If it was an authority for the petitioner's propositions, then it was not good law in Scotland. (4) The form of this application was incompetent. A petition under section 35 of the Companies Act 1862 (quoted supra) was only competent when the question raised was whether the person whose name was on the register had or had not agreed to take shares. Here that was not disputed—the question was whether he had a right to rescind his contract. That required an action of reduction.

At advising—