Page 262 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

Notes
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Caution It is important to remember that the allottee cannot both retain the shares and get
damages from the company. In actual practice, suit for damages against the company is
rarely filed. The usual claim against the company is for rescission of the contract of
allotment. Damages are generally claimed from the directors, promoters and other persons
who had authorised the issue of the prospectus personally, or from experts who had
signed reports referred to in the prospectus.

Remedies against directors or promoters. A shareholder who had been induced to take shares
may claim from the directors or promoters or from any one else responsible for untrue statement
occurring in the prospectus: (i) damages for fraudulent misrepresentation; (ii) compensation
under s.62; (iii) damages for non-compliance with the requirements of s.56 regarding contents of
the prospectus.
1. Damages for fraudulent misrepresentation. An allottee of shares may bring an action for
deceit, i.e., fraudulent misrepresentation. There must be an intention to defraud and that
is to be proved by him. The directors, etc., will not be liable for the tort of deceit if they
honestly believed the statements to be true. The facts in Derry v. Peek were as follows: The
directors of a Tramway Company issued a prospectus stating that they had the right to run
tram-cars with steam power instead of with horses as before. In fact, the Act incorporating
the company provided that such power might be used with the sanction of the Board of
Trade. But the Board of Trade refused to give permission and the company had to be
wound up. P, a shareholder sued the directors for damages for fraud. The House of Lords
held that the directors were not liable in fraud because they honestly believed what they
said in the prospectus to be true.
2. Compensation for untrue statement (s.62). Another remedy available to an allottee of
shares for misstatements in a prospectus is to file a suit for compensation under s.62. A
claim can be made, whether the statements are fraudulent or innocent. Section 65 provides
that a statement is deemed to be untrue if it is misleading in the form and context in which
it is issued. It is not necessary for the allottee to prove any fraud or knowledge on the part
of the directors that the statement was untrue.
If a director pays damages under s.62, he is entitled to recover contributions from his co-
directors, if they, too, are guilty of misstatement, misrepresentation, untrue statement;
and on the death of the co-directors, from their estates.
3. Defences available to avoid civil liability [s.62(2)]. Section 62 names persons who are
liable to pay compensation but certain defences are available to them. In a claim for
compensation, the director may prove in defence that:
(i) he withdrew his consent to act as director before the issue of the prospectus and it
was issued without his authority or consent; or
(ii) the issue was made without his knowledge or consent and on becoming aware of
the issue he gave reasonable public notice of that fact; or
(iii) he withdrew his consent after the issue of the prospectus but before allotment and
public notice was given; or
(iv) he had reasonable ground to believe that the statements were true and believed
them to be true; or

(v) the statement was correct and fair summary or copy of an expert’s report; or
(vi) the statement was made by an official document.

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