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Scottish Court of Session Decisions |
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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> City of Edin. Brewery Co. (Ltd) v. Durham (Gibson's Executor) [1869] ScotLR 6_578 (23 June 1869) URL: http://www.bailii.org/scot/cases/ScotCS/1869/06SLR0578.html Cite as: [1869] SLR 6_578, [1869] ScotLR 6_578 |
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Page: 578↓
The prospectus of a joint-stock company stated the capital at £50,000, with power to increase. The memorandum of association stated the capital at £50,000, with power to increase, reduce, or alter. Held that there was not such a difference between the prospectus and memorandum as to entitle a party who had applied for and obtained an allotment of shares shortly after the registration of the memorandum to have his name removed from the register of shareholders.
A party cannot escape liability as a shareholder merely because the prospectus exaggerated the position and prospects of the company.
In this action the pursuers sued for payment of the allotment money and the amount of the calls made in respect of certain shares held by the late Mr Gibson in the pursuers' company. In April 1866, before the pursuers' company was registered, Mr Gibson applied for fifty shares, and that number of shares was allotted to him in terms of his application; but no allotment money was paid. When the first call was made, Mr Gibson declined to pay it, or have anything to do with the shares, because so very few shares of the pursuers' company had been subscribed for. Shortly thereafter Mr Gibson died, and subsequent calls were made and intimated either to the defender, who was Mr Gibson's executor, or his agents; but as the defender refused to make payment of the calls, this action was brought. There after, a petition was presented by the defender to have the late Mr Gibson's name removed from the register of shareholders; and a proof was allowed. The Lord Ordinary, after considering the proof, decerned against the defender in terms of the conclusions of the summons. The defender reclaimed; and the petition at the defender's instance, and his reclaiming note, were discussed together.
Clark and Trayner, for the reclaimer, argued—The defender resists payment here, and prays to have Mr Gibson's name removed from the register, on the ground that Mr Gibson never applied for shares in the pursuers' company as now constituted. Mr Gibson applied for shares on the faith of the prospectus of the company, which set forth that a large capital was necessary for the successful working of such a company; that the capital of the proposed company was to be £50,000, “ with power to increase;” whereas the articles and memorandum of association stated the nominal capital of £50,000, with power to increase, reduce, or alter; that the reserved power to reduce the capital enabled the company to make their capital a sum so small that success was hopeless, and was such a condition as would have deterred Mr Gibson from applying for shares if he had been aware of it. The prospectus set forth no intention or reserved power to reduce the capital, and the insertion of such condition or power in the articles and memorandum of association was a material variation between them; and such material variation was sufficient to entitle Mr Gibson (and the defender as his executor) to decline the shares, and to have his name removed from the register. Stewart's case (Law Rep.,) 1 Ch. App. 674; Kisch's case (L. R.,) 2 Eng. and Ir. App. 99; Ship's case (L. R.) 3 Eng. and Ir. App. 343. The prospectus farther set forth that a great number of persons in the trade had become shareholders; and this statement induced Mr Gibson to apply for shares, and he relied on the truth of that statement in making his application. That statement was untrue, and was known to the pursuers to be so when they made it; out of fifty-one shareholders there were only ten connected with the “trade,” and this misrepresentation was of itself sufficient ground to warrant Mr Gibson in declining the shares, and to support his application for the removal of his name from the register. — Smith's case (L. R.) 2 Ch. App. 604, and 4 Eng. and Ir. App. 64. Kisch's case supra.
Solicitor-General ( Young) and Muneo for respondents—The alleged variation was quite immaterial. The variation in the cases quoted was of a very different kind from that founded on here. Generally speaking, in these cases the variation was one which extended by the articles and memorandum of association the object of the company, and the risk of the shareholder. Here there was nothing in the articles of association at variance with the prospectus. The reserved power to reduce the capital was no more a reason
Page: 579↓
for declining the shares in question than would the reduction of the capital by mercantile losses be a ground for resisting liability for the debts of the company. On the ground of misrepresentation, the counsel for the respondent were stopped by the Court. At advising—
By letter of the 8th May, the secretary of the company intimated to Mr Gibson the allotment of the 50 shares, and requested him to pay 10s. deposit on each share to the Union Bank before the 24th. This request not having been attended to, the secretary again wrote to Mr Gibson on the 30th June, requesting him to pay the deposit money. Mr Gibson then consulted his agents as to his liability to take the shares unless the whole or nearly the whole shares of the company were taken up; but he made no answer to the Secretary's letter.
On 12th March 1867 the secretary intimated to Mr Gibson a call of £2 per share, payable on Monday the 4th of April. This letter Mr Gibson handed to his agents, and thereafter died on the 18th April 1867. In the meantime, his agents had written to the secretary, stating that the reason for Mr Gibson not taking up the shares was, that he had been informed that the company was in abeyance. This was not the fact.
The only reason that Mr Gibson ever suggested during his lifetime for not paying the calls on his shares was, that the nominal capital of the company had not been taken up to nearly the full extent, the fact being, that out of 5000 shares of £50 each only 1600 shares had been subscribed for and allotted, and the names of the holders entered in the register. But this was obviously not a good reason for Mr Gibson refusing to perform his obligations as a partner; it might be a good reason for the partners who had actually subscribed for shares seriously considering their position and resolving to wind-up; but none of them was entitled to desert the others and be free from liability. All were entitled to equal consideration. It was not indeed urged in the argument that any available defence against this action for calls can be founded on this consideration.
But the defender maintains that Mr Gibson was and he is entitled to be relieved from all liability as a partner on two grounds:—(1) that the company, as constituted by the articles of association and memorandum of association, was essentially different from the company proposed by the prospectus; and (2) that Mr Gibson was induced to take the shares by fraudulent representations contained in the prospectus.
As regards the first of these defences, the defender contends that it was an essential element in the constitution of the company, as described in the prospectus, that the capital should be not less than £50,000, so large a capital being necessary to carry on such a business in competition with individual energy, and that the prospectus contemplated a possible increase of the capital abovo £50,000, but no diminution in any event—while the articles of association and the memorandum give power to the company either to increase or diminish the capital as may be found most expedient from time to time. This, it is said, makes the company eventually incorporated an essentially different company from that proposed in the prospectus.
I entertain no doubt that if the business of a company should be described in the prospectus as being of one distinctive character, and the business ultimately fixed by the memorandum of a clearly different character, the person who has been induced on the faith of the prospectus to take shares will, as soon as he discovers the variance, be entitled to have his name removed from the register, because the company of which he undertook to become a partner is not the company of which he has been made a partner by the insertion of his name in the register. And the same would hold if the extent of the business undertaken by the company as incorporated were greatly in excess of what was proposed by the prospectus, though of the same kind. But, in the absence of fraud, it may be greatly doubted whether the applicant for shares is not bound to make himself acquainted with the terms of the memorandum of association as soon as it is registered, and whether, if he allows his name to be put on the register after this, he is not bound by the terms of the memorandum.
In the present case, however, it is unnecessary to consider that question; for it is, I think, quite clear that the difference between the prospectus and the memorandum is not such as to entitle the defender to the relief he seeks. The power to diminish the capital of the company neither changes the character of the business nor exposes the partners to any indefinite extension of the business or of the risk; it is nothing else than a power (very prudently as it seems to me) reserved to the company to limit the extent of the capital if they find that they cannot advantageously employ the whole of it in the business of the company.
The defence founded on allegations of fraudulent representations in the prospectus stands in a different position. If this can be established, there can be no doubt that the defender is entitled to be liberated from his obligations as a partner, provided he can show that these representations induced him to take the shares, and that they were material to the risk he was thereby undertaking, and either that they were false, with the knowledge of the partners, or were made by the promoters in ignorance of whether they were false or true.
But here, again, the facts as proved are quite insufficient to let in the application of this rule. The false representation is said to be contained in this paragraph of the prospectus—“ The company affords peculiar advantages to parties in the trade becoming shareholders. Their having a direct interest in the company, by being purchasers and shareholders, need not be enlarged on. Already a large number of gentlemen in the trade and others have become shareholders. It is by no means expected that share holders will merely consist of parties in the trade, as the shares will prove highly remunerative as an investment to those desirous of obtaining a good return for capital.” The number of gentlemen in the trade ( ie., in the trade either of brewers or of the customers of brewers) seems to have been about 10 or 12 out of 65 at the time the register was made up. The gentlemen in the
Page: 580↓
In conclusion, I must observe that the two defences now relied on by Mr Gibson's executor are maintained by him in very unfavourable circumstances, seeing that they were never suggested by that gentleman himself during his life, though he was obviously very anxious to be quit of the shares and all liability connected with them.
But the defences are untenable on their own merits, and therefore I am for adhering to the Lord Ordinary's Interlocutor.
Mr Gibson, whom the defender represents, received the allotment of shares on his own application, and got due notice of the allotment, and did not refuse or repudiate it. He failed to pay the 10s. a share due on allotment, and when asked for payment he resisted, on grounds which were untenable, and are not now pressed, and he did not state any of the objections now urged. I think it is settled, even by the decisions to which we have been referred, that in the absence of fraud, and in the absence of any real variation of project or increase of risk, a person receiving allotments without objection cannot escape from liability on the first ground here stated.
The next question relates to the alleged falsehood of the prospectus. I am of opinion in regard to this plea also, that, as Mr Gibson had notice of the allotment for which he had applied, and as he did not repudiate nor state the objections now urged, the defender representing him cannot succeed in this action in respect of any mere inaccuracy in the prospectus, or of any mere exaggeration and high colouring in the sanguine and attractive painting of the anticipated advantages and the encouraging prospects of the company. Exaggeration is common, and is indeed to be expected in such a matter, and the language of a prospectus is always received with some qualification. Unless something of the character of fraud or wilful falsehood has been instructed, I do not think that the defender can succeed on this plea; and I see no ground whatever for imputing fraud or wilful falsehood.
If ten or eleven gentlemen in the trade had really become shareholders, and others not in the trade, to the number of thirty-five or forty, had become shareholders, I cannot think that the statement that “a number of gentlemen, &c.,” is either false or fraudulent. I am not satisfied that, on fair construction of the prospectus, it is otherwise than substantially true, and, at all events, I cannot say it is wilfully false. There is no evidence of fraud, and I cannot infer fraud from the statement itself. I shall only add that I concur in the opinion of the Lord Ordinary.
The objection taken to the inclusion of Mr Gibson amongst the shareholders is an alleged discrepancy between the prospectus of the company and the memorandum of association, which, with the articles of association to which it refers, constitutes the contract of copartnership.
I can entertain no doubt of the general principle that an essential discrepancy between the prospectus of the company—on the faith of which shares are taken—and the contract of copartnery by which the company is actually constituted, will entitle the party who purchases shares on the faith of the prospectus, to be entirely freed of the name and obligations of a partner. Nor will it be necessary to effect this result that a case of fraud should be established. The simple and sufficient ground is, that he contracted for one thing and is tendered another; he agreed to become partner in one description of company—he is sought to be made partner in another and entirely different.
But if no such discrepancy exist, it will not void his agreement to become a partner that the articles of association contain a number of regulations for the administration of the company, of which no' special and detailed notice is given in the prospectus. From the nature of the case,
Page: 581↓
In the present case, I think that no essential discrepancy exists between the prospectus and articles of association. The company was established for the purpose of brewing ale and beer in Edinburgh or its vicinity. So the prospectus bears. The articles of association do not transform it into a company for spinning cotton, or building vessels, or manufacturing wine, or brewing on any but the purest principles; nor do they change or extend the proposed locality of the company. The capital of the company is stated in the prospectus as £50,000, with power to increase so it is stated in the articles of association. The objection is, that in one of the regulations for the management of the company, power is reserved to the company to reduce, if it seem expedient, the aggregate amount of capital, and to divide it into shares of larger or lesser amount. This is just one of those not infrequent regulations for the administration of such a company, very important to have in potential exercise, with a view, were there no other, to its financial guidance and prosperity. I consider its insertion in the articles to be no breach of the good faith of the prospectus. The argument of the defender has proceeded throughout on the fallacy of supposing that, whilst the prospectus sets forth a certain amount of capital, the articles of association set forth a reduced amount as fixed and absolute. But nothing of the kind occurs. The capital is maintained the same. The reduction is potential only. All that is done is to reserve to the company the power to reduce the aggregate amount, and to make the nominal shares larger or lesser; a power to he exercised by the voice of the shareholders, including Mr Gibson himself. I conceive that nothing is to be found here warranting a repudiation of the name and liability of a shareholder.
On only one other point was the alleged misleading said to exist. The prospectus set forth; “already a large number of gentlemen in the trade and others have become shareholders.” It was contended that this was untrue in point of fact. The defender, as I conceive, has failed to prove that, in any sound sense, it was so.
I am of opinion that the Lord Ordinary's interlocutor should he affirmed.
Agents for Pursuer— Ferguson & Junner, W.S.
Agents for Defender— Murray & Hunt, W.S.
