176
COMPANY
the expenses cf earning them.” To pay dividends out of capital is not only ultra vires but illegal, as constituting a ca ta to v en s. recurn dividends, must takeBefore reasonable Dividends pi ldirectors shareholders. paycare to secure the preparation of proper balance-sheets and estimates, and must exercise their judgment as business men on the balance-sheets and estimates submitted to them. If they fail to do this, and pay dividends out of capital, they will not be held excused. The onus is on them to show that the dividends have been paid out of profits. The Court as a rule does not interfere with the discretion of directors in the matter of paying dividends, unless they are doing something ultra vires. The Companies Acts, and the regulations under them, regard the directors of a company as the persons in whom the^ management the contemplate company’s affairs is Meetings. ves But theyofalso the ultie(j> mate controlling power as residing in the shareholders. A controlling power of this kind can only assert itself through general meetings; and that it may have proper opportunities of doing so, every company is required to hold a general meeting, commonly called the statutory meeting, within—as now fixed by the Companies Act, 1900—three irtonths from the date at which it is entitled to commence business, and thenceforward one general meeting at least every year. This annual general meeting is usually called the ordinary general meeting. Other meetings are extraordinary general meetings. Notices convening a general meeting must inform the shareholders of the particular business to be transacted; otherwise any resolutions passed at the meeting will be invalidated. Voting is generally regulated by the articles. Sometimes a vote is given to a shareholder for every share held by him, but more often a scale is adopted; for instance, one vote is given for every share up to ten, with an additional vote for every five shares beyond the first ten shares up to one hundred, and an additional vote for every ten shares beyond the first hundred. In default of any regulations, every member has one vote only. Sometimes preference shareholders are given no vote at all. The machinery of company formation is generally set in motion by a person known as a promoter. This is a of business, not law. It means, to use Promoter. term Qj1jef.j us^ce Cockburn’s words, a person “ who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.” Whether what a person has done towards this end constitutes him a promoter or not, is a question of fact; but once an affirmative conclusion is reached, equity clothes such promoter with a fiduciary relation towards the company which he has been instrumental in creating. This doctrine is now well established, and its good sense is apparent when once the position of the promoter towards the company is understood. Promoters — to use Lord Cairns’s language in Erlanger v. New Sombrero Phosphate Co. (3 App. Cas. 1236)—“have in their hands the creation and moulding of the company. They have the power of defining how and when and in what shape and under what supervision it shall start into existence and begin to act as a trading corporation.” Such a control over the destinies of the company involves correlative obligations towards it, and one of these obligations is that the promoter must not take advantage of the company’s helplessness. A promoter may sell his property to the company, but 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 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, 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 included 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—provisionally, that is—for under the Companies Act, 1900, no contract is to bind a company unless it has obtained a certificate from the Begistrar of Joint Stock Companies that it has complied with certain formalities entitling it to commence business. 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 plan is obviously open to grave abuse. When a company intends to appeal to the public to subscribe its capital, the usual way of doing so is by issuing a prospectus. A prospectus is an invitation to the public to take shares on the faith of the ProsPectus' 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 Lord Herschell in Derry v. Peek, 14 App. Cas. 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 has now been repealed by the Companies Act, 1900, but only in favour of more stringent provisions. Linder the new Act not only is every prospectus to be signed and filed with the Begistrar of Joint Stock Companies before it can be issued, but the prospectus must set forth a series of specified 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 th 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, 1900. This Act was passed to meet the decision of the House of Lords in Peelc v. Derry (12 App. Cas. 33), that a director could not
