must bring his case within one or other of the following heads :

(1) That the representations were made by the directors or other the general agents of the Company entitled to act and acting on its behalf-as, for example, by a prospectus issued by the authority or sanction of the directors of a Company inviting subscriptions for shares.

(2) That the representations were made by a special agent of the Company while acting within the scope of his authority -as, for example, by an agent specially authorised to obtain on behalf of the Company subscriptions for shares. This head, of course, includes the case of a person constituted agent by the subsequent adoption of his acts.

(3) That the Company can be held affected before the contract is complete with the knowledge that it is induced by misrepresentations-as, for example, when the directors on allotting shares know in fact that the application for them had been induced by misrepresentations even though made without any authority.

(4) That the contract was made on the basis of certain representations, whether the particulars of those representations were known to the Company or not, and it turns out that some of those representations were material and untrue—as, for example, if the directors of a Company knew when allotting that an application for shares was based on the statements contained in a prospectus even though that prospectus was issued without authority, or even before the Company was formed, and even if its contents were not known to the directors.1

ACTION OF DAMAGES.-This remedy is not competent against the Company, since the shareholder being still a member of the incorporation it is inconsistent with his position. The right to claim damages continues even after the Company has gone into liquidation. The persons against whom the action. requires to be directed, and the material facts which a share1 Lynde v. Anglo-Italian Hemp Spinning Co., 1896, 1 Ch. 178.

holder must prove to recover damages, are now mainly regulated by the Directors Liability Act of 1890,1 which extended the personal responsibility of persons issuing prospectuses.

Before the Act, the law as laid down in a case decided in the House of Lords 2 was that a director was not liable for an untrue statement if when he made it he honestly believed it to be true; that for a negligent representation as distinguished from a fraudulent representation there was no liability, and that there must be the mens rea to ground an action for deceit. It was further necessary to prove that the person sued made the

statement himself. But the Act of 1890 has extended this. Sec. 3 first of all enlarges the class of persons liable for a misrepresentation in a prospectus. It is not the person who made it who is alone liable, but every person who was a director at the time of issuing the prospectus, and every promoter of the Company, and every person who authorised the issue of the prospectus, is now liable to pay compensation for any loss occasioned by "any untrue statement." To escape liability under sec. 3 the person who makes or is party to a statement must show he had "reasonable ground" for believing, and did in fact believe, that the statement was true. What, then, is "reasonable ground"? Honest belief will not suffice it must be shown that the belief was not only bonâ fide, but based on reasonable grounds. If the statement is made carelessly though under an honest belief in its truth, the liability attaches.3

UNDERWRITING AGREEMENTS. Should there be any risk of the shares not being sufficiently subscribed for by the public so as to entitle the directors to proceed to allotment, recourse is had to the underwriting of a certain number of the shares. The commission agreed to be paid therefor is a legitimate charge against the Company. It was long thought that such a procedure was illegal, but the Courts confirmed the practice,

1 For which see Appendix.

2 Derry v. Peek, 14 App. Cases, 337.

3 Greenwood v. Leather Shod Wheel Co., 1899, 1 Ch. 421. + Act 1900, sec. 4 (1).

and it is now expressly sanctioned by the Companies Act, 1900. To entitle the directors to charge the payment of the commission against the Company, the payment of the commission and the amount or rate per cent. thereof must be authorised by the Articles of Association and disclosed in the prospectus.1 Unless this is done no Company can apply any of its shares or capital money either directly or indirectly in payment of any commission, discount, or allowance to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares of the Company.2 This does not, however, prevent a vendor paying to the underwriter any sum he pleases, so long as the Company is not charged with the payment thereof.

Form of Underwriting Agreement. The following is a fair example of an underwriting agreement, which may be made. either directly with the Company or with the promoters, viz. :— "I agree for the consideration hereinafter stated, at any time within three months from the date hereof if and as called upon by you, to subscribe or find responsible subscribers for any number of shares of £ of this Company you may require not exceeding in accordance with the terms of the prospectus dated . . . and to pay or cause to be paid the instalments upon the said shares in accordance with the terms of the said prospectus. In consideration whereof you are to pay me a commission of . . . per cent. in respect of each of the said shares. If upon the publication of the prospectus the shares offered to the public are partially subscribed for by the public, my liability is to be proportionally reduced so that I shall only be bound to subscribe or find subscribers rateably with the other persons or firms who shall have underwritten the shares or any portion of the shares of the Company. If the whole of the shares so offered are subscribed for by the public I shall be under no liability in respect thereof, but in any event I shall be entitled to receive the whole amount of the said commission upon the said shares."

1 Act 1890, sec. 8 (1).

2 Ibid. sec. 8 (2).

The foregoing letter is sufficiently stamped with a duty of sixpence.

Whatever the arrangement is it should be stated in plain and just language, as before an underwriter can be held responsible the conditions specified to in the letter must be implemented. An agreement can be embodied in the letter empowering the person to whom it is addressed to apply for shares in the underwriter's name should he fail to do so when

called upon.

Like all other contracts, the offer of an underwriter must be accepted, and the acceptance communicated to the offerer.

1 In re Harvey's Oyster Co. Ltd., 1894, 2 Ch. 474. Ex parte Audain, 42 Ch. D. 1. Paul Boyer Ltd. v. Edwards, 1900, 17 T. L. R. 16.

CHAPTER IV

SHARES IN COMPANIES AND THE PAYMENT THEREOF

WHAT IS A SHARE IN A COMPANY.- “A share in a Company," says M. R. Lindley, p. 449, "signifies a definite portion of its capital a definite portion of the joint estate after it has been turned into money and applied as far as may be necessary in payment of the joint debts. But it includes a right to receive dividends, and ordinarily it confers a right to vote."

APPLICATIONS FOR SHARES: HOW MADE.-Applications for shares are usually, although not invariably, made upon printed forms issued along with the prospectus. A letter applying for shares, or even a verbal application, is sufficient. Where shares are applied for by one person on behalf of another, the directors should be satisfied that the applicant has authority to act in the manner he proposes.

ALLOTMENT OF SHARES. Important alterations have been made on the law with regard to the allotment of shares by the Companies Act of 1900,1 to which reference is made. The Act specifies the amount that must be subscribed before the directors can go to allotment, the amount payable on application, the repayment of such application money in the event of the requisite subscriptions not being obtained, and enacts that any condition requiring or binding any applicant for shares to waive compliance with any requirement of sec. 4 is void. Further, when an allotment is made, the Act provides 1 For which see Appendix.