The prospective shareholders are entitled to all true
disclosures in the prospectus. The persons issuing the prospectus are bound to
state everything accurately and not omit material facts.
What is an untrue
statement? According to s.65 (1): (a) A statement included in a prospectus
shall be deemed to be untrue, if the statement is misleading in the form and
context in which it is included; and (b) where the omission from a prospectus of
any matter is calculated to mislead, the prospectus shall be deemed in respect
of such omission, to be a prospectus in which an untrue statement is included.
The expression 'included' with reference to a prospectus means, included in the
prospectus itself or contained in any report or memorandum appearing on the
face thereof or by reference incorporated therein or issued therewiih.
Example. A company issued a prospectus.
All the statements included therein were literally true. One of the statements
disclosed the rates of dividends paid for
a number of years. But dividends had
been paid not out of trading profits but
out of realized capital profits. This material fact was not disclosed. Held, that
the prospectus was false in material particulars and Lord Kylsant, the managing directoi and chairman, who knew that
it was false, was held guilty of fraud
[Rex v. kylsant, (1932) 1 K.B.442).
A person who has applied for shares in the company and
who has been allotted shares has certain remedies against the company and the
persons issuing the prospectus. But a buyer of shares in the open market or a
subscriber to the memorandum has no such right. If, however, a prospectus is
issued with the object of including persons to buy shares in the open market, any person who
buys shares even in the open market on the basis of the statements made in it
has a right of action if the statements are untrue or there is material
omission from the prospectus.A false statement or omission of material facts gives rise to civil as well as criminal liability.
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