Discuss the consequences of misleading statement in the prospectus of a company and illustrate the remedies available for the aggrieved person?

Introduction:

Prospectus is mirror of the company. One can estimate the value of the company by seeing the prospectus of a company. So, before the issuing of a share or investing in the company everyone should look the prospectus of the company. Read and understand the prospectus of a company is primary and basic responsibility of everyone who authorize the issue of the company. Every one should not only read the prospectus but also judge the prospectus.[1]

There has lots of incidents that company give the misstatement of the company to attract the customes or the shareholders.[2] Actually people invest their money on the basis of information provided in the prospectus of the company.They have to judge that the information what is provided the company is acceptable or not. They have to look after against the wrong or false statement in the prospectus.earlei I wrote there has lots of incident that company provide misleading statement in their prospectus and investor invest the basis of the prospectus. Like in Bangladesh in 1996 Shinepukur Holdings issued their share in the Dhaka stock exchange. They give attractive information in their prospectus. They wrote they had huge capital. The investors attractrd by the prospectus and invested huge amount on the share but after somedat the company was vanished from the stock exchange. Actually they didn’t have any capital. They just provided false information in their prospectus. Prospectus must, therefore build full and truthful announcement of resources facts without cover up or skip over any related information. The real nature of the companys project or venture must be disclosed and frank, that every investor  can make the clear judgement of the company.The statements which do not qualify to the particulars mentioned in the prospectus or any information is intentionally and willfully concealed by the directors of the company would be construed as mis-statement

What is Misrepresentation

A false statement of fact or law is called misrepresentation.[3] that is relied on by the other party in entering a contract. Suppose, Rahim took a wedding dress with beads and sequins to the cleaners. They gave her a contract to sign and she asked the assistant what it was. The assistant said it was to stop risk to the beads. In fact the contract exempted all liability. The dress was stained. But the exclusion was ineffective because of the assistant’s misrepresentation.

For example, a second hand car dealer claiming “this is the fastest car ever”, or a washing detergent company advertising that their product will clean your clothes “whiter than white” do not count. This is because a reasonable person would be unlikely to take such claims seriously.

Criteria of Misleading information

Misrepresentation is one of several vitiating factors which can affect the validity of a contract. A misrepresentation occurs when one party makes a false statement with the intention of inducing another party to contract. For an action to be successful, some criteria must be met in order to prove a misrepresentation. These include:

  • A false statement of fact has been made,
  • The statement was directed at the suing party and
  • The statement had acted to induce the suing party to contract.

Misleaidng Representation include

(1) untrue statement

(2) statements which produce wrong impression

(3) statements which are mis-leading

(4) concealment of material facts, and

(5) omission of facts.

 The prospectus must take all statements with absolute accuracy and not state the facts which are not strictly correct. A statement may be not only because of what it states but also because of what it states but also because of what it conceals or omits

1) The statements is misleading in the form and context in which it is included and
2) The omission from a prospectus of any matter is calculated to mislead.

 Misleading Prospects:

 The prospectus which contains mis-statements or misleading statements, is called Misleading Prospectus.

 Liability:

The liability may be civil or criminal.

Who are liable for mis-statement in the prospectus?

1) Every person who is a director of the company at the time of the issue of the prospectus;

2) Every person who has authorized himself to be named and is named in the prospectus either as director or as having agreed to become a director either immediately or after an interval of time;

3) Every person who is a promoter of the company and

4) Every other person who has authorized the issue of the prospectus.

 Civil liability

 Compensation[4]; The above persons shall be liable to pay compensation to every person who subscribes for any shares or debentures for any loss or damage sustained by him by reason of any untrue statement included therein.

 In McConnel v Wright it has been held that the measure of the damages is the loss suffered by reason of the untrue statements, omissions etc the difference between the value which the shares would have had and the true value of the shares at the time of a allotment.

Damages for deceit or fraud: Any person induced to invest in the company by fraudulent statement in a prospectus can sue the company and person responsible for damages. The shares should be first surrendered to the company before the company is sued for damages.

Fraud occurs when any statements is made without belief in the truth or carelessly. A statement made with knowledge that it is false will constitute fraud or deceit. In the leading case on the point it has been held that if the person making the statement honestly believes it to be true he is not guilty of fraud even if the statement is not true. The facts of this case were:

The Tramway company had power by special Act to make tramways and to use steam power with the consent of the Board of Trade. The plans of the company wee approved. The directors of the company honestly believed that since the plans were approved, permission to use steam power from Board of Trade was only a formality and would be granted Prospectus was issued wherein the directors stated that the consent to use steam power was obtained by the company. Subsequently the consent was refused and the company had to be wound up. On the action by plaintiffs for deceit it was held that the directors were not liable for fraud as they honestly believed that the consent would be obtained though the statement was untrue.

The prohibition on misleading conduct is set out in section 18(1) of the Australian Consumer Law:

“A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

Section 4(2)(a) of the CCA defines conduct as:

“…doing or refusing to do any act, including the making of, or the giving effect to a provision of, a contract or arrangement, the arriving at, or the giving effect to a provision of, and understanding or the requiring of the giving of, or the giving of, a covenant;”

Whether conduct is misleading or deceptive is a question of fact determined by considering the conduct as a whole.

To be misleading or deceptive the conduct must contain a misrepresentation capable of inducing the relevant class into error. Generally, misrepresentations will be false statements of fact. However, statements that are factually true may also be misrepresentations if they are capable of inducing consumers into error.

The relevant test is whether the conduct misleads or deceives, or is likely to mislead or deceive, the relevant class. Accordingly, it does not matter if the conduct intends to mislead or deceive, or is negligent or reckless as to whether they mislead or deceive. However, in some circumstances it may be necessary to show that the person doing the conduct did intend to mislead or deceive, for example when the person is merely passing on information.

Silence may be misleading in limited circumstances. When there is a duty between parties at common law to disclose facts, then a failure to do so may be misleading conduct. Furthermore, even if there is no common law duty to disclose, a person’s silence, when considered in light of all the circumstances (other statements they have made, or other actions they have taken) may be misleading conduct. Generally, ‘mere silence’ is not misleading conduct unless there is a reasonable expectation that the person should disclose facts.

When the relevant conduct is a representation about the future (as opposed to a representation about present facts), then according to section 4 of the ACL, that conduct will be taken to be misleading if the person making it cannot show they have reasonable grounds. In these situations, representations about the future are presumed to be misleading, and the burden of proof is on the person making the representation to produce evidence to show that they had reasonable grounds.

Although section 18 is usually thought of in terms of consumer protection, it is not limited to these circumstances. Section 18 applies to representations made in commercial transactions, for example during negotiations between franchisers or for the sale of a business.

Remedies for misleading or deceptive conduct

We have seen that the Trade Practices Act provides a variety of remedies for breach of s 52, including an injunction remedy which is appropriate for advertising cases but not for pre-contract negotiations. What we need to do now is examine the remedy provisions a little more closely.

Causation

To establish a successful s 52 claim, it is necessary to show that the misleading conduct caused loss. But this simple statement disguises two levels of causation.

· First, it is necessary to show that the conduct was actually misleading. This means that something was said which was incorrect and that this led the other party into error. The wrong information (or whatever) must have been relied on – there must be a causal connection between the wrong information and the recipient’s erroneous belief. This level of causation is dealt with in the case book on p 1117 – see in particular the judgment of Parker J in Australian Protective Electronics.

· Secondly, the error must be causative of loss. The case book deals with this level of causation on p 1116. This is clear in s 82 (the damages section) and it is clear in s 87 (the ancillary remedies section) where it provides “…a party to the proceedings has suffered, or is likely to suffer, loss or damage…” So, even if the misled party is seeking an order for rescission, he or she must first be able to show that he or she has suffered, or is likely to suffer, loss or damage.

Remedies against the company

If there is a misrepresentation of a material information in a prospectus and if it has induced anyone to purchase shares, he can

(i)         rescind the contract;

(ii)        claim damages from the company.

The contract to accept allotment of shares or debentures can be rescinded if the following conditions are satisfied:

 Loss of right of rescission

The option to rescind a contract to take shares is lost in the following circum­stances:

  By affirmation

If a shareholder with full knowledge of misrepresentation upholds the contract, he cannot afterwards rescind it. He will lose his right to rescind the contract where he:

(a)        attempts to sell his shares;

(b)        executes a transfer;

(c)        pays call money;

(d)        receives dividend;

(e)        attends and votes at general meeting of the company.

 Damages for deceit

Deceit is a tort. It means fraud. Nothing less than fraud must be proved. Any person induced by a fraudulent statement in a prospectus to subscribe for shares is entitled to sue the company for damages. He must prove the same matters in claiming damages for deceit as in claiming rescission of the contract.

Remedies

Fines

There are no pecuniary penalties available for a breach of section 18. However, for a breach of many of the related provisions in the Australian Consumer Law, the Australian Competition and Consumer Commission (ACCC) can seek pecuniary penalties of up to $1.1 million from corporations and $220,000 from individuals

Damages

A victim of misleading or deceptive conduct is only entitled to damages (i.e., monetary compensation) if they have suffered loss or damage as a result of the conduct. The measure of loss or damage here is generally the same as it is in contract law or tort law. According to section 82(1B) of the CCA, which was introduced in 2004, if a victim contributed to the loss or damage that they suffered, then the court can reduce the amount of damages that they are awarded, in a similar fashion to the reduction of damages in a negligence claim if the plaintiff is guilty ofcontributory negligence. However, if the person engaging in the conduct intended to mislead or deceive, or was fraudulent in their conduct, then the courts cannot reduce the damages.

There is a limitation period of six years on actions for damages, according to section 82(2).

Section 87 orders

Power of Court to prohibit payment or transfer of moneys or other property

(1) Where:

(a) proceedings have been commenced against a person for an offence against a provision of Part VC; or

(b) an application has been made under section 80 for an injunction against a person in relation to a contravention of a provision of Part IVA, V or VC; or

(c) an action has been commenced under subsection 82(1) against a person in relation to a contravention of a provision of Part V; or

(d) an application for an order under subsection 87(1A) or (1B) has been or may be made against a person in relation to a contravention of a provision of Part IVA, V or VC;

the Court may, on the application of the Minister or the Commission, make an order or orders mentioned in subsection (2) if the Court is satisfied that:

(e) it is necessary or desirable to do so for the purpose of preserving money or other property held by or on behalf of a person referred to in paragraph (a), (b), (c) or (d), as the case may be (in this section referred to as the relevant person), where the relevant person is liable or may become liable under this Act to pay moneys by way of a fine, damages, compensation, refund or otherwise or to transfer, sell or refund other property; and

(f) it will not unduly prejudice the rights and interests of any other person.

The measure of loss or damage here may be different than the measure for damages under section 82. Some cases have suggested that since section 87 is not just about recovering monetary loss, then the measure should be broader. However, other cases consider that the same measure of loss or damage should be used.

There is also a limitation period of six years on actions for section 87 orders, according to section 87(1CA).

 Conclusion

 Misleading promotion has become a community concern at present as this can undermine the public’s trust in health professionals and may encourage inappropriate prescribing. Ironically, misleading drug promotion has appeared to be a vicious circle between the drug companies and health professionals that does more harm than good worldwide.4 Various studies reported variable rates of misleading claims in the printed promotional materials. In an analytical study, 18% misleading claims were found in Pakistan.5 Another study from Germany showed 94% unsubstantiated information in the advertising material and marketing brochures sent out by drug companies to GPs.6 A previous study in an Asian country showed 21% controversial, 32% exaggerated and 26% false claims of the total misleading claims identified.5 Again, a US-based study found 15% exaggerated claims in the brochures distributed to the family doctors by drug companies.7 Similarly, our study also reported significant rate of misleading claims of different types.

Owing to non-probabilistic sample selection, the study results cannot be generalized, but it may give important information about the rate and patterns of misleading drug promotion in Bangladesh. The occurrence of high level of misleading claims in the company, promotional brochures may adversely affect prescribing behaviour of the health professionals in the country. Further, large-scale studies are required to gauge actual prevalence of misleading drug promotion and its broad impact on public health.

 References

  1. http://law.anu.edu.au/colin/Layout/Misrep_h.htm. (n.d.).
  2.   HYPERLINK “http://en.wikipedia.org/wiki/PS_Atiyah” \o “PS Atiyah”  PS Atiyah , Introduction to the Law of Contract (4th edn Clarendon, Oxford 1994)
  3. H Beale, Bishop and Furmston, Cases and Materials on Contract Law (OUP 2008)
  4. A Burrows, Cases and Materials on Contract Law (2nd edn Hart, Oxford 2009) ch 11

[1] A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.

[2] Definition of Shareholder on Investopedia – Any person, company, or other institution that owns at least one share in a company.
[3]  Misrepresentation Act 1967 s1(a): “Where a person has entered into a contract after a misrepresentation has been made to him, and the misrepresentation has become a term of the contract, then, if otherwise he would be entitled to rescind the contract without allegingfraud, he shall be so entitled, subject to butt the provisions of this Act”

[4]something given or received as an equivalent for services,debt, loss, injury, suffering, lack, etc.; indemnity: Theinsurance company paid him $2000 as compensation for theloss of his car.