A
prospectus is defined by Section 2 of the Act as “any notice, circular
advertisement or other invitation, offering to the public for
subscription or purchase any shares or debentures of a company”.
The definition
suggests that a prospectus embrace any document, notice, circular
advertisement. What matters is not the name given to the document by its
authors but its effect on the person reading it. If the person reading
the document would conclude that he was being ‘invited’ to apply for
any shares or debentures of a company, the document would legally be a
prospectus even if it is not headed so. The offer must be made to the
public.
Case Law: Nash vs. Lynde (1929)
The
directors of a company prepared a document which was in the form of a
prospectus and was in marked “strictly private and confidential”. The
document did not contain all the material facts required by the Acct to
be disclosed. It was circulated among the directors and their friends.
The plaintiff had purchased shares on the footing of these documents
which he obtained from a friend of a director.
It was held
that the document received by him was not a prospectus as private
communication between business friends does not constitute a
prospectus. The “public” according to Section 57(1) is not restricted
to the public at large but includes any section of the public whether
selected as members or debenture holders or as clients of the person
issuing the prospectus or in any other manner.
Case Law: Re. South of England Natural Gas and Petroleum Co. Ltd (1911)
3000
copies of a prospectus headed “for private circulation only” were
distributed to shareholders of gas companies. It was not publicly
advertised.
It was held that the prospectus was an offer of shares “to the public” even though it was marked “for private circulation only”.
Contents of the Prospectus
A prospectus under Kenya law
must contain the necessary information to enable the public to decide
whether or not to subscribe for its shares or debentures. The matters
to be included in the prospectus are:-
(i) Directors and auditors of the Company
- Names,
occupations, postal address, directors’ qualification shares,
directors’ remuneration and directors interest in the company’s
promotion.
(ii) Formation Expenses
- Benefits paid to promoters underwriting commission etc.
(iii) Investor Information
- The minimum subscription
- The amount payable on application
- The time of opening of the subscription lists
- Voting and dividend rights attached to different classes of shares.
(iv) Company’s Business and Assets
- Venders of property of the company
- Amount paid for property bought or goodwill
- Length of time business has been carried on.
The prospectus also contains reports such as:-
(i)
Auditor’s report showing profit and loss in each of the last five
years, rates of dividend paid during the last five years, assets and
liabilities at the date of last accounts and details relating to
subsidiary companies.
(ii)
Where the proceeds of the issue are to be used to buy a business, a
report by named accountants on profit and loss of the business for each
of the last five years.
(iii)
Where the proceeds of the issue are to be used to buy shares in any
other body corporate, a report by named accountants on profit or loss of
that body corporate for each of the last five years.
The aim of
the statutory provision is to enable the prospective investor to asses
the risk of the intended investment, each matter is stated for a
specific purpose, for example the names, occupations and postal address
of directors enables the prospective investors to know who the directors
of the company are or will be. It is very important to know who the
“drivers” will be since save arrival of the vehicle exclusively depends
on the competence of drivers who are called “directors”. The disclosure
of their occupation and qualification would facilitate the
ascertainment of their suitability for appointment as directors by
indicating whether they have relevant business experience.
Statement in Lieu of Prospectus
Section
50(1) provides that a company having a share capital which does not
issue a prospectus on or with reference to its formation or which has
issued such a prospectus but does not proceed to allot any of its shares
or debentures shall not allot any of the said shares or debentures
unless, at least three days before the first allotment, there has been
delivered to the registrar for registration a statement in lieu of
prospectus.
Section 32(1)
provides that if a company, being a private company, alters its articles
in such a manner that they no longer include the provisions which under
Section 30, are required to be included in the articles of a company in
order to constitute it a private company, the company shall, on or
before the date of alteration, cease to be a private company and shall
within 14 days after the said date, deliver to the registrar for
registration a statement in lieu of prospectus in the form and
containing the particulars set out in Part I of Second Schedule and Part
II of that schedule, it must set out the reports specified therein.
Section 32(3)
provides that if default is made in complying with Subsection (1) above,
the company and every officer of the company who is in default shall be
liable to a fine of Sh. 1,000.
Subsection 4
further provides that if the statement in lieu of prospectus delivered
to
the
registrar contains an untrue statement, that is, misleading statement,
every person who authorized the delivery of the statement in lieu of
prospectus for registration, shall be guilty of an offence and liable to
imprisonment for a term not exceeding 2 years or to a fine not
exceeding Sh. 10,000 or both unless he proves that the untrue statement
was immaterial or that he had reasonable ground to believe and he did up
to the time of the delivery for registration of the statement in lieu
of prospectus.
Liability or mis-statement or omission in a Prospectus
Prospectus
constitutes the basis of the contract between the company and the person
who purchases shares or debentures. The persons who are behind the
company have full knowledge to the future prospects and the present
situation of the enterprise and the investing public has none. It is
but fair that the former should not only disclose all the matters within
their knowledge relating to the enterprise, but should also state them
correctly and accurately. Where an untrue statement occurs in a
prospectus, there may be:-
(a) civil liability
(b) criminal liability
(a) Civil Liabilities
A person who
has been induced to subscribe for the shares in a company on the
strength of mis-statement or omission in the prospectus may have a
remedy either against the company or against the directors.
Remedies against the Company
A person who has been induced to subscribe for shares may:-
(i) Rescind the contract
(ii) Claim damages
(i) Recession of the Contract:
Where
a person has purchased the shares of a company on the faith of a
prospectus which contained an untrue or misleading, but not necessarily
fraudulent statement, he can seek rescission of the contract.
The right to rescind the contract is available if he proves the following:-
(i) That the prospectus included an untrue or misleading statement or misrepresentation.
(ii)
That the untrue or misleading statement was in respect of a material
matter and was one of the inducements to apply for shares or debentures.
Case Law: R v. Kylsant (1932)
A
prospectus of a company said that the company had paid a dividend every
year between 1921 and 1927, years of depression, thus giving the
impression of a financially stable company. However, the company had in
each of those years incurred considerable losses on trading account and
was only able to pay a dividend out of reserves accumulated in previous
years. This fact was suppressed.
The court held that the prospectus was false in a material statement and conveyed a false impression.
(iii) That he has taken action promptly to rescind the contract.
The shareholder must start proceedings for rescission within a reasonable time and before the company goes into liquidation.
(ii) Claim Damages
Any person induced by fraud to take shares is entitled to sue the company for damages provided he has rescinded his contract in time. The company is under Kenya law liable in damages where the misrepresentation is an innocent one.
Remedies against the Directors
Any person who subscribed for any shares or debentures on the faith of the prospectus may sue for compensation under Section 45 of the Companies Act.
The directors would also be liable under the common law action of deceit for making a statement which is false and which is known to them to be false or is made by them recklessly or without care, whether it is true or false. But they would not be liable for damages if they honestly believed them to be true.
(b) Criminal Liabilities
In
order to enforce compliance with its provisions which relate to
prospectus, the Companies Act provides the following penalties for non
compliance:-
(a) Section
40(4) provides that if application form is not accompanied by a
prospectus which contains the prescribed matters and reports, any person
responsible is liable to a fine not exceeding Sh. 10,000.
(b) Section
42(2) provides that if a prospectus includes a statement purporting to
be made by an expert but does not include the expert’s written consent
to the issue, the company and every person who is knowingly a party to
the issue shall be liable to a fine not exceeding Sh. 10,000.
(c) Section
43(5) imposes a fine not exceeding Sh. 100 per day for issuing a
prospectus without delivering a signed copy thereon to the registrar for
registration.