Liabilities arising from misrepresentation or non disclosure in a prospectus

The following are the remedies open to a person who had been induced to subscribe for
shares on the faith of a statement in a prospectus that is untre:-
1. Rescission for fraud or misrepresentation. A contract to take shares is avoidable
if it was induced by misrepresentation whether fraudulent or innocent. Hence, a
person who is induced to take shares on the basis of a material mis-statement in a
prospectus can get his contract rescinded before the company goes into
liuidation. His name would be removed from the register of the shareholders.
!ut he cannot both retain the shares and get damages against the company.
The remedy of rescission would be available only if the following conditions are
satisfied:-
a. The statement which induced the shareholder must be one of fact and not
merely an e"pression of opinion. A prospectus if based upon the report of
an e"pert and the report contains mis-statement# a shareholder may sue for
rescission if the directors have invited subscription for shares on the faith
of the statement in the report, unless they have clearly warned the public
that they do not vouch for the accuracy of the report.
b. The statement so relied must be untrue. !ut if, taking the whole prospectus
together, there is really a misrepresentation of fact# the contract may be set
aside, though each statement by itself is literally true.
c. The statement so relied upon must be material one# it should be of such
nature that it would influence the mind of a person.
d. The statement must have been actually relied upon by the shareholders in
applying for shares.
$$. Damaged for fraud. An action of deceit would also lie if the statement in
the prospectus is false, and if it is known to the persons issuing the prospectus
to be false or is made recklessly. This remedy is open even where the remedy
by way of rescission as against the company is lost either through delay or
negligence or even if the company goes into liuidation.
1
A director will not be liable in damages for statements in a prospectus if he
honestly believed them to be true even if there was no reasonable ground for
his belief.
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