be placed upon the list of contributories in their own right, and not in their representative capacity.9

§ 41. 1. All fraudulent practices, either of the shareholders, or directors, resorted to for the purpose of raising the price of shares in the market, where sales have been induced in faith of the truth of such representations, will be relieved against in a court of equity. As where the directors of a joint-stock company, in * order

"Fearnside & Deans Case, Law Rep., 1 Ch. 231.

1 Stainbank v. Fernley, 9 Simons, 556. And in a very recent case, the plaintiff, a director in a bank, who had been such from its organization, who usually attended the meetings, and was actually present and took part in the proceedings of the board of directors when the last dividend was declared, having purchased from the cashier of the institution twenty shares of the capital stock, brought an action to have such contract rescinded, and to recover back the money paid, on the ground of false representations and concealments by the cashier as to the value of the stock and the condition of the bank at the time of the purchase: Held, that the plaintiff was not estopped from setting up his actual ignorance of the condition of the bank at the time of the sale.

That although the purchaser was a director of the bank, having the means of knowledge, he was not in the particular transaction chargeable with notice of the condition of the bank.

That if he was actually ignorant of its condition, the fraudulent vendor would be equally responsible to him for the deceit as to any stranger to the institution.

That it was not a case in which the plaintiff was legally bound to know the truth or falsity of the vendor's representations.

Held, also, that the evidence in such action plainly showing that at the time of the alleged sale and transfer of the stock, on the 29th August, 1857, the bank was, by the application of all the ordinary tests, sound, solvent, and prosperous,

to sell their shares to advantage, represented in their reports, and by their agents, that the affairs of the company were in a very prosperous state, and declared large dividends, at a time when the affairs of the company were greatly embarrassed.

*

2. A person who had been induced, by these means, to purchase shares of one of the directors, filed a bill against that director, praying to be paid his purchase-money and offering to retransfer the shares; a demurrer for want of equity, and because all the other partners in the transaction ought to have been made parties, was overruled. But where a bill was filed against the public officer of a joint-stock bank, charging a similar fraud, through the fraudulent representations of the directors, in their reports, as to the prosperous state of the company's affairs, and that the plaintiff had thereby been induced to purchase five hundred shares in the bank, and praying that the sale might be declared void as between him and the company, and that they might be decreed to repay the purchase-money, it was held, that as the litigation was between one member of the partnership and the other members, the public

and the stock worth all that the defendant had represented it to be, the plaintiff could not be allowed to show the contrary by introducing in evidence what purported to be a certified copy of proceedings had in November, 1857, on the petition of certain stockholders for the re-establishment of the bank. Lefever v. Lefever, 30 N. Y. 27.

In the very recent case of Smith v. The Reese River Silver M. Co., Law Rep. 2 Eq. 264; s. c. 2 Jur. N. S. 616 (April, 1866), where a person was induced to take shares in a company on the faith of a statement in the prospectus, as to the nature of the property contracted to be purchased, which statement the promoters had no ground for believing to be true, and which turned out to be untrue, Sir W. Page Wood, V. C., held, he was entitled to an injunction restraining the company from enforcing calls against him, notwithstanding the articles of association to which the prospectus referred would have informed the purchaser that the statement in the prospectus was not justified. The learned judge said: "He is not bound to call at the office for the mere purpose of ascertaining whether the representations are false or not. He was entitled to rely upon the representations made to him as being true to the knowledge of the directors."

But the party who claims to be injured by such fraudulent practices of directors and other agents of corporations must bring his action for relief at the earliest practicable opportunity after having learned the probable fact of such fraudulent practices. Clarke v. Dickson, 1 El. Bl. & El. 148, s. c. 5 Jur. N. S. 1029; Hop & Malt Company in re, Law Rep. 1 Eq. 483. One who purchases upon the facts stated in a prospectus must be held to have notice of facts stated in other documents expressly referred to unless there is special grounds for presuming the contrary. Ib.

officer was improperly made a party, as representing the company, and a demurrer was allowed.2

But in a late case before the Court of Chancery Appeal, it was decided that the directors of a railway company are in the position of trustees, and if the purchaser has not by his own conduct affected his rights, the company cannot, as against him, retain money acquired from a fraudulent sale of their property to him, through the false representations of their directors. But the court held that the plaintiff was not entitled to a decree against the directors, but was entitled to a decree against the company for his money and interest.3

And it seems to be settled, by the decision of the House of Lords, that in England and in Scotland, for any fraudulent act done by the directors, without the range of the powers of the company, whereby third persons suffer damage, they are personally liable to an action: but for all such acts within the power of the body of the shareholders to sanction, although the directors might not have been justified in what they were doing, there could be no right of action.4

And a director cannot screen himself from responsibility for any imposition which is brought upon others by means of the * circulation of a prospectus through his instrumentality, upon the ground that the document is capable of a construction by which it may be regarded as true. It is for the jury to say whether that is the natural sense. And it is not necessary that there should have been any direct communication between the plaintiff and defendant in order to subject the defendant to an action for false representation. If the defendant authorized the circulation of the prospectus before the public, containing false representations, by

2 Seddon v. Connell, 10 Simons, 58. It was further held, in this case (10 Simons, 79) that it is not competent for the party in such case to file a bill against the company and some of the directors, praying, that if he is not entitled to relief against the company, he may have it against the directors, and that such a bill is demurrable, on the ground that the prayer for relief should be absolute, for relief against the directors, in order to maintain the bill against them. But it is not necessary to make all the parties to a fraud defendants in a bill for relief.

3

Conybeare v. New Brunswick & Canada Railw. & Land Company, 1 De G. F. & J. 578; s. c. 6 Jur. N. S. 518.

Davidson v. Tulloch, 3 McQu. Ho. Lds. 783; s. c. 6 Jur. N. S. 543.

5 Clarke v. Dickson, 6 C. B. N. S. 453; s. c. 5 Jur. N. S. 1029. See also Nicol ex parte, in re Royal British Bank, 3 De G. F. & J. 387 ; s. c. 5 Jur. N. S. 205.

which the plaintiff was misled, it is the same as if the defendant had made such representations to him personally.5 And the fact that other inducements were also held out to plaintiff by other parties by which he was partially influenced, will not excuse the defendant.5

But the representation of an officer of the company as to the effect of deeds, which it forms no part of his duty to expound, will not release the party executing the deed from his liability."

3. The declaring of dividends by the directors, where none have been earned, if done by them for the purpose of fictitiously enhancing the price of shares, for their own benefit, is regarded as such a fraud as will relieve a party who has purchased shares in faith of such facts, at prices greatly beyond their value, and the transfer of the shares will be set aside.

4. In this case, Lords Campbell and Brougham concurred in saying: "Dividends are supposed to be paid out of profits only, and where directors order a dividend to be paid, when no such profits have been made, without expressly saying so, a gross fraud is practised, and the directors are not only civilly liable to those whom they have deceived and injured, but are guilty of conspiracy, for which they are liable to be prosecuted and punished."

*

5. Where both parties labored under the same delusion in regard to the value of stock, relief could not be granted, of course, on the ground of fraud in the sale, and a court of equity will not ordinarily interfere to set aside a sale, on the ground of mutual misapprehension as to the state and condition of the subject-matter, unless in extreme cases, as where that is sold as valuable which is wholly valueless, or does not exist.8 To constitute a fraud in such cases, it is requisite, ordinarily, that the parties should have been upon unequal footing in regard to their means of access to the knowledge of the true state of the company's funds and property, and that the party gaining the advantage in the bargain should, in some way, participate in giving currency to the false estimate of its condition, beyond the mere fact of repeatAthenæum Life Ins. Co. in re Sheffield, 5 Jur. N. S. 216; s. c. Johnson, Eng. Ch. 451.

7 Burnes v. Pennell, 2 House of Lords' Cases, 497.

* 1 Story's Eq. Jur. § 142; Hitchcock v. Giddings, 4 Price, 135, 141; 2 Kent, Comm. 469.

ing the report of the directors, where both parties have equal means of judging of its correctness.

6. It seems to be regarded as settled law, that in case of such false representations to raise the price of stocks, and damage thereby sustained, the suffering party may maintain an action of tort against the party making the false representation, although it were not made directly to such injured party, there being no necessity for any privity between the parties to support an action of tort, for a false representation. But, where the action is ex contractu or quasi ex contractu, some privity is indispensable to the maintenance of the action.9

7. It has recently been decided that a bona fide sale and transfer of property of one company to another, in consideration of shares in the one company being transferred to the other, is not such a return of capital as would be in contravention of the English statute, which is in confirmation of the general rule of law, prohibiting the conversion by corporations of capital into income, and thus virtually reducing the stock of the company below the requirements of the charter; and on the other hand giving * the shares of the company a false value in the market by reason of fictitious dividends.10

9 Gerhard v. Bates, 2 El. & Bl. 476; s. c. 20 Eng. L. & Eq. 129. In this case the defendant was one of the promoters and managing directors of a joint-stock company, and, in offering the shares for sale, had guaranteed a certain semiannual dividend to all who should purchase, but without any other communication with the plaintiff personally, but the plaintiff purchased upon the faith of such general guaranty or representation; and it was held that he could not maintain an action upon the guaranty, but that he might recover in tort, as for a fraudulent representation. Post, §§ 175, 187.

10 Cardiff C. & C. Co. in re Norton, 11 W. Rep. 1007. See also McDougall v. Jersey Imp. H. Co., 2 H. & M. 528; s. c. 10 Jur. N. S. 1043. This point of one company taking shares in another company is discussed, to some extent, in the Court of Chancery Appeal in the recent case of Great Western Railw. Co. v. Metropolitan Co., 9 Jur. N. S. 562. There can be no doubt, as a general rule, this will not be allowed, unless by the express sanction of legislative permission. And it was here considered, that such an express sanction will not be construed to extend to additional shares, issued by the same company, and expressly required to be allotted to the existing shareholders. Vice-Chancellor Wood, when the case was before him, cited the case of Solomons v. Lang, 12 Beav. 377, as establishing the right of the defendant in the suit, to raise the question of the plaintiff's right to take these additional shares, beyond the amount which the special legislative permission authorized. The case of the Attorney-General v. The Great