Although Sections 39-48 regulates the contents and issue of prospectus, they do not define a prospectus
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 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 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.

(d)     Section 46(1) provides that where a prospectus includes any untrue statement, any person who authorized the issue of the prospectus 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.


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