Company law revision question and answer

Tama Quin Ltd., a company manufacturing pharmaceutical drugs is about to make a new issue of 400,000 shares of Sh. 40 each at the current market price of Sh. 50 each.

The prospectus states: “The company has just patented the manufacture of a drug that cures malaria.”

Jacob White, the managing director of the company is interviewed on television and he states that the news to be released shortly will demonstrate a great break-through in the control of malaria. He also stated that the company was the only one with modern technical knowledge of this great invention. As a result there is over-subscription of the shares.

Allan, who has not read the prospectus, applied for shares and is allotted 2000 at the price of Sh. 50 each.

Betty, who read the prospectus, is not allotted any shares but buys 3000 shares at the stock exchange at Sh. 60 per share.

Charles, who read the report of the interview in the national newspaper, bought 5000 shares at the stock exchange at Sh. 55 per share.

In the meantime, the patents are found not to be original and are revoked. The shares fall in value to Sh. 10 per sh

David who owned 10,000 shares in the company long before the new issue is disappointed as he believes the publicity has caused the shares to fall in price (value).

Advise Allan, Betty, Charles and David.

ANSWER

This problem is based on civil liability in respect of prospectuses.
• In this case, the prospectus of Tamaquin Ltd contained a false statement in that the patent had not been registered. However, for the company or its officers to be held liable it must be proven that the statement:
o Was false in material particular
o Was more than mere sales talk or puff
o Was one of fact not opinion
o Was in fact made the company or its officers
o Was intended to be acted upon the investors e.g. Allan or Betty.
o Influenced the party‟s decision to apply for the shares.
• It is important to note that the issue was over-subscribed which means that the prospectus became exhausted and persons who bought the shares at the stock exchange cannot purport to hold the company liable on the basis of the prospectus.
• My advise to Allan is that he has no action against the company or its officers in that he did not rely on the prospectus to purchase the shares.
• Betty has no action against the company or its officers as she bought the shares at the stock exchange which time the prospectus had become exhausted. My advise is

consistent with the decision in Peek V. Guvney where it was held that the plaintiff could not base his action on the prospectus as it had been exhausted.
• Charles cannot sue the company or its officer in that he did not read the prospectus and the report of the interview is not a prospectus. My advise is based on the decision in Peek V. Guvney.
• David has no actionable claim against the company or its officers in that the company is not liable to investors when the value of its shares fall due to speculators. In this case it is evident that the drop in the value of the company‟s shares is not based on any of the fundamentals.

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