Legal recourse for a misstated prospectus
A prospectus is a document that gives details of a company's activities and aims to persuade the public to invest in their company. Since the public invests in a company relying on prospectus's content, it is the company's obligation to ensure that it is authentic and transparent. However, in reality, there have been several instances where corporations have made false statements in the hope of attracting shareholders.
Before diving into the legal recourse in this regard, it is essential to understand what constitutes misstatement in a prospectus. Section 143 of the Company Act 1994 provides a comprehensive vision in this respect. By interpreting this section, three notions can be discovered which come within the scope of misrepresentation. Those notions are false statements, statements that provide the incorrect impression, and concealment of essential information.
Let us now revert to the basic concern of whether the aggrieved party has recourse to the law if they are deceived by a misrepresented prospectus or not. The answer is yes, for aggrieved subscriber or defrauded shareholder, legal redress is possible. Basically, two remedies are available for aggrieved shareholder. The rescinding of the contract is the first remedy accessible to the aggrieved party. If he discovers any untrue statements regarding material facts in the prospectus, he has the right to cancel the transaction. To rescind the contract, nevertheless, the aggrieved party needs to prove that the company provided a fraudulent prospectus. The second remedy that is available to the aggrieved party is claiming the damages. Section 145 of the Company Act clarifies this by saying that if the misstatement is discovered, the aggrieved party may seek compensation or damages from the directors, promoters, or any other person who has permitted their name to be mentioned during the prospectus's issuance.
However, some defences have been granted to the directors under this provision, which safeguards them from burden of paying compensation. Section 145 in clause 2 stipulates that a director is not obligated to pay compensation if he can demonstrate that the prospectus was produced without his knowledge or that he had reason to think the assertion was genuine. This clause specifies four more instances which operate as defence to the director. Those instances are as follows: first, withdrawing his/her consent to become a director before the prospectus was issued; second, becoming familiar with the idea of a misstatement and stepping away his/her assent after the prospectus was issued but before the allotment; third, the statement was a replica of an official paper made by an official person; and finally, the statement was a fair presentation produced by the expert and he/she withdrew his/her approval. The aggrieved party will not be able to obtain damages from the directors if the directors are successful in proving these circumstances.
Apart from that, making misstated statements are punishable under sections 146 and 147 of the Act. According to section 146, anybody who is authorised to produce a prospectus faces a two-year jail sentence or 5,000 taka fine or both, if they make any type of misstatement in the prospectus. Fraudulently encouraging individuals to invest money is punishable under section 147. For this, the penalty is either 5 years in prison or a fine of 15 thousand taka or both.
In view of the foregoing, it emerges that aggrieved investors will get legal recourse if they are defrauded by a deceptive prospectus. Despite the fact that legal redress is accessible, investors will need to exercise greater caution. They must examine the prospectus diligently before investing in the company since they usually act believing in the substance of the prospectus to invest money.