Company Law

Gluckstein v. Barnes

[1900] AC 240

Facts

A syndicate, including Gluckstein, acquired the Olympia exhibition property.
The syndicate first purchased charges and securities over the property at discounted prices.
It later acquired the property itself for approximately £140,000.
The promoters formed a company and sold Olympia to it for approximately £180,000.
The £40,000 difference between the purchase and resale prices was disclosed in the prospectus.
However, the promoters had made an additional profit of approximately £20,000 by purchasing charges at a discount and later receiving their full value.
This additional profit was not clearly disclosed.
The prospectus contained only a vague reference to “interim investments.”
Gluckstein and the other promoters became the first directors of the company.
They argued that the persons handling the company’s formation knew of the transactions and that disclosure had therefore been made.
Members of the public subscribed for shares in reliance on the prospectus.
The company later entered liquidation.
The liquidator sought recovery of the undisclosed £20,000 profit from the promoters.
Gluckstein argued that:
the company knew the relevant facts through its first directors;
the £20,000 arose from a separate transaction; and
the disclosed difference between the property prices was the only profit requiring disclosure.

Whether promoters must disclose every profit connected with acquiring and reselling property to the company.
Whether disclosure by promoters to themselves as the company’s directors is legally sufficient.
Whether the company could recover the undisclosed profit even though another profit had been openly stated.

Promoters occupy a fiduciary position towards the company and prospective shareholders.
They must not retain a secret profit obtained through the promotion.
A promoter may lawfully earn a profit only where:
its nature and amount are fully disclosed; and
the transaction is approved by an independent board or informed shareholders.
Partial disclosure is insufficient where it creates a misleading impression that all relevant profits have been revealed.
Disclosure to directors who are themselves members of the promoting syndicate is not disclosure to the company.
A promoter cannot satisfy the duty by communicating information from one personal capacity to another.

The disclosed £40,000 arose from the straightforward difference between the price paid for Olympia and the price charged to the company.
The additional £20,000 came from buying securities over the property below their face value and later realising them in full.
Although the profits arose through technically different steps, both formed part of the promoters’ overall acquisition and resale scheme.
A reasonable investor reading the prospectus would believe that the disclosed £40,000 represented the promoters’ full gain.
The vague expression “interim investments” did not reveal:
that the promoters had purchased existing charges at a discount;
that those charges were redeemed at full value; or
the amount of the resulting profit.
The omission was therefore materially misleading.
The promoters could not rely on the knowledge of the first directors because those directors were themselves interested participants.
An interested promoter cannot provide effective consent on behalf of the company to the promoter’s own profit.
The relevant persons needing disclosure were:
an independent board; or
the body of shareholders whose money financed the transaction.
Since neither received full disclosure, the profit remained secret.
The promoters’ fiduciary duty required them to account for it even though the company had entered liquidation.

The House of Lords held that the promoters were liable to repay the undisclosed £20,000.
Disclosure of one profit did not excuse concealment of another.
Knowledge among members of the promoting syndicate was not knowledge or approval by an independent company.
The case confirms that promoters must disclose the complete financial benefit obtained from transactions connected with the promotion.
Use this case for: disclosure must be full, intelligible and made to independent corporate decision-makers or shareholders; promoters cannot disclose secret profits merely to themselves.