Committee of Investigation.

• Charles L. W. Fitz-Gerald, Esq.
• Henry Grèwing, Esq.
• John Taylor, Esq.
• Arthur H. Baker, Esq.
• George B. Howden, Esq.
• R. A. Germaine, Esq.

In presenting to you the further Report on your Company's affairs, your Committee wish to state that they have as far as possible avoided personalities, and simply state the facts as they occurred.

After the Committee of Investigation had presented to you their Report on the position of the affairs of your Company, you expressed a wish that certain points should be more minutely examined and reported on.

The Allotment of Shares was one of the points, and you will see that the opinion of our Counsel gives hopes of your being able to attack Sir Julius Vogel on the subject of the allotment of shares to himself.

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We have thoroughly examined all the facts bearing on the compromised contract for the 4,000 Telephones, but in this case, as you will see, our Counsel does not hold out great hopes that any proceedings could be taken against your late Directors.

We have considered to what extent the assets of the Company necessitate a reduction of capital, and add a recommendation to that effect.

Certain alterations of the Articles of Association appear to us desirable, and they are laid before you.

We also submit an arrangement by which the control of your Company over the affiliated Companies, and the harmonious working of these different concerns, will be assured.

We recommend a Reduction of Directors' Fees in all the four Companies.

The letters which passed between your present and past Directors, referring to the latter's claims for fees, deserve your attention.

We finally add some remarks about the Staff of your Company, the legal expenses, and the settlement with the River Plate Telephone Company.

The adoption and passing of the Report and Accounts for the year ending 31st March, 1884, appears to us to be now desirable, and we think that a portion of the balance (£10,290 17s. 9d.), to the credit of the revenue account, might be used to write off certain items, such as depreciation of plant, bad debts, &c.

£7,050 of the above £10,290 17s. 9d. should not be dealt with as profit, because Mr. Grower was paid a far larger sum than that for the contract of the 4,000 Telephones.

This amount should go to the reduction of goodwill, &c.

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Allotment of Shares.

Colonel Gouraud having attempted to cast a doubt on the accuracy of the Committee's Report respecting the allotment of shares in April, 1881, we think the shareholders should be made acquainted with the following facts.

Sir Julius Vogel had allotted to himself 3,330 shares, and for the balance of the 15,000 shares (alluded to in the former report), he handed the Secretary a list of nominees; this list was unfortunately given back to Sir Julius after the shares had been placed in the nominees' names, so no record is left of the parties receiving the shares.

Colonel Gouraud had allotted to himself 3,250 shares, and to his nominees 10,200 shares; of these there is a record, as Colonel Gouraud has placed his name against them in red ink in the allotment book. 1,000 shares were also allotted to Mr. Powers—Colonel Gouraud's nephew—total 14,450.

Mr. Carnegy had allotted to himself 500 shares, and to one nominee 2,000 shares.

In respect to the allotment of shares to Sir Julius Vogel, the following facts have been laid before Counsel, and the opinion thereon is given below.

Sir Julius Vogel sent in a written application for 1,000 shares. In the Allotment Register this 1,000 has been altered into 5,000, and 3,330 shares allotted to him.

The original letter of application was not altered, nor was any further written application made by Sir Julius Vogel.

On December 2nd, 1881, the Director's declared a dividend, and sent a circular round to the Shareholders, in which the following appears :—

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I am to inform you that the Directors believe they will be in a position to continue to pay regularly quarterly dividends, of the same amount, which is equal to 10 per cent, per annum.

There were two further dividends declared; one on the 24th April, 1882, with the accounts of the Company, and one on the 16th June, 1882; since then no dividend.

Sir Julius Vogel sold the greater part of his shares between December, 1881, and May, 1882.

On that date marks of business done occur as high as 21/10.

On the 15th May, the price was 2¼ to 2¾, with marks as high as 3.

From this date the shares receded.

We contend that Sir Julius Vogel made improper use of his position as a Director, to obtain a larger number of shares than he applied for, and we have taken Counsel's opinion to see if there is a case against him for doing so.

Counsel's Opinion.

The principle of law applicable to this case is clear. The difficulty is in applying it to the facts. The principle is that an agent, who in the course of his agency, and in the matter of his agency, acquires a profit, must account for it to his principal, unless his principal knew of and assented to his acquiring the profit.

In the present case the agency of the Director in the matter of the allotment of shares was clearly not concluded until the allotment was made. This being so, the way the case strikes me is this—As a consequence of the issue of the prospectus the Company and its Directors either were not or were as between the Company and the applicants bound to allot the total number of shares offered, if they received a page 5 sufficient number of applications from responsible persons. If they were not so bound, then to the extent to which the Director rejected applications, he was bound to give the Company any benefit he might derive from the rejection. If, on the other hand, they were so bound, then to the extent to which the Director substitutes his own name for that of an outside applicant as an allottee, he is using his agency with exactly the same result as if he bought those shares or the inchoate right to those shares from the applicant at par and subsequently sold the shares at a premium.

The difficulty is in drawing the line, for there is no doubt that the Director is to some extent entitled to allot shares to himself. A principle may I think be found in this (taking this particular case) that, as regards the 1,000 for which Sir Julius applied, he stood at risk and stood towards the Company in a position in which the Company had rights against him, for if the Company allotted to him he was bound; but as regards the excess he never stood at risk, but acquired the shares, so to speak, despite the Company, and at a time when by reason of the large number of applications the shares had gone to a premium. As matter of logical result, perhaps one ought to say that the Director ought not to receive upon his application more than his proper rateable proportion, having regard to the total number of applications from responsible persons; but I think this is too fine.

To the extent of the 1,000 shares no objection can, I think, be taken, but I am of opinion that as to the excess Sir Julius is liable.

Your Committee are of opinion that this case might be taken as a test case, and, if the shareholders approve, proceedings will then be taken against Sir Julius Vogel.

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If the result of such action be successful, we could then consider the advisability of taking similar action against some of the other Directors.