Company Law

Peek v. Gurney

(1873) LR 6 HL 377

Facts

The directors and promoters of Overend, Gurney & Co. converted an existing financial business into a limited company.
A prospectus was issued inviting members of the public to subscribe for shares.
The prospectus presented the business as financially sound but failed to disclose serious liabilities and the unstable condition of the undertaking.
The prospectus successfully attracted initial subscribers, and the shares were allotted.
Peek did not apply for shares under the prospectus.
He later purchased shares from an existing shareholder on the stock exchange.
The company subsequently failed, and Peek suffered financial loss.
He sued the directors, alleging that he had purchased the shares in reliance on the misleading prospectus.
The directors argued that the prospectus was issued only for the purpose of obtaining original subscriptions.
By the time Peek purchased his shares in the secondary market, that purpose had been completed.

Whether directors issuing a misleading prospectus owe a duty to persons who later purchase shares in the secondary market.
Whether Peek could recover despite not having subscribed directly under the prospectus.
Whether omission of important facts may make statements in a prospectus misleading.

A prospectus is a representation addressed primarily to persons whom the company invites to subscribe for its shares.
Persons who apply for and receive shares directly on the faith of the prospectus may sue for loss caused by fraudulent misrepresentation.
The maker of a representation is not liable to every person who may later read or rely upon it.
Liability depends on whether:
the representation was intended to reach that class of person;
it was intended to influence the particular transaction; and
the claimant acted upon it for that purpose.
A prospectus may be misleading through concealment where the omitted matter makes the statements actually made false or deceptive.

The House of Lords accepted that the prospectus contained serious and misleading omissions.
It had been designed to obtain capital for the company by inducing the public to apply for newly issued shares.
That purpose continued during the period of subscription and allotment.
Peek, however, did not enter into a transaction with the company.
He purchased already-issued shares from another shareholder after the original allotment process had ended.
The directors had not issued the prospectus specifically for the purpose of inducing later stock-market dealings.
The chain between their representation and Peek’s transaction was therefore legally insufficient.
The Court distinguished between:
a direct allottee who gives money to the company in response to its invitation; and
a subsequent purchaser who acquires shares from another investor.
Extending liability to every later buyer would make prospectus issuers indefinitely responsible to an uncertain class of persons in future market transactions.
Peek could have succeeded only if the prospectus had been shown to be a continuing representation deliberately intended to influence secondary-market purchasers.
No such continuing purpose was established.
The case did not approve the omissions in the prospectus; it rejected the claim because Peek was outside the class to whom the representation was legally directed.

The House of Lords dismissed Peek’s action.
The directors’ prospectus was addressed to original subscribers, not to persons subsequently buying shares on the market.
Since Peek had not acquired his shares directly from the company in response to the prospectus, he could not recover from the directors.
The decision established an important limit on common-law prospectus liability based on the intended recipient and purpose of the representation.
Use this case for: a misleading prospectus ordinarily gives a common-law claim to direct allottees, not automatically to later secondary-market purchasers.