Liability to shareholders in M&A - Lloyds/HBOS shareholder class action

Shareholder claims against Lloyds Bank and its directors in connection with its acquisition of HBOS were dismissed by the High Court in November 2019. The case (Sharp v Blank [2019] EWHC 3078 (Ch)) involved a number of legal issues for companies, in particular around directors’ recommendations to the shareholders and the standards of disclosure required in shareholder circulars.

The case arose from the Lloyds/HBOS merger, which was negotiated at the height of the financial crisis in 2008. It was primarily concerned with whether the recommendation by the Lloyds directors that shareholders vote in favour of the merger was negligent and whether the information in the circular was sufficient.

Key points of interest for boards are:

• Recommendation– The court held that a reasonably competent chair or executive director of a large bank could reasonably have reached the view at that time that the acquisition was beneficial to Lloyds’ shareholders. In order to demonstrate negligence, claimants must show that no reasonably competent director could have made the recommendation.
• Disclosure standards – Directors must provide shareholders with a fair, candid and reasonable account of the circumstances in a shareholder circular to enable shareholders to make an informed decision on how to vote. This will include both the positives and the negatives of the proposed transaction but need not necessarily emphasise the weaknesses. A process for considering whether something needs to be disclosed, including the receipt of advice, will be important in the assessment of whether any defect on such a circular was negligent.
• Professional advice – If directors have received advice from professional and experienced advisers, this will be an indicator that the board has not behaved negligently. A board which did not seriously consider the advice of an investment banker on a significant takeover would almost certainly be negligent.