Directors' duties owed to company not shareholders when seeking shareholder approval for transaction

In a recent decision in the Lloyds shareholder litigation, the High Court has struck out a number of aspects of the claims against the defendant directors based on alleged fiduciary duties to shareholders: Sharp & Others v Blank & Others [2015] EWHC 3220 (Ch). Herbert Smith Freehills is acting for Lloyds and the director defendants.

The decision helpfully confirms that, in general, directors owe fiduciary duties to the company rather than directly to shareholders when providing information to shareholders about a transaction. It recognises that broader fiduciary duties can arise in exceptional circumstances where, on the facts of a particular case, there is a "special relationship" between the director and the shareholders. However, that special relationship must be something over and above the usual relationship that any director of a company has with its shareholders. It is not enough that the director, as a director, has greater knowledge of the company's affairs or that the directors' actions have the potential to affect the shareholders; as the court commented, these factors will almost always be present.

The judgment underlines the difficulty of establishing a direct fiduciary duty to shareholders in the context of a large, listed company with large numbers of shareholders. As the decision recognises, it is no accident that the cases in which such a duty has been held to exist mostly concern small, closely held companies where there is often a family or other personal relationship between the parties. As the court commented, the present case is a long way removed from that paradigm case.  

That does not however mean that the directors of large, listed companies do not owe any duties to shareholders in providing information about a transaction. As the defendants accepted in the present case, directors do owe a duty to provide shareholders with sufficient information to enable them to make an informed decision as to how to vote at a shareholder meeting, as well as a duty to take reasonable care in making certain statements or recommendations.

Background

The decision arises from shareholder litigation brought in connection with Lloyds' acquisition of Halifax Bank of Scotland (HBOS) and the connected recapitalisation of the enlarged group at the height of the financial crisis. The acquisition and recapitalisation required the approval of Lloyds' shareholders.

The claimants, a group of individual and institutional shareholders in Lloyds, are bringing proceedings against five former directors of Lloyds and Lloyds itself. They allege that the directors breached fiduciary and other duties owed directly to shareholders when advising them that the acquisition and recapitalisation were in their best interests, and in procuring shareholders’ approval of the transactions on the basis of misleading information and the concealment of the true financial position of HBOS.

Specifically they allege that:

1. the circular which Lloyds sent to its shareholders ahead of the general meeting to approve the acquisition contained material misstatements and omissions which led to it being misleading; and
2. the directors' recommendation to shareholders that they vote in favour of the resolutions was in breach of duty given what they knew about HBOS's financial position at the time.

The claimant shareholders say that, as a result of (i) and (ii), the directors were in breach of various tortious and fiduciary duties which they owed to the claimants. 

In this application, the defendants applied for summary judgment/strike out in respect of the claimants’ allegation that the directors owed shareholders a series of broad fiduciary duties.

The defendants pointed to the well-established principle that the directors of a company owe fiduciary duties to the company and, in general, do not owe such duties to individual shareholders. While accepting that there are exceptions to this general principle (for example if directors acquire shares from shareholders with knowledge, gained as a director, as to the true value of the acquired shares), the defendants argued that the claimants had not identified any special circumstances which gave rise to fiduciary duties being owed by the directors of Lloyds directly to the shareholders in the period leading up to the shareholder meeting.

The defendants did accept that they owed the shareholders a duty in equity to provide them with sufficient information to enable them to make an informed decision as to how to vote at the EGM as well as a duty to take reasonable care in the provision of the recommendation to vote in favour of the resolutions.

Decision

Mr Justice Nugee said it was established law that directors do not owe fiduciary duties to a company’s shareholders simply because they are directors, but only where, on the facts of the particular case, a special relationship exists between the director and the shareholders.  This may be some personal relationship or a particular dealing or transaction between them.

In this case, the claimants had failed to plead any special relationship between the directors and the shareholders of Lloyds of the sort required by the authorities. All the pleaded facts really amounted to was that the directors, who knew more about the company than the shareholders, were giving the shareholders advice and information to enable them to decide how to vote at the forthcoming EGM. That was the only relationship pleaded and it did not give rise to the broad fiduciary duties alleged. The judge said:

"The relationship is one of giving advice and information for a particular purpose: there is nothing here which as far as I can see comes close to a relationship where the directors have in any more extended sense undertaken to act for or on behalf of the shareholders in such a way as to give rise to a duty of loyalty, or have undertaken an obligation to put the interests of shareholders first, or are themselves entering into transactions with the shareholders, or where there are any of the other hallmarks of a fiduciary relationship."

Accordingly, the fiduciary duty claims were struck out.