In Sharp and Others v Blank and Others , one of a series of judgments in the litigation between shareholders of Lloyds TSB and its directors, the High Court struck out various parts of the shareholders’ particulars of claim and confirmed that directors normally owe fiduciary duties to the company rather than its shareholders.
The litigation arose in connection with the acquisition by Lloyds TSB plc of Halifax Bank of Scotland (HBOS) in January 2009 and the subsequent recapitalisation of the enlarged group. The acquisition and recapitalisation required the approval of Lloyds’ shareholders. Lloyds TSB plc changed its name to Lloyds Banking Group plc after the acquisition of HBOS.
The claimants, individual and institutional shareholders of Lloyds, brought proceedings against five former directors of Lloyds and Lloyds Banking Group plc (the Defendants).
The shareholder group alleges that the directors breached fiduciary and tortious duties owed directly to shareholders when advising them that the acquisition of HBOS and the subsequent government recapitalisation of the combined entity, Lloyds Banking Group, were in their best interests; and in procuring shareholders’ approval of the transactions at an EGM on the basis of misleading information and the concealment of the financial position of HBOS at the time. The shareholders allege that the directors did not inform shareholders that HBOS was reliant on emergency liquidity assistance from the Bank of England of up to £25.4 billion, financial support from the Federal Reserve of up to US$18 billion, and a loan from Lloyds of £10 billion.
The Defendants admitted that (based on previous case law) the directors owed a duty in equity to the shareholders to provide them with sufficient information so as to enable them to make an informed decision as to how to vote at the EGM in relation to Lloyds’ acquisition of HBOS and its participation in the recapitalisation. Nugee J described this duty as the “sufficient information duty”.
The Defendants argued, however, that directors of a company do not in general owe fiduciary duties to the company’s shareholders and that there was nothing in the facts that warranted the conclusion that the directors owed any equitable duty to the shareholders other than the sufficient information duty. Accordingly, the Defendants applied for the court to strike out all but two of the fiduciary duties pleaded, the two in question being consistent with the sufficient information duty.
So far as tortious duties were concerned, the Defendants admitted that the directors owed the shareholders a duty to take reasonable care and skill insofar as they made any written statements and/or provided any recommendations in certain documents.
Fiduciary duties owed by directors
Nugee J reviewed the general principles, which are well established:
- The directors of a company owe fiduciary duties to the company. This is unexceptionable and flows from the fact that the directors are agents of the company and stewards of its affairs.
- But in general, the directors do not, solely by virtue of their office of director, owe fiduciary duties to the shareholders, collectively or individually. If the directors owed fiduciary duties to the shareholders they would be exposed to a multiplicity of actions, each shareholder having his own personal claim.
A fiduciary, as explained by Millett LJ in his classic judgment in Bristol v West Building Society v Mothew , is someone who has undertaken to act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. But the relationship between directors and shareholders is not in general like that. A director is a fiduciary for his company; by agreeing to act as a director, he necessarily agrees to act in the interests of the company. Although the interests of the shareholders and the company are in general aligned, this does not mean that a director has agreed to act for the individual shareholders or has a direct relationship with them; his relationship is with the company. If a director owed a fiduciary duty to shareholders, this would frequently place him in a position where his duty to shareholders would be in conflict with his duty to the company. The idea of a potential conflict between the directors’ duty to the company and their supposed duty to shareholders can be found in Perceval v Wright , often regarded as the origin of this line of authority.
Need for special relationship if fiduciary duty is to be owed to shareholders
A director of a company can owe fiduciary duties to the company’s shareholders only where there is a “special relationship” between the director and the shareholders. This special relationship must be something over and above the usual relationship that any director of a company has with its shareholders. The sort of relationship that has given rise to a fiduciary duty owed to shareholders has been where there has been some personal relationship or particular dealing or transaction between them.
The cases where such a duty has been held to exist mostly concern companies which are small and closely held, where there is often a family or other personal relationship between the parties; a situation far removed from Lloyds TSB. In almost all cases, there is a particular transaction involved in which the directors are dealing with the shareholders. The imposition of a fiduciary duty in such circumstances reflects the fact that directors may be tempted to exploit that relationship to take unfair advantage of the shareholders.
Sufficient Information Duty
There was argument as to the nature of the ‘sufficient information duty’. Determining whether the sufficient information duty was a fiduciary duty or not and then establishing the content of the duty from that was, the judge said, the wrong approach. The correct approach is first to identify the content of a duty. As Millet LJ said in Mothew, [a person] ‘is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.’
The essence of the sufficient information duty is reasonableness or fairness in the circumstances, having regard to the interests of the company as a whole.
Nugee J concluded that there was nothing to suggest a duty to act in the interests of others with loyalty.
“The wellspring of this duty is not that the directors have agreed to put the interests of the shareholders first, but the much more simple one that if they are going to invite the shareholders to a meeting, common fairness requires that they explain what the purpose of the meeting is. That includes being clear and comprehensible and not misleading or tricky; but the reason for this is one of fairness, not of loyalty.”
Decision of the High Court
The Defendants applied for summary judgment and/or a strike out of various parts of the particulars of claim.
The shareholders allege that the directors owed the shareholders both fiduciary duties and a common law duty of care in tort.
However, the facts relied on did not, in the view of the court, establish any special relationship between the directors and shareholders. All that the pleaded facts really amounted to was that the directors, who know 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.
It was not disputed that the relationship between directors who invite shareholders to vote at an EGM and give them advice and information and the shareholders, does give rise to a duty, the sufficient information duty mentioned above, which it was accepted includes a duty not to mislead or conceal material information and a duty to give advice and information in clear and readily comprehensible terms.
There was nothing in the facts, however, which came close to a relationship where the directors have 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.
The fiduciary elements of the claim by the shareholder group were unsustainable and were, accordingly, largely struck out by the court, save to the extent that they were consistent with the sufficient information duty.
The particulars of claim included an allegation that the directors acted negligently in permitting the EGM to take place. This was not, however, supported by the tortious duties which the shareholder group identified in the particulars of claim as being owed to the shareholders of Lloyds. Accordingly, this element of the claim was also held to be unsustainable and was struck out by the court.