Standard of liability

General standard

What is the standard for determining whether a board member or executive may be held liable to shareholders in connection with an M&A transaction?

The Companies Act 2006 (CA 2006) requires that a director, in carrying out and complying with his or her duties, exercises the care, skill and diligence of a reasonably diligent person. The director must satisfy an objective test: that he or she has acted with the general knowledge, skill and experience that can reasonably be expected of a person carrying out the functions carried out by that director. He or she must also satisfy a subjective test: that he or she has acted with the general knowledge, skill and experience that he or she actually has.

The duties imposed on directors allow, prima facie, for the scrutiny of directors' conduct by the courts. For example, an allegation that a director has acted in breach of his or her duty to promote the success of the company for the benefit of its shareholders as a whole ostensibly requires the courts to examine the reasoning of the director and the factors that he or she took into account in managing the company, taking decisions and acting in the way he or she did.

The intention behind the legislation is to impose a high standard on directors. However, a court is likely to be slow to second-guess a director's good faith discretionary decision.

The recent case of Sharp v Blank [2019] (Sharp v Blank [2019] EWHC 3078 (Ch)) (concerning the Lloyds v HBOS litigation) indicates the courts' approach to assessing the decisions of directors. Part of the claim alleged that Lloyds Banking Group’s (LBG) directors had breached a duty of care owed directly to the shareholders by recommending the takeover of HBOS to LBG's shareholders. The judge held that the question to be answered was:

Could a reasonably competent chairman or executive director of a large bank reasonably reach the view (on the available material and within the timeframe required) that the Acquisition was beneficial to Lloyds and its shareholders? Or would any such director so placed of necessity have reached the view that the Acquisition was not beneficial? (Sharp v Blank [2019] EWHC 3078 (Ch))

In Sharp, it was held that a reasonably competent chairman or director could reasonably have reached the view that the takeover of HBOS was beneficial to LBG's shareholders, and so the shareholders' claim failed.

Type of transaction

Does the standard vary depending on the type of transaction at issue?


Type of consideration

Does the standard vary depending on the type of consideration being paid to the seller’s shareholders?


Potential conflicts of interest

Does the standard vary if one or more directors or officers have potential conflicts of interest in connection with an M&A transaction?

The standard of care owed by a director does not vary depending on whether he or she has a potential conflict of interest in connection with an M&A transaction.

However, a director has a duty to notify the other directors of any interest he or she may have in a proposed transaction or arrangement with the company, and (except to the extent authorised by shareholders or, where permitted, the other directors) to avoid an actual or potential conflict as regards matters other than a proposed transaction where, in either case, the situation can reasonably be regarded as likely to give rise to a conflict of interest. In addition, the company's articles of association will often contain provisions regulating the situation and, in most cases where a director has any material conflict in relation to a proposed transaction, he or she will either, as a matter of law or best practice, recuse him or herself from any board decisions regarding the matter.

Controlling shareholders

Does the standard vary if a controlling shareholder is a party to the transaction or is receiving consideration in connection with the transaction that is not shared rateably with all shareholders?

The applicable standard of care does not vary.

Where the company is involved in the transaction, its directors will have a duty to ensure that the transaction is in the interest of the company as a whole and not just that of the controlling shareholder.