In the Lloyds shareholder litigation (Sharp & Others v Blank & Others  EWHC 3220 (Ch)), the High Court recently struck out various claims brought by the shareholders concerning the defendant directors' alleged breach of fiduciary duties. The decision helpfully reaffirms that, whilst directors owe duties to provide shareholders with sufficient information about a transaction, in the absence of a special relationship between the parties, the directors will not owe wider fiduciary duties to those shareholders.
The decision arises from the group action brought by Lloyds TSB shareholders against the company and its directors relating to Lloyds' acquisition of Halifax Bank of Scotland ("HBOS") and the recapitalisation of the Lloyds Banking Group at the peak of the financial crisis in late 2008 and early 2009.
The shareholders alleged:
- that the directors had superior knowledge about the transaction and they had relied on the directors to provide them with information;
- the information provided by the directors was misleading because it contained material misstatements and omissions, and the true financial position of HBOS was concealed;
- the transaction was not in the shareholders' best interests; and
- accordingly the directors' recommendation that shareholders approve the HBOS acquisition was in breach of fiduciary and other duties owed by the directors to the shareholders.
The defendants accepted that they were subject to a fiduciary duty to provide shareholders with sufficient information to enable them to make an informed decision as to how to vote at the shareholders' meeting and a duty to take reasonable care when recommending shareholders vote for resolutions. However, they rejected the claimants' argument that they owed shareholders any broader fiduciary duties beyond this and they applied for summary judgment to strike out these allegations.
Mr Justice Nugee, hearing the summary judgment application, held that it was established law that directors owe fiduciary duties to the company, but not to the company's shareholders unless there is a special relationship between the director and shareholders. This "special relationship" may arise where the facts demonstrate a personal relationship or a particular dealing or transaction between the director and shareholder such as may occur in small or family-run businesses.
The judge found that the claimant shareholders had failed in this case to show the existence of any "special relationship". The directors' superior knowledge and the advice and information that they had given to the shareholders about the acquisition was insufficient to give rise to the broad fiduciary duties alleged. Striking out the fiduciary duty claims, Mr Justice Nugee commented:
"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."
Directors and their D&O insurers will welcome the decision. If the decision had gone against the directors then they may have be unduly burdened, placed in a position of possible conflict between their duties to the company and duties to shareholders, and faced additional exposure to various shareholder claims.
Directors should take comfort from the decision which reaffirms established equitable principles. Shareholders will only succeed in arguing that directors owed them fiduciary duties where they can bring their claim within the very narrow confines of a "special relationship", and the Lloyds litigation shows that this will be a difficult argument to run.