In a recent judgment in the Lloyds shareholder litigation, the court struck out various claims by shareholders that directors had breached their fiduciary duties. Although the directors owed duties to provide shareholders with sufficient information, they did not owe wider fiduciary duties in the absence of a special relationship between the parties.
The case concerns a group action brought by the shareholders of Lloyds TSB against the company and its directors in relation to Lloyds' acquisition of Halifax Bank of Scotland Plc ("HBOS") in 2008. This is one of the first times the court has made a group litigation order (or "GLO", which permits multiple claims against a defendant giving rise to common or related issues to be grouped into a single action) in the financial services arena, and is one of the most prominent GLOs making its way through the court. The shareholders alleged that the communications by the directors contained material misrepresentations and omissions, and that the directors' recommendation that the shareholders approve the HBOS transaction was in breach of their duty to the shareholders. This judgment is one of several relating to the defendants' application for summary judgment and/or strike out in relation to various parts of the Particulars of Claim. On the same day, the court refused the defendants' application for summary judgment on the allegation pleaded in the claim that the directors knew that HBOS had manipulated its LIBOR submissions.
The claimant shareholders argued that various tortious and fiduciary duties were owed by the defendant directors. Six fiduciary duties were alleged. The claimants argued that the duties arose because the directors had vastly superior knowledge to the shareholders, and the shareholders relied on the directors to provide them with information.
The defendants accepted that they owed a duty to provide the shareholders with sufficient information to enable them to make an informed decision as to how to vote at the shareholders meeting in relation to the acquisition. The judge labelled this the "sufficient information duty". On that basis, the defendants did not object to two of the duties pleaded as fiduciary duties, namely a duty not to mislead or conceal material information and a duty to advise and inform the shareholders in clear and readily comprehensible terms. The defendant directors objected to the other fiduciary duties pleaded.
In line with established principles, the court held that directors owe fiduciary duties to the company but do not, solely by virtue of their office of director, owe fiduciary duties to the company's shareholders. Although directors can owe fiduciary duties to the company's shareholders, those case are limited to where the facts demonstrate a special relationship between the directors and shareholders. Such a relationship gives rise to the shareholder placing trust and confidence in the directors, as is the hallmark of fiduciary duties. On the decided cases, the sort of relationship that has given rise to a fiduciary duty is where there has been some personal relationship or particular dealing or transaction between them, most prevalent in small, family run companies.
The judge recognised the policy considerations behind the general principle. If directors did owe fiduciary duties to shareholders, they would be liable to "harassing actions by minority shareholders, and exposed to a multiplicity of actions, each shareholder having his own personal claim". Moreover, if directors owed a general fiduciary duty to shareholders not only would this place an unfair burden on them, it would also place directors frequently in a position where their duty to the company conflicts with their duty to shareholders.
On the facts, the court found there was nothing which supported the existence of any greater duties than the sufficient information duty. The claimants failed to plead any special relationship between the directors and shareholders necessary to give rise to the broad fiduciary duties it alleged. They alleged that the directors knew more about the company than the shareholders, but this would almost always be the case. The fact that the shareholders relied on the directors to provide them with information to enable them to decide how to vote at the shareholders' meeting does not go over and above the usual relationship between directors and the company's shareholders, and gives rise only to the sufficient information duty, the existence of which had been conceded by the directors. The court therefore struck out the pleaded duties that did not form part of the sufficient information duty.
The decision is not new law but rather a reaffirmation of the established principles of fiduciary duties. The case serves as a reminder that fiduciary duty is a special kind of duty reserved for a particular set of circumstances and within narrow confines.
This is a welcome decision for directors and their D&O insurers alike. It remains difficult for shareholders to establish that they are owed fiduciary duties by directors of a large listed company. Only special circumstances will justify the imposition of fiduciary duties.