By way of legal background, the Companies Act 2006 introduced into English law a "code of conduct" for directors (source: the Government's explanatory notes to the Act). Since the word code connotes a systematic collection of laws on a given subject, its use here is bizarre. Directors are subject to innumerable duties, only seven of which are included in the "code" and then only in summary form. The misleading impression, that all one needs do to educate oneself is speed-read the code, is compounded when one reads that a director owes the codified duties to the company alone, and not to shareholders. Actually this is true, so far as it goes. It is when the inference is drawn that only a company can sue its directors for breach of duty or negligence that the scale of the fallacy is revealed. For under the right conditions of course shareholders can sue directors.

The observations below are limited to the topic of circulars to shareholders. (A circular is in this sense merely a letter, as opposed to a prospectus or periodic reports such as those accompanying the annual accounts.) Companies – or rather directors on behalf of their companies – communicate with shareholders all the time, with more or less formality. Given that circulars are, by definition, in writing and that frequently their raison d'être is to explain an accompanying notice of shareholders' meeting, they are often at the more formal end. In other words they tend to be over-long, repetitive, costly to produce and boring. Admittedly, these are not grounds of legal liability. Contrast circulars which amount to a breach of duty or contain negligent misstatements; which are deceitful or "tricky" (framed to mislead); which breach investor protection laws or are defamatory. Circulars may also sin against relevant regulation, most obviously the rules of the Financial Services Authority (FSA) and of the Panel on Takeovers and Mergers.

There follow a few examples from the cases of directors being found personally liable to shareholders. While some involve large listed companies, in others the small family company is more characteristic. Either way it is worth noting that the principle that a company is a separate entity is not serving to shield the directors from personal liability. Most relate to takeovers; the HBOS circular of course related both to its acquisition by Lloyds and a massive fund-raising and complex scheme of arrangement.

  • In the context of a takeover bid by Company A for Company B, the directors of Company B owe duties not just to Company B but also to Company B's shareholders. These include a duty to be honest and a duty not to mislead. (1971)
  • Where directors advise shareholders to support a resolution, they owe a duty to give such advice in good faith and not fraudulently. (1981)
  • If directors take it upon themselves to advise shareholders in connection with a sale of their shares they must not, whether deliberately or carelessly, mislead. Any advice should be factually accurate and in shareholders' interests (and not in the directors' own interests). (1986/1988)
  • Where directors are negotiating to purchase shares in their company from outside shareholders, they may come under a fiduciary (meaning "trustee-like") duty to shareholders to disclose material information. (1991) So much more the case if they are seeking to use their position and special inside knowledge to take unfair advantage.
  • Just like anyone else a director may in certain circumstances be sued for careless or negligent statements.
  • A director/shareholder in a company which operated a BMW dealership was ordered to compensate two other shareholders (his brothers) after making negligent misrepresentations to them in the context of a sale of the business. (1999/2000)

We ought not to forget the criminal law. In the context of inducing shareholders to sell (or retain) their shares, or to vote (or not vote) at a forthcoming shareholder meeting, it is a criminal offence recklessly to make "a statement, promise or forecast which is misleading, false or deceptive in a material particular". (Note that the prosecution need not prove dishonesty.) The statutory offence of fraud, new from 2007, sits alongside older Theft Act offences including that of publishing statements known to be misleading, false or deceptive with intent to deceive shareholders. On the regulatory side, inaccurate disclosures may amount to "market abuse" in respect of which the FSA can censure directors, impose financial penalties and seek restitution orders. A director of a listed company also exposes himself to FSA sanctions if found to be "knowingly concerned" in a breach of its rules, including those regarding circulars.

As regards quantity, the standard is that directors must provide shareholders with sufficient information to make an informed decision about the proposals to be put to the shareholder meeting. In the words of a court judgment a few years back, circulars must give "a fair, candid and reasonably full" explanation of the purpose of the meeting. Neither too little information nor too much; this is the elusive goal. Now we can turn to the 349-page circular (and scheme document) posted to HBOS shareholders last month. The size of the circular demonstrates the lengths to which its authors went not just to comply with the law but also to reduce the risk of liability. It involves no feat of speculation to imagine that the HBOS/Lloyds TSB merger must have been one of the most worried-over transactions of recent times. (Lloyds TSB estimate its costs at £130 million. HBOS's costs have not been disclosed.) What lessons can one extract from such a document as to how directors should phrase their company's communications with shareholders? Here are some of the strategies worth considering.

No-one is suggesting that directors routinely owe fiduciary duties, or duties of care, to shareholders; special circumstances are needed. And if claims against directors by their companies are rare, then claims against them by individual shareholders are really really rare. Nevertheless, when a company despatches a circular effectively recommending a bid which crystallises large paper losses for shareholders and at the same time seeks to raise £11.5 billion as part of a controversial Government bailout plan, a heightened sensitivity to the consequences of what one says in public is to be expected. It is for this reason – even if the HBOS circular were a model of concision and clarity – that it would not be a template for shareholder circulars in future. On the other hand, when one examines the strategies deployed throughout the HBOS circular what is most striking about them is their simplicity. They are best used sparingly and proportionately, targeting real and identified risks.