High Court clarifies scope of duties owed by directors to shareholders
The High Court has struck out a number of claims brought by shareholders in what was, in 2008, Lloyds TSB against its directors (Sharp & others v Blank & others).
The claims alleged that the directors owed fiduciary and tortious duties in the context of providing information to shareholders and in seeking their approval of a transaction which resulted in Lloyds TSB's takeover of HBOS in November 2008. The shareholders are seeking compensation for losses of upwards of £300m.
In 2014, shortly before the 6 year limitation period was due to expire, investors brought a claim against the directors of Lloyds TSB who were in office in 2008, alleging that they had failed to disclose the true nature of HBOS’s financial condition including that it had received funding of around £25.65bn and $18bn (£12bn) from the Bank of England, and a loan facility of around £10bn from Lloyds TSB prior to the takeover.
Shareholders enjoyed a victory in July 2015 when they obtained a judgment significantly narrowing the scope of documents the defendants were entitled to withhold on the grounds of litigation privilege (see our previous article about this decision). However, numerous aspects of the investors’ claim have now been struck out.
In their particulars of claim, the claimant shareholders submitted that as a result of the directors “vastly superior knowledge” of the state of HBOS compared to that of the Lloyds TSB shareholders, the directors had voluntarily assumed responsibility for (i) the correctness of alleged advice and recommendations given to the Lloyds TSB shareholders about the merits of the proposed acquisition; and (ii) the completeness and accuracy of all material information provided to the Lloyds TSB shareholders in respect of the proposed transactions.
The shareholders argued that in providing information on HBOS and in procuring and/or permitting the transactions to be put before the shareholders for approval, and in procuring the completion of the transactions, the defendants owed the claimants a common law duty of care in tort and fiduciary duties. The alleged fiduciary duties included:
- a duty to act in good faith;
- a duty to act in the best interests of the claimants and to prevent them from suffering a loss;
- a duty not to mislead the claimants or conceal material information from them;
- a duty not to place themselves in a position where their duties to the claimants conflicted with their personal interests or their duties or obligations to any third party;
- a duty to act for a proper purpose; and
- a duty to advise and inform the Lloyds shareholders in clear, and readily comprehensible terms.
The pleaded common law duties of care included a duty not to mislead or conceal information and a duty to ensure that information provided to the shareholders was complete and did not contain material omissions.
The defendants admitted that, in so far as they made any written statements or provided recommendations in the public documents provided to shareholders, they owed a duty to take reasonable care and skill. The defendants further were unable to dispute the duties at (3) and (6) above, and in any event suggested that these fell under a duty “in equity” as opposed to a "fiduciary" duty. This duty was described by the judge as the “sufficient information duty": a duty in equity to provide the shareholders with sufficient information so as to enable them to make an informed decision as to how to vote at the EGM in relation to the HBOS takeover.
The existence of the other fiduciary duties was denied by the directors on the grounds that directors of a company do not generally owe fiduciary duties to a company’s shareholders absent a special relationship, and that there was no reason on the facts to conclude that the directors owed any equitable duty other than the "sufficient information duty".
The judge found for the defendants as to the non-existence, in this situation, of the particular fiduciary duties allegedly owed by the Lloyds TSB directors to the shareholders.
It is well established law that directors of a company owe fiduciary duties to the company; this arises out of the fact that directors are agents of the company (Peskin v Anderson  1 BCLC 372 applied). Directors do not generally, solely by being directors, owe fiduciary duties to shareholders, either collectively or individually. The judge explained that this is supported by policy reasons; however determining the position in each case also requires a close analysis of the nature of a director’s relationship with a company as compared with a company’s shareholders.
The judge drew on the principle that only the company, not its members, can sue for wrongs done to the company, and that in those circumstances shareholders specifically cannot sue for losses that are merely derivative or reflective (see Prudential Assurance Co Ltd v Newman Industries Ltd (no2)  Ch 204, for example).
Further, directors would be liable to a torrent of “harassing” actions by minority shareholders. This would place an unfair burden on the directors. The court was also reminded of circumstances where imposing a duty on directors to act in the best interests of a company’s shareholders could foreseeably place a director in a position of conflict with the director's primary duty to the company (see  2 BCLC 1 at 14).
Considering the nature of the relationship
The judge recognised that there were circumstances where a director could have assumed fiduciary duties to shareholders. However, this was dependent upon establishing a “special factual relationship”. This special relationship must be something more than the usual relationship between director and shareholder, and in the nature of one giving rise to a relationship of trust and confidence. In this case, it was not enough that the Lloyds TSB directors had “superior knowledge” of HBOS; since the directors directed and controlled Lloyds TSB's affairs, this would almost inevitably be the case.
To establish the range of fiduciary duties alleged by the shareholders, there would need to be some kind of personal relationship or particular dealing or transaction between the parties, such as is more commonly found in “small, closely-held companies”. That was absent in the case of Lloyds TSB.
Finally, as well as considering the nature of the relationship between the directors and shareholders of Lloyds TSB, it was essential to identify the content of the accepted “sufficient information duty", and then to analyse that duty to consider whether it should properly be characterised as fiduciary duty or not. In this respect the judge cited RAC Motoring Service Ltd  1 BCLC 307: “The essence of the [sufficient information] duty is reasonableness or fairness in the circumstances having regards to the interests of the company as a whole.” (emphasis added)
In light of this, the judge explained that the wellspring of the "sufficient information duty" was common fairness; where directors invited shareholders to an EGM then fairness required the directors to explain clearly what the purpose of that meeting was.
There was nothing on the facts to suggest the directors had undertaken to act for or on behalf of the shareholders in such a way as to give rise to a duty of loyalty or particular trust and confidence, nor to put the interests of shareholders first, nor certainly to prevent the shareholders from suffering a loss.
Regarding the duty to act in good faith, the judge commented that "good faith" is more often used as shorthand for the duty of a fiduciary to disclose material facts before entering into a transaction with his principal, which it is possible to breach without conscious or deliberate impropriety. However, this extended sense of a "good faith" obligation was not found to form a part of the "sufficient information duty", which was a duty in equity rather than a fiduciary duty.
As such (1), (2), (4) and (5) as set out in the particulars of claim (and as above) were struck out.
This judgment clarifies the nature and reach of duties owed by directors. The judge provided helpful guidance on circumstances where directors could be found to have assumed fiduciary duties towards shareholders of a company. It seems, however, that those duties will arise rarely; only where companies are small enough, and there are personal relationships and/or specific transactions taking place between directors and shareholders. The general position (propped up by on-going policy reasons) remains that directors, having a direct relationship with the company alone, will generally not have a close enough connection to its shareholders to give rise to fiduciary duties.