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Directors’ duties when seeking shareholder approval

05 May 2016

The High Court of England and Wales (the Court) has rejected a number of claims by a group of Lloyds’ shareholders alleging a breach of fiduciary duties by the company’s directors. The claims arose in litigation concerning Lloyds’ 2008 takeover of Halifax Bank of Scotland (HBOS), which required shareholder approval both for the takeover and the subsequent recapitalisation of the group.

In Sharp & Others v Blank & Others [2015] the plaintiffs argued that the directors had fiduciary duties, including: a duty to act in the best interests of the shareholders and to prevent them from suffering a loss; and a duty not to mislead or conceal material information from them. They claimed that these duties arose because the shareholders had relied on the directors, who had greater knowledge of HBOS’s financial situation, to provide them with information about the proposed transaction.

The defendants acknowledged that directors do have a duty to provide shareholders with sufficient information, to inform their voting decisions at shareholders’ meetings − the ‘sufficient information duty’. However, they denied that they owed fiduciary duties to the shareholders.

In line with the established position, the Court found that directors owe fiduciary duties to the company and not its shareholders. However, it recognised that fiduciary duties to shareholders can arise in certain circumstances. Where a special relationship between the directors and shareholders exists, which is based on either a personal relationship or particular dealing or transaction between them and not the usual director-shareholder relationship, then a fiduciary duty may arise.

The Court held that the shareholders’ reliance on the information provided to them did not create a special relationship beyond the usual director-shareholder relationship. It gave rise only to the ‘sufficient information duty’ and the Court therefore dismissed the claims based on breach of fiduciary duty.

This case clarifies the duties owed by directors and provides helpful guidance on the very limited circumstances where directors could be found to have assumed fiduciary duties directly in favour of shareholders. The general position remains that directors, having a direct relationship with the company alone, will usually not have a close enough connection to its shareholders to give rise to fiduciary duties.