In Sharp & Others v Blank & Others [2015] EWHC 3220 (Ch) the High Court reaffirmed the long-standing principle of English law that directors of a company will only owe fiduciary duties directly to shareholders in limited circumstances where a “special relationship” is found to exist between the parties (see Percival v. Wright [1902] 2 Ch 421).

The claimants, who were shareholders of Lloyds bank, brought claims alleging that the directors of Lloyds had breached various duties owed to the shareholders in relation to the purchase by Lloyds of Halifax Bank of Scotland (“HBOS”). The claimants argued that the breaches of duty arose from the directors’ advice to the shareholders that Lloyds’ acquisition of HBOS and the recapitalisation of Lloyds were in the best interests of the shareholders and their recommendation that such transactions should be approved by the shareholders. In particular, the claimants alleged that:

• the directors had vastly superior knowledge in relation to the transaction to that of the shareholders, and that the shareholders had relied on the directors to provide them with information;
• in advising the shareholders in relation to the transaction, recommending that such transactions should be approved and providing them with information, the directors took responsibility for: (i) the correctness of the advice and recommendations given to the shareholders; and (ii) the completeness and accuracy of all material information provided to the shareholders in relation to the proposed transactions; and

• as such, on the basis that the information provided was misleading due to material inaccuracies and omissions and also because it had subsequently transpired that the transaction was not in fact in the best interests of the shareholders, the directors had breached various fiduciary and other duties owed to the shareholders, including duties to act in good faith, to act in the best interests of the claimants and to prevent them from suffering loss.

The directors conceded that they owed the shareholders a tortious duty to take reasonable skill and care when making written statements and/or providing recommendations in certain written documents (the announcements and circular relating to the transaction). In addition, the directors accepted that they had a duty to provide the shareholders with sufficient information to enable them to make an informed decision in relation to the transaction, which included a duty not mislead or conceal material information and a duty to provide advice to shareholders in readily comprehensible terms. However, aside from these duties, it was argued that the directors did not owe any further duties (fiduciary or otherwise) to the shareholders. In particular, the defendants contended that the directors of a company did not in general owe fiduciary duties to the company’s shareholders, and that there was nothing on the facts to warrant the imposition of any other equitable duty apart from the duty to provide sufficient information about the transaction to the shareholders.

The Court held that, in accordance with established principles, directors of a company owe their fiduciary duties to the company. In addition, directors could also owe fiduciary duties to the shareholders directly, but such duties will not arise by the mere fact of being a director. Rather such duties could only be found to exist where, on the facts of a particular case, a “special relationship” exists between the directors and the shareholders. Such a “special relationship” would need to have characteristics which were in addition to the normal relationship between directors and shareholders. It was not sufficient for directors to have additional knowledge of the company’s affairs, or for there to be potential for the actions of directors to affect shareholders, as both of these are almost always true for directors of a company. Almost all of the cases where directors had been found to owe fiduciary duties directly to shareholders had involved facts where there was a personal relationship between the parties, or there had been a particular transaction or dealing between them. Such cases also usually involved the shareholders placing trust and confidence in the directors in relation to a transaction from which the directors stood to benefit from personally. A fiduciary duty was imposed on directors in these situations to prevent directors with a personal or family relationship with shareholders from abusing that relationship for their own benefit. On the facts of the case, no such special relationship was evident and therefore the Court did not find that the directors owed the fiduciary duties pleaded to the shareholders.

This decision will give comfort to directors of companies, as it confirms that they will only be found to owe fiduciary duties directly to shareholders in limited circumstances. It will also serve as a warning to directors who have a personal or close relationship with their shareholders or who are involved in transactions directly with shareholders. In such situations, where shareholders place trust and confidence in directors, and the facts are such that the directors might be able to abuse their position for their personal benefit, then the directors should be aware that they may be found to owe additional fiduciary duties to the shareholders directly.

For further information, please contact Adam Kuan.

• Share this blog

• Twitter
• Facebook
• Linkedin