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Re-affirming the Limits of Directors’ Duties to Company Shareholders

In Sharp & Others v Blank & Others [2015] EWHC 3220 (Ch), the High Court has clarified the limits to the  duties that directors owe to the company’s shareholders as distinct from the duties they owe to the company.

The case

This on-going and well publicised case concerns a challenge brought by shareholders of Lloyds Banking Group against the directors of the bank for alleged breaches of various duties the shareholders claimed the directors owed them. The breaches relate to a circular that the directors sent to all shareholders of the bank to secure their approval for the acquisition of HBOS in November 2008. The shareholders duly voted in favour of the subsequently disastrous acquisition of HBOS.  

Striking out a number of duties the shareholders claimed the directors had breached as “not sustainable in law” the High Court took the opportunity to provide a comprehensive summary of exactly what duties directors do and do not owe to their shareholders.

The High Court decision

The High Court confirmed that the starting point is that the principle fiduciary duty of directors is to the company itself and that this is a natural result of directors being the agents of the company and stewards of its affairs. Confirming the principle that a company is distinct from its shareholders, the High Court explained that a director’s primary fiduciary duty is to promote the best interests of the company and that, while to do so is often aligned with the best interests of shareholders, directors are not subject to any direct fiduciary duty to promote the best interests shareholders themselves.

That said the High Court then went on to summarise those duties that directors do owe to their shareholders.

Directors owe shareholders a duty to provide them with sufficient information to enable them to make an informed decision as to how to vote when directors seek a shareholders approval for a particular course of action.

The High Court also confirmed that directors can owe a direct fiduciary duty to promote the best interest of a shareholder where there is a “special factual relationship” between the director and the shareholder. This special relationship must be one which gives rise to special trust and confidence being placed in the director which is not usually the case in normal director / shareholder relations.  Detailing previous instances where such special relationships had been found to exist the High Court commented that it was not surprising that:

  1. most concerned small family owned companies where there was a personal relationship between the directors and shareholders; and
  2. in almost all cases there was a particular transaction in which the directors were dealing with shareholders and from which the directors stood to benefit personally.

The High Court explained that the imposition by courts of an additional fiduciary duty on directors in these circumstances is necessary in order to protect shareholders from directors who may be tempted to exploit a personal or family relationship and take unfair advantage of shareholders for their own benefit. On the facts the High Court found that no such special relationship could be said to exist between the directors and shareholders of Lloyds Banking Group.

Conclusions

Concluding the judgement, the High Court found that directors owed the following duties to shareholders:

  1. a duty to take reasonable care and skill when making statements or providing recommendations in certain documents;
  2. a duty to provide sufficient information to enable them to make informed decisions; and
  3. a fiduciary duty to promote the best interests of the shareholders only where the special factual relationship detailed above is present.

Should this case go to trial the High Court will rule on whether the directors breached those duties and we will report again.

If you would like to discuss any issues raised further please contact Charles Spragge or Max Palmer.