No duty of loyalty owed by directors to shareholders

In brief, the shareholder group alleges failures by the board to give accurate and complete information and advice in 2008 prior to a vote on the proposed acquisition of HBOS.  This includes allegations that the board failed to disclose a prior loan of £10bn made by Lloyds to HBOS and that HBOS was already wholly reliant on covert financial support from the Bank of England and Federal Reserve to pay its debts and continue to trade.  In simple terms, HBOS was in a mess financially and had this information been disclosed, the vote would certainly not have been passed.

The disclosure failures and very decision to allow the shareholders’ meeting to proceed were pleaded as breaches of fiduciary duties and common law duties in tort.  The defendants objected and applied to strike out parts of the claim. 

Nugee J saw no basis to impose fiduciary duties in favour of the shareholders.  He therefore struck out those elements of the claim.  He also noted that none of the various “tortious duties” listed in the pleading were capable of sustaining an allegation that it was negligent of the board to allow the shareholders’ meeting to proceed.  So he struck out those parts of the claim too.

The general rule

Directors owe fiduciary duties (e.g. loyalty, good faith, to act in best interests and avoid conflict) to the company but not its shareholders. 

Whilst interests of shareholders and the company are generally aligned, this does not mean a director agrees to act for individual shareholders or that he has a direct relationship with them.  His or her relationship is with the company.  As a matter of policy, courts are slow to hold directors accountable to shareholders to this degree.  Otherwise, they will be exposed to multiple legal actions by dissenting minority shareholders. 

In very limited circumstances a fiduciary duty may extend to individual shareholders.  However, this requires a “special factual relationship” between the directors and shareholders.  Following an examination of the authorities, Nugee J noted the common thread for such a relationship is a small and closely-held company, often with a family or other personal relationship between director and shareholder.  In almost all cases the relevant transaction is one where the director stands to benefit personally.  Thus the duty intervenes to deal with potential temptation for directors to exploit the relationship and take unfair advantage of shareholders for their own benefit.  Nugee J noted the present case was “a long way removed from that paradigm case”. 

The sufficient information duty

Nugee J held that the proper approach for assessing obligations is to look at the duties incumbent on the board first, and then determine what the appropriate label might be.  Counsel for the shareholders had argued that the relevant duties follow naturally once it is accepted that there is a fiduciary duty on the board.  This inverse approach was rejected. 

The shareholders referred to the board’s “vastly superior knowledge” along with a reliance on the directors to provide accurate information.  Whilst this was not enough to impose a special relationship giving rise to obligations of a fiduciary, it did mean a “sufficient information” duty arose.  The obligations which come with such a duty do not share the characteristics typical of fiduciary duties.  The distinguishing feature is the former is one of fairness whereas the latter involves a relationship of loyalty.  Existence of this lesser duty was conceded by the board along with associated obligations not to mislead or conceal material information and to advise and inform the shareholders in clear and comprehensible terms.

It remains to be seen how matters will play out at trial.  If the allegations are made good by the shareholder group, it seems highly likely that the conduct complained of will be caught by the (lesser) sufficient information duties. 

Whilst the decision does not introduce new law, it serves as a useful reminder of the proper approach when assessing directors’ duties as well as the very limited circumstances in which fiduciary duties may arise in favour of shareholders.  You can read more about directors’ duties generally in our recent note here.