In a recent judgment in the Lloyds shareholder litigation, the court struck out various claims by shareholders that directors had breached their fiduciary duties. Although the directors owed duties to provide shareholders with sufficient information, they did not owe wider fiduciary duties in the absence of a special relationship between the parties.
The case concerns a group action brought by the shareholders of
Lloyds TSB against the company and its directors in relation to
Lloyds' acquisition of Halifax Bank of Scotland Plc
("HBOS") in 2008. This is one of the first times the
court has made a group litigation order (or "GLO", which
permits multiple claims against a defendant giving rise to common
or related issues to be grouped into a single action) in the
financial services arena, and is one of the most prominent GLOs
making its way through the court. The shareholders alleged that the
communications by the directors contained material
misrepresentations and omissions, and that the directors'
recommendation that the shareholders approve the HBOS transaction
was in breach of their duty to the shareholders. This judgment is
one of several relating to the defendants' application for
summary judgment and/or strike out in relation to various parts of
the Particulars of Claim. On the same day, the court refused the
defendants' application for summary judgment on the allegation
pleaded in the claim that the directors knew that HBOS had
manipulated its LIBOR submissions.
The claimant shareholders argued that various tortious and
fiduciary duties were owed by the defendant directors. Six
fiduciary duties were alleged. The claimants argued that the duties
arose because the directors had vastly superior knowledge to the
shareholders, and the shareholders relied on the directors to
provide them with information.
The defendants accepted that they owed a duty to provide the
shareholders with sufficient information to enable them to make an
informed decision as to how to vote at the shareholders meeting in
relation to the acquisition. The judge labelled this the
"sufficient information duty". On that basis, the
defendants did not object to two of the duties pleaded as fiduciary
duties, namely a duty not to mislead or conceal material
information and a duty to advise and inform the shareholders in
clear and readily comprehensible terms. The defendant directors
objected to the other fiduciary duties pleaded.
In line with established principles, the court held that directors
owe fiduciary duties to the company but do not, solely by virtue of
their office of director, owe fiduciary duties to the company's
shareholders. Although directors can owe fiduciary duties to the
company's shareholders, those case are limited to where the
facts demonstrate a special relationship between the directors and
shareholders. Such a relationship gives rise to the shareholder
placing trust and confidence in the directors, as is the hallmark
of fiduciary duties. On the decided cases, the sort of relationship
that has given rise to a fiduciary duty is where there has been
some personal relationship or particular dealing or transaction
between them, most prevalent in small, family run companies.
The judge recognised the policy considerations behind the general
principle. If directors did owe fiduciary duties to shareholders,
they would be liable to "harassing actions by minority
shareholders, and exposed to a multiplicity of actions, each
shareholder having his own personal claim". Moreover, if
directors owed a general fiduciary duty to shareholders not only
would this place an unfair burden on them, it would also place
directors frequently in a position where their duty to the company
conflicts with their duty to shareholders.
On the facts, the court found there was nothing which supported the
existence of any greater duties than the sufficient information
duty. The claimants failed to plead any special relationship
between the directors and shareholders necessary to give rise to
the broad fiduciary duties it alleged. They alleged that the
directors knew more about the company than the shareholders, but
this would almost always be the case. The fact that the
shareholders relied on the directors to provide them with
information to enable them to decide how to vote at the
shareholders' meeting does not go over and above the usual
relationship between directors and the company's shareholders,
and gives rise only to the sufficient information duty, the
existence of which had been conceded by the directors. The court
therefore struck out the pleaded duties that did not form part of
the sufficient information duty.
The decision is not new law but rather a reaffirmation of the
established principles of fiduciary duties. The case serves as a
reminder that fiduciary duty is a special kind of duty reserved for
a particular set of circumstances and within narrow confines.
This is a welcome decision for directors and their D&O insurers
alike. It remains difficult for shareholders to establish that they
are owed fiduciary duties by directors of a large listed company.
Only special circumstances will justify the imposition of fiduciary
duties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.