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Spotlight on directors' duties to shareholders



Japan, United Kingdom

Legal action by Lloyds' shareholders, who made losses when the share price crashed following the bank's acquisition of HBOS, will illuminate directors' duties in relation to shareholder circulars.

Disgruntled Lloyds Bank shareholders, who made losses when the share price crashed following the bank's acquisition of Halifax Bank of Scotland, are taking legal action against Lloyds and its former directors seeking £350m in compensation.  The case will illuminate the duties directors owe to shareholders when giving them information and recommendations as to how to vote on shareholder resolutions.  Although the court proceedings are continuing, there have been a couple of preliminary decisions which directors should note.

The first decision relates to information provided to Lloyds Bank shareholders in a circular giving information about the HBOS acquisition and recommending them to vote in favour of it.  The Lloyds directors acknowledged they had a duty to take reasonable care in preparing the circular.  They also accepted they had a duty to provide the shareholders with sufficient information to enable them to make an informed decision as to how to vote on the resolution to approve the acquisition, and that this included a duty to advise the shareholders in clear and readily comprehensible terms and not to conceal any material information.  Whether these duties were breached will be tested at the full trial.

However, claims by the shareholders that the directors owed them other duties of a fiduciary nature were struck out.  Whilst directors clearly owe fiduciary duties to the company, this is not the same as owing such duties to the shareholders.  For that, there must be some special relationship beyond that of director and shareholder, for example, where there is a personal relationship or transaction between a director and a shareholder.

The Lloyds Bank shareholders based their claim of fiduciary duties on the fact the directors had vastly superior knowledge about the HBOS acquisition and they relied on the directors to provide them with information.  The court did not agree that this gave rise to any special relationship.  The directors therefore had no duty to act in the best interests of the shareholders or prevent them from suffering loss.

The second decision related to the shareholders' claim that the Lloyds directors were aware that HBOS was manipulating its LIBOR submissions before the acquisition went ahead and should have disclosed this to shareholders in the circular.  The allegation was that this information was concealed, and misleading information included in the circular.  The directors denied any knowledge of the LIBOR manipulation by HBOS. 

If they had no such knowledge, the claim that they should have disclosed it would fall away, so the directors asked the court to give summary judgment on this question.  The court refused to do so, on the grounds that there was no evidence before it as to what, if anything, had been revealed about LIBOR manipulation in the due diligence exercise prior to Lloyds Bank's acquisition of HBOS.  This claim will therefore be tested at the trial stage.

These are early stages in this high profile case and we await further developments with interest.  It is a useful reminder to directors that, if they are going to invite the shareholders to a meeting, common fairness requires that they explain what the purpose of the meeting is and enable shareholders to make an informed decision on the business to be addressed.  For private companies, the same applies if the directors propose a written resolution to the shareholders.

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