On 15 November 2019, the first judgement on a shareholder class action in England and Wales was delivered, dismissing a claim brought by a group of Lloyds shareholders against Lloyds TSB plc (“Lloyds”) and five of its former directors relating to an acquisition of HBOS plc (“HBOS”) in 2008.
Sharp v Blank  EWHC 3078 (CH) (the “Case”) highlights the difficulties faced by shareholders when pursing a class action and provides guidance to directors of listed companies in respect to their duties during the decision-making process and prior to proceeding with any recommendations in relation to an acquisition.
Below, we set out: (a) the facts of the case; (b) the 2 main claims put forward by the shareholders; and (c) whether it could be determined that the shareholders suffered a loss as a result of the information (or lack of) provided by the directors to the shareholders in relation to the acquisition.
In this Case, over 5000 claimants sought to make the directors of Lloyds personally liable for carelessness and breach of their fiduciary duties.
On 18 September 2008, Lloyds and HBOS jointly announced the proposed takeover to the market and confirmed an agreement had been reached. A further announcement prepared by the directors setting out the revised terms was published on 29 October 2008 (the “Announcements”). At the time of the announcement, HBOS were in receipt of Emergency Liquidity Assistance (“ELA”) funded by the Bank of England and a £10 billion repo facility (the “Lloyds Repo”) granted by Lloyds.
Due to the nature of the takeover, Lloyds were required to send a circular to its shareholders providing details of the takeover and to seek approval of the acquisition. On 3 November 2008, Lloyds issued the shareholder circular (the “Circular”). However, neither the Lloyds Repo or the ELA was mentioned in the Circular.
In December 2008, the shareholders approved the acquisition whereby 96% voted in accordance with the directors’ recommendations in favour of the acquisition while the other 4% voted against the acquisition.
The acquisition was completed in January 2009. Shortly after the acquisition, Lloyds share price plummeted.
The claims were twofold and focused mainly on the Circular:
- the recommendation claim: the shareholders alleged the directors negligently recommended to the shareholders that they should approve and vote in favour of the takeover of HBOS on the basis that the directors failed to take into account the funding and capital risks involved in acquiring HBOS at the time; and
- the disclosure claim: the shareholders alleged that the Circular did not disclose sufficient information or material information about the risks of acquiring HBOS and/or included negligent misstatements about HBOS the takeover.
The shareholders argued that:
- had the directors not been negligent in their recommendation for the shareholders to approve the takeover; or
- had sufficient information been disclosed about Lloyds and HBOS,
the acquisition would not have proceeded, the shareholders would have voted against the acquisition, or the acquisition would have collapsed.
Both claims were dismissed by the court, on the basis that had the shareholders been presented with the omitted information at the time in question, it would not have affected the outcome.
SUMMARY THE RECOMMENDATION CLAIM
The shareholders stated that the directors owed common law duties them to use reasonable skill and care when providing advice and information on the acquisition, and to ensure the advice provided was supported by information available to the directors at the time.
The court emphasised that the duty of care the directors owed to each individual shareholder is different from the directors’ duties, prescribed by the Companies Act 2006 (The “Act”) owed to Lloyds, unless a special fiduciary relationship exists between the directors and shareholders. The shareholders failed to show evidence of such a relationship.
The directors did however agree a common-law duty was owed to the shareholders to take reasonable care and skill in relation to the statements and recommendations contained in the Circular.
The court held where a director holds an honest view that a particular course of action is in the best interests of the company, the claimants must be able to show that no reasonably competent director could have reached the same view. Therefore, court found in relation to the Circular, that a reasonably competent chairman or executive director of a large bank could have reasonably reached the view that the acquisition of HBOS was beneficial to Lloyds shareholders and maintained that position until the shareholders vote was taken. For the above reasons, the recommendation claim was dismissed.
THE DISCLOSURE CLAIM
In the judgement, the directors agreed that a statement included within the Circular which stated “the directors had taken reasonable care to ensure the information contained in the Circular is in accordance with the facts and does not omit anything likely to affect the import of such information”, gave rise to a duty of care.
The court found misstatements were made by the directors in relation to the above statement that the directors had taken reasonable care.
It is important for directors to note when in the process of making a recommendation, that they must provide a fair, candid and a reasonable account of the circumstances to allow shareholders to make an informed decision. A ‘fair and candid’ account must include the strengths and weaknesses of a transaction, but it is not necessary to emphasise those weaknesses or every single piece of information which the directors based their recommendation, or which may impact the shareholders.
The court held the directors were in breach of the ‘sufficient information’ duty as the directors did not take reasonable care to ensure the Circular contained adequate information about the ELA. In this Case, the directors failed to inform or seek advice from their legal advisors in relation to the ELA. Furthermore, the court found the ‘extraordinary’ Lloyds Repo facility should have been disclosed as information which the shareholders could take into account.
As a result, court concluded directors had breached the common law duty of care and the equitable duty of disclosure.
Consequences of non-disclosure
In order for the shareholders to be successful in recovering damages and equitable compensation, the shareholders had to evidence to the court that as a result of the directors being in breach of the sufficient information duty and the misstatement about the degree of care they exercised in preparing the Circular, have caused them loss.
CAUSATION AND LOSS
The shareholders sought to establish their loss and based their loss on three potential outcomes that would have happened had the directors disclosed the existence of the ELA and the Lloyds Repo (the “Funding”):
- termination: the directors would have declined to proceed;
- collapse: the transaction would have collapsed; and
- rejection: the majority of shareholders would have voted against the transaction.
The court found that had the funding been disclosed to the shareholders:
- the directors would not have terminated the transaction (as the directors were of the view that the acquisition was beneficial to the shareholders) and would have put forward the disclosure along with their recommendation to the shareholders, for the acquisition to be approved;
- the HBOS share price would not have collapsed and there probably would have only been a mildly negative reaction with a decline of 10-15% in the HBOS share price; and
- it was unlikely that disclosure would have led to the majority of the shareholders altering their vote, to vote against the acquisition. The claimants had insufficient evidence to prove the outcome would’ve been different.
Consequently, the court concluded there was no loss and dismissed the arguments put forward by the claimants.
This Case provides useful guidance to directors of listed companies, guidance of which should be taken into consideration during the decision-making process of a transaction.
The board should be aware that the courts will assess a director’s actions to a reasonable standard. Therefore, boards should ensure prior to making a recommendation on a proposed acquisition that a number of steps are taken, such as:
- to seek professional advice on the contents of any statements, circulars and recommendations made in relation to a transaction: the board should ensure it seeks advice of legal, accounting and financial advisors to assist in the preparation of recommendations. The board should scrutinise any advice received, ask questions and bring to the attention of its advisers any information relevant to the transaction;
- to maintain detailed records of the decision-making process: the board must ensure it documents the reasons why a particular transaction is in the company’s interest and consider if a reasonable director would reach the same decision; and
- adhere to directors’ duties prescribed by Act: the board must ensure that the it acts in good faith while promoting the success of a company, in addition to exercising reasonable care, skill and diligence during any decision-making process or course of action.
For more information, and any guidance or advice on corporate governance requirements and directors’ duties and obligations, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.
 s.172 Companies Act 2006: The duty to promote the success of the company for the benefit of its members as a whole; and s.174 Companies Act 2006: The duty to exercise reasonable care, skill and diligence.