Sharp & Ors v Blank & Ors

The court considered an application to strike out or for summary judgment under CPR 3.4(2)(a) and CPR 24.2 in relation to pleadings that the defendant directors owed fiduciary and tortious duties to Lloyds shareholders concerning the acquisition of HBOS and a recapitalisation. The judge held that directors owe fiduciary duties to the company but do not, by virtue of their office alone, owe fiduciary duties to shareholders except where a special factual relationship exists. The only equitable duty accepted by the defendants and recognised by the court was the duty to provide sufficient information to shareholders to enable an informed vote at an EGM (the "sufficient information duty"), including the duties not to mislead or to conceal material information and to inform in clear terms.

Accordingly the court struck out pleaded fiduciary duties that went beyond the sufficient information duty (paragraphs 39(1), 39(2), 39(4) and 39(5)), ordered amendment of the imprecise tort pleading at paragraph 40(5), allowed paragraphs 39(3) and 39(6) and paragraph 122 to stand, and struck out paragraphs 121 and 127 which sought to plead breaches and bad faith on unsustainable bases. The striking out was made under CPR 3.4(2)(a) on the ground that the pleaded duties disclosed no reasonable grounds for the claim.

This was the final judgment in a sequence of applications concerning the pleadings in a claim by shareholders challenging the Lloyds acquisition of HBOS and related recapitalisation. The defendants applied for strike out and/or summary judgment under CPR 3.4(2)(a) and CPR 24.2 in respect of various parts of the Particulars of Claim which alleged that defendant directors owed fiduciary and tortious duties to shareholders.

(Nature of the application): The defendants sought to strike out or obtain summary judgment on parts of the pleading that alleged broad fiduciary duties and a wide tortious duty to prevent shareholder loss, and also attacked specific paragraphs alleging it was a breach to permit the EGM to proceed.

(Issues framed):

• whether directors, by virtue of their office, owe fiduciary duties to shareholders beyond a duty to provide sufficient information for an EGM;
• the proper content and label of the tortious duties pleaded, in particular paragraph 40(5);
• whether particular paragraphs (121, 122(2), 127) pleading breach and causation were sustainable.

(Court’s reasoning and conclusions): The judge reviewed authorities (including Peskin v Anderson, Mothew, Coleman v Myers and earlier authorities) and reiterated that directors’ fiduciary duties are owed to the company; fiduciary duties to shareholders arise only in exceptional cases where a special factual relationship exists (typically in small, closely held companies with personal relationships or direct transactions between directors and shareholders). The pleaded facts — directors having superior knowledge and providing information and advice in advance of an EGM — did not establish the special relationship needed to impose fiduciary duties of loyalty beyond the sufficient information duty. The sufficient information duty itself was characterised as a rule of fairness about disclosure at meetings rather than a general fiduciary duty of loyalty; the court doubted whether it should be called a fiduciary duty but accepted its content (not to mislead, to disclose material facts, and to be clear and comprehensible).

The court: (i) directed that paragraph 40(5) be deleted or amended to clarify it was not a free-standing duty but concerned scope of loss; (ii) struck out paragraphs 39(1), 39(2), 39(4) and 39(5) as disclosing no reasonable grounds; (iii) left paragraphs 39(3) and 39(6) and paragraph 122 intact; and (iv) struck out paragraphs 121 and 127 as unsustainable. The court made these orders under CPR 3.4(2)(a).

Contextual note: The court observed that fiduciary duties to shareholders are rare and normally arise in special, often closely-held, circumstances. The judgment emphasises identifying the content of any duty from the facts before applying fiduciary labels.

First instance: The court allowed the defendants' application in part. It held that directors do not by virtue of office owe fiduciary duties to shareholders except where a special factual relationship exists; the only duty established on the pleaded facts was the "sufficient information" duty (including not to mislead and to provide clear information). Consequently paragraphs 39(1), 39(2), 39(4) and 39(5) of the Particulars of Claim were struck out as disclosing no reasonable grounds, paragraph 40(5) should be deleted or re-drafted to clarify it is not a free-standing tortious duty, paragraphs 39(3) and 39(6) and paragraph 122 were allowed to stand, and paragraphs 121 and 127 were struck out. The orders were made under CPR 3.4(2)(a) on the ground that the pleaded duties were unsustainable in law.