Sharp v Blank

The claim was a shareholder challenge to the Lloyds board’s recommendation and disclosure in relation to the takeover of HBOS and the related government recapitalisation in autumn 2008. The court analysed (a) whether the directors’ recommendation was negligent or in breach of fiduciary/equitable duty and (b) whether the Circular and related market statements omitted material information that should have been disclosed (in particular Emergency Liquidity Assistance and an interbank facility from Lloyds to HBOS).

Key legal principles applied:

• Directors’ duties are principally owed to the company under s.172 and the statutory duty of skill and care in s.174 Companies Act 2006; individual shareholders do not generally have a separate actionable fiduciary claim absent special circumstances.
• A director who makes statements in a shareholders’ circular which asserts he has taken reasonable care may be subject to a common-law duty of care in respect of the accuracy and completeness of that circular; but market announcements and oral presentations have different legal character and do not automatically create personal duties to each shareholder.
• The equitable duty to provide shareholders with sufficient information to allow an informed vote requires fair, candid and reasonable disclosure; omission of material matters may render the meeting result vulnerable to challenge but does not automatically give rise to individual compensation claims absent causation.

The court found that the board’s unanimous recommendation fell within the range of decisions a reasonably competent chairman and executive directors could make on the available material in the extraordinary market conditions of autumn 2008, so the "recommendation" claim failed. As to disclosure, the court accepted the directors knew of a bespoke Bank of England liquidity facility to HBOS and of Lloyds’ own repo facility made available to HBOS; it held that the Circular should have disclosed those facilities in a careful, contextualised way and therefore that the board did not take all reasonable care in preparing the Circular. However, the Claimants failed to prove causation: they did not establish on available evidence that, had those items been disclosed in the form the Court considered appropriate, the shareholders’ meeting result would probably have been different or that the Claimants suffered recoverable loss as a result. The claim was therefore dismissed.

This was a first-instance Chancery Division trial of a group shareholder claim arising from Lloyds TSB Group plc’s acquisition of HBOS plc announced 18 September 2008 and completed January 2009. The claimants alleged that five Lloyds directors (the named defendants) wrongly recommended the acquisition and failed to disclose material information, causing loss to the shareholders who brought the action.

Background and procedure

• The acquisition and the contemporaneous government-led recapitalisation of UK banks were steps taken in the immediate aftermath of the Lehman collapse and in the midst of extreme market dislocation. Lloyds negotiated revised terms and proceeded with an announcement and a shareholder circular recommending the deal and explaining the recapitalisation measures the government and the Bank of England were implementing.
• After trial (extensive documentary and witness evidence including expert witnesses on banking, accounting, valuation and media), the principal legal issues were narrowed to: (i) whether the directors had been negligent / in breach of fiduciary/equitable duty in recommending the takeover and (ii) whether the Circular and related presentations failed to disclose material matters (notably emergency liquidity assistance from the Bank of England to HBOS, and the repo facilities Lloyds provided to HBOS) such that shareholders were not given sufficient information to vote and the claimants suffered loss.

Issues decided and the court’s reasoning

• Recommendation case: the judge reviewed the board papers, due diligence, expert evidence and contemporaneous context. Emphasis was placed on avoiding hindsight; the standard applied asked whether the decision to recommend the acquisition was within the range of reasonable decisions open to a competent chairman and executive directors at the time. The court found the board had received detailed, tested advice (including PwC, sponsor banks, internal risk assessments and FSA interaction) and that the directors’ unanimous recommendation fell within the ambit of reasonable commercial judgment in the exceptional circumstances of 2008. The recommendation claim therefore failed.
• Disclosure case: the court analysed the content and purpose of the Circular and the legal standards for disclosure to shareholders (equitable duty to provide sufficient information; the limited common-law duty of care where directors expressly undertake they have taken reasonable care). The judge concluded that knowledge of HBOS’ bespoke bilateral Bank of England liquidity support and of the Lloyds repo facility were material facts which should have been disclosed to shareholders in a measured, contextualised form. On that narrow point the court found the Circular did not contain sufficiently candid disclosure and therefore there was a breach of the sufficient-information duty (and the formal representation that the directors had taken all reasonable care was not fully justified).
• Causation and loss: critically, the claimants had to show that the omission caused the loss they claimed (shareholder diminution or dilution), or at least that the missing information would probably have changed the shareholders’ vote. The court examined market reaction evidence, expert opinion (analysts, media), and the real-world constraints on how the Tripartite and the Bank would have behaved. The judge concluded that, although omission of ELA/Lloyds-repo should have been disclosed, the claimants failed to prove on the evidence that disclosure would probably have produced a different shareholder outcome (or established the loss claimed). The market would not necessarily have "collapsed" on disclosure and there was no reliable basis for inferring the required majority against the deal would have been produced.

Wider points and practical outcome

• The judgment emphasises the difficulty of judging commercial decisions made in extreme stress with the benefit of hindsight, and reforms an important delineation between duties owed to the company, duties owed via a circular and the limits of directors’ personal liability to each shareholder for commercial recommendations.
• Relief sought: the claim was dismissed. The court did record that certain omissions in the Circular as to ELA and the Lloyds repo should have been disclosed, but that finding did not produce an actionable remedial award because causation of the shareholders’ losses was not established.

The claim is dismissed. The court held that the directors’ unanimous recommendation of the acquisition was within the range of reasonable commercial decision-making in the 2008 crisis context, so the recommendation claim failed. The court further held that the Circular omitted material information about a bespoke Bank of England liquidity facility to HBOS and a Lloyds repo facility and therefore did not fully meet the equitable duty to provide sufficient information; however the claimants failed to prove that disclosure of those matters would probably have changed the shareholders’ vote or that they suffered recoverable loss as a result, so damages were not awarded.