Case law: court clarifies directors' duties to shareholders
Directors should ensure the information they provide to shareholders is clear and comprehensible, not misleading and does not hide material particulars. However, in the absence of a special relationship, directors do not owe fiduciary duties to their company's shareholders.
This update was published in Legal Alert - March 2016
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The directors of a bank gave advice and information to its shareholders about a proposed acquisition and capitalisation of another bank, to help them decide whether to vote for the acquisition. The shareholders later alleged that the advice and information was incomplete and inaccurate. They said the directors owed them fiduciary duties, including a duty to act in good faith, for a proper purpose and in their best interests, and had failed to discharge those duties.
Historically, the courts have said that directors' duties are owed to their company, and not to the company's shareholders. In this case, the High Court affirmed this approach and said that directors did not owe shareholders fiduciary duties - unless there was some 'special factual relationship' between them, over and above the usual director/shareholder relationship. It was not sufficient that:
- The directors had more knowledge of the company's affairs than a shareholder
- The directors' actions would potentially affect the shareholders
However, the Court said a director could owe a fiduciary duty to a shareholder if, for example, there was a personal relationship between them, or a specific dealing or transaction triggering a fiduciary duty. There was none in this case.
The Court did find that there was a duty to ensure information provided to shareholders was not misleading and was clear and comprehensible, and not to hide material information.
- Directors should ensure that information they provide to shareholders is clear and comprehensible, not misleading and does not hide material particulars but, in the absence of special relationship, directors do not owe shareholders fiduciary duties
Case ref: Sharp and others v Blank and others  EWHC 3220
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