Directors’ duties developed in the courts over hundreds of years and were codified in the Companies Act 2006. These duties include a duty to promote the success of the company, a duty to exercise reasonable care and skill and a duty to avoid conflicts of interests.
These duties are owed to the company and, contrary to a common misconception, directors do not, by virtue of their office, owe any such duties to the shareholders. However, similar duties to shareholders can arise in certain in certain scenarios.
The High Court recently considered this issue in a claim relating to a Management Buy Out (MBO). For the uninitiated, an MBO typically involves the purchase of a company by its executive management team from the retiring shareholders. In the case before the High Court, the claimants contended that the retiring shareholders had sold their shares at an undervalue. They claimed that they had been misled by the management buyers concerning the financial position of the company.
The management buyers were also directors and the claimants alleged that they had breached their fiduciary duties to the shareholders.
The court reviewed and affirmed the following principals:
- Directors do not, by virtue of their office, owe fiduciary duties to shareholders. Circumstances may arise in which duties are owed but only by way of exception. To achieve this, there here must be something unusual in the nature of the relationship. Special circumstances which “replicate the salient features of well-established categories of fiduciary relationships” must be present.
- The mere fact that a director has access to the company’s affairs, or that their actions have potential to impact shareholders, does not, of itself, amount to “special circumstances“, or give rise to a special relationship. These are “inevitable” features of the relationship between directors and shareholders.
- The purchase of shares from a shareholder is not (on its own) sufficient to create a fiduciary duty. Even in a situation where a director is purchasing shares from a shareholder, the existence of such a duty depends on the existence of special circumstances.
In summary, no duty is created as a result of a director’s superior knowledge about a company, nor does a de facto duty arise simply because a director is entering into a transaction with a shareholder. Something more is needed and each case will be decided as a result of the factual relationship between the director and the shareholder. Situations in which this most commonly arises are with small, closely held companies (often involving a family or other personal relationship between director and shareholder) and a specific transaction between them. However, the court has also found the duty to arise in the following examples:
- a director who undertakes a responsibility to act on behalf, or for the benefit, of a shareholder (for example, a directors who holds himself out as agent for a shareholder in connection with the acquisition or disposal of shares);
- a directors who makes a material representation to shareholders or supplies them with specific information and advice on which the shareholders have relied; and
- a directors who fails to make material disclosures of insider information in the context of negotiations for a take-over of the company’s business.
Each case will be decided on its facts and, whilst there is no general duty between a director and its shareholders, it is strongly recommended to take advice in situations where a duty may arise. The consequences of breach of fiduciary duty attracts personal liability and can be expensive.
To discuss any matters relating to the above or any other commercial or corporate requirements, please contact Greg Vincent, Partner in the Corporate and Commercial Team on 0208 971 1033 or by email on [email protected]