On 15 November, a shareholder class action claim (the first of its kind in the English courts) brought by a group of over 5000 Lloyds shareholders (both retail and institutional) against Lloyds and five of its former directors relating to the acquisition of HBOS at the height of the financial crisis in 2008, was dismissed. Although the background to the claim was the exceptional events of the financial crisis, the judgment in Sharp v Blank provides useful guidance on the duties of directors of listed companies as well as illustrating some of the hurdles in pursuing such claims successfully, including issues of causation and quantum.
The claim arose out of the acquisition by Lloyds of HBOS in the Autumn of 2008, at the height of the financial crisis and in the aftermath of the collapse of Lehman Brothers. Lloyds’ shareholders were required to approve the transaction and a shareholder circular containing a recommendation from Lloyds’ directors in favour of the acquisition was produced prior to an Extraordinary General Meeting. The claim was made in two ways:
- That the Lloyds’ directors were negligent in recommending that shareholders approve the transaction (“the recommendation case”).
- That the shareholder circular failed to disclose material information or made material misstatements including that HBOS was in receipt of emergency funding from the Bank of England (“the disclosure case”).
The claimant shareholders claimed that, were it not for the negligent recommendation, the acquisition would not have proceeded and that if all material information had been disclosed, the directors would have halted the acquisition, the transaction would have collapsed or the shareholders would have blocked the acquisition at the EGM.
In respect of the recommendation case, the court found that a reasonably competent director of a bank such as Lloyds could reasonably have concluded that the acquisition of HBOS was beneficial to Lloyds’ shareholders. Notably, the court held that where a director honestly holds the belief that a particular course is in the best interests of the company then a claimant will be required to show that no reasonably competent director could have reached that view. The court also held that directors are entitled to rely on the advice of professional advisers unless there is obvious error in that advice.
With regards to the disclosure case, the court held that the directors had a common law duty to take reasonable care to ensure the accuracy of the shareholder circular and an equitable duty to provide sufficient information. The judge found that HBOS’ use of emergency funding from the Bank of England (as well as a £10bn loan facility provided by Lloyds) should have been disclosed. However, the court found that disclosure of these matters to shareholders would not have changed the directors’ recommendations, would not have led to a collapse in the HBOS share price and that the claimants had not provided sufficient evidence that shareholders would have voted differently at the EGM, relying as they did on the evidence of a small number of shareholders, without any structured survey evidence or evidence from large stakeholders. Interestingly, amongst other findings in relation to the duty to provide sufficient information, the court held that while a fair and candid account must include both strengths and weaknesses of a transaction, it need not necessarily emphasise those weaknesses.
Significantly, the court also held that the losses claimed were reflective loss (i.e. losses which the company rather than shareholders has the right to claim) and would therefore not have been recoverable by the shareholder claimants.
While the judge was careful to emphasise that this case was not a public enquiry into the takeover of HBOS, one of the most high profile repercussions of the financial crisis in the UK, it will be of keen interest to those who have been involved in the litigation fallout of the events of 2008 as well as observers with an eye on the future of shareholder class actions in England & Wales. This case highlights some of the hurdles to be cleared in order to succeed with such a claim, including adducing evidence of how a necessary proportion of shareholders would have acted differently and demonstrating a recoverable loss to shareholders.
Additionally, directors (and their advisers) will take note of the guidance from the court on the decision-making process which precedes a recommendation to shareholders on a proposed acquisition.
Further reading: Sharp v Blank  EWHC 3078 (Ch).