Shareholder Class Actions

Syedur Rahman of Rahman Ravelli outlines the issues raised by the first such case to be brought in English courts.

Sharp v Blank [2019] was the first shareholder class action claim to be brought in the English courts. It serves as guidance for directors of listed companies regarding their duties and indicates the challenges facing those pursuing such a claim.

The action was brought by more than 5,000 Lloyds Bank shareholders against the bank and five of its former directors regarding its acquisition of HBOS during the 2008 financial crisis. It alleged that the directors had breached their duties.

As Lloyds’ shareholders had to approve the acquisition, a circular was sent to them before an extraordinary general meeting (EGM). The circular included a recommendation from Lloyds’ directors that the acquisition should go ahead. The acquisition was approved and went ahead in January 2009.

The class action claimed that: 

• Lloyds’ directors were negligent in recommending that shareholders approve the transaction.
• The shareholder circular did not disclose material information or made material misstatements, including a failure to explain that Lloyds had made a facility of £9.9 billion available to HBOS to assist with its immediate funding requirements and that the Bank of England had provided HBOS with emergency liquidity assistance.

The claimant shareholders claimed that the acquisition would not have gone ahead without the negligent recommendation. They argued that if all material information had been disclosed it was likely that the directors would have halted the acquisition or shareholders would have blocked it at the EGM. 

Decision

Regarding the claim that directors were negligent in recommending shareholders approve the transaction, the court found that a reasonably competent director of a bank such as Lloyds could have reasonably concluded that acquiring HBOS would benefit Lloyds’ shareholders. The court held that if a director honestly believes a course of action is in the company’s best interests the claimant will have to show that no reasonably competent director could have had that belief. According to the court, directors are entitled to rely on advice from professional advisers, unless that advice has an obvious error in it. 

Regarding the circular not disclosing material information or containing material misstatements, the court held that directors had a common law duty to ensure the accuracy of the shareholder circular and a duty to be fair and impartial in providing sufficient information. The judge found that HBOS’ Bank of England funding and the loan facility from Lloyds should have been disclosed. But the court found that disclosure of these matters to shareholders would not have changed the directors’ recommendations or have prompted a collapse of HBOS’ share price. It also found that that the claimants had not provided sufficient evidence that shareholders would have voted differently at the EGM, as they relied on evidence from a small number of shareholders, with no structured survey evidence or evidence from large stakeholders. 

The court held that a fair and candid account must include a transaction’s strengths and weaknesses but it does not have to emphasise the weaknesses. It also stated that even if the claimants had been successful they would not have been awarded damages, as the losses claimed were losses that the company rather than shareholders had the right to claim and would not have been recoverable by the shareholder claimants. 

The case highlights the need for claimants in such cases to have evidence that a necessary proportion of shareholders would have acted differently and that there was a recoverable loss to shareholders. It emphasises the difficulties in achieving this. The difficulty includes the reflective loss principle: where a company suffers loss caused by a breach of a duty owed to it (such as by a director) only the company can sue in respect of it, not the shareholder (unless the company has no cause of action). This is a principle whose scope is being reviewed by the Supreme Court, as a result of Sevilleja Garcia v Marex Financial Ltd [2018].

Sharp v Blank [2019], therefore, highlights the need for claimants to seek expert advice. But it also shows the responsibility that directors and their advisers have in providing shareholders with information and a recommendation relating to a possible acquisition.

This article was also featured on Lexology.com.