Directors' Fiduciary Duties To Shareholders

Most cases which come before the courts in connection with the sale and purchase of a company are brought by buyers against sellers. However, a recent High Court case looked at the sale and purchase of a company from a different perspective - that of the sellers who contended they were misled into selling by the management team who were leading a management buy-out.

Facts

The three defendants were the executive management team (the Management Team) of a company called Updata Infrastructure (UK) Ltd (the Target). Backed by a private equity house, the Management Team launched a management buy-out. Following a bidding process, in which there was a competing potential buyer, the entire issued share capital of the Target was bought by a new company (Newco), substantially owned by the Management Team and the private equity house backing them. At the time of the bidding process, the majority shareholder in the Target had considered the final offer from the Management Team more attractive than the rival bid. However, the key individuals in the majority shareholder subsequently came to believe that, in the course of the 2009 sale negotiations, they had been misled by false representations made by the Management Team about the Target's financial position. The majority shareholder had received £5.244 million for its 60% share in 2009 but in the proceedings contended that the true value of this stake, at the time of the sale, was £22 million.

One of the claimant's grounds of claim was that the Management Team had owed fiduciary duties to the shareholders, that the Management Team were in breach of those duties and that the claimants should therefore be able to recover an account of profits from the Management Team. The Management Team, two of whom were directors, argued that no such duties existed.

Decision

The court noted that while the directors of a company owe fiduciary duties to the company itself, they do not, merely by virtue of their office of director, owe fiduciary duties to the shareholders of a company. However, directors can exceptionally in certain circumstances owe fiduciary duties to shareholders if there is a special relationship over and above the usual relationship between a director of a company and its shareholders. As regards the nature of any such special relationship, the court noted the following factors:

it must replicate the main features of well-established categories of fiduciary relationships. (e.g. agency) which involve...