A question which struck a chord with judges when dealing with the recent case of Vald. Nielsen Holding A/S v Baldorino earlier in July this year, where the High Court considered the circumstances in which company directors owe fiduciary duties to the company’s shareholders.
The case in particular concerned the sale of shares in a company (Target) to a newly formed company (Buyer), pursuant to a management buy-out led by the defendants who were also members of the Target’s executive management team. The claimants argued that the Target’s shareholders were cheated into selling the Target to the Buyer at a substantially lower value due to false representations which were made by the defendants in respect of the Target’s financial position. The claimants therefore sought to recover an account of profits from the defendants on the grounds of breach of fiduciary duty.
High Court Judges reviewed numerous English, Australian and New Zealand authorities in this area. It quickly became apparent that:
There was no doubt as to the general rule that directors do not, solely by virtue of their office, owe fiduciary duties to shareholders. Even though there are situations where such duties can be owed (by way of exception to the general rule), there must be something unusual in the nature of the relationship that would give rise to it, and will require special circumstances which essentially mirrors the obvious features of well-established categories of fiduciary relationships.
These authorities illustrate that the simple fact of a director having superior knowledge of the company’s affairs, or that their actions have the potential to affect the shareholders doesn’t amount to the required special circumstances mentioned above, nor does it give rise to the necessary special relationship between the directors and shareholders. These are the usual and indeed inevitable features of the type of relationship between directors and shareholders of a company.
The sheer fact that a director is purchasing shares from a shareholder is not in itself sufficient enough to create a fiduciary duty. So far as English law is concerned, even in situations where directors are purchasing shares from a shareholder, the existence of a fiduciary duty depends entirely upon the existence of special circumstances.
Overall, the cases in which fiduciary relationships had been held to exist had mostly concerned small, closely held companies such as with family members or other personal relationships and where a particular transaction is taking place involving director and shareholder.
In light of the above, the High Court found that the present claim was far from the circumstances in which a fiduciary relationship had been held to exist between director and shareholder, and that in this instance no special circumstances were present which mirrored those obvious features of fiduciary relationships. As a result, no fiduciary duties were found to have arisen between the defendant and the Target’s shareholders, and as such the claim for breach of duty was struck out.
If you require advice on the buying or selling of company shares or advice on fiduciary duty, please contact Farleys’ experience corporate law team on 0845 287 0939 or email us.