Fiduciary duties to company shareholders

Earlier this year I discussed the importance of good corporate governance following the decision in Stobart Group v Tinkler. Paramount to good corporate governance is the adherence to the directors’ duties, whether contractual or fiduciary. Given the inherent lack of tangibility of any duties with a fiduciary persuasion, directors can often be found wanting when trying to quantify and qualify the positions where such duties might be owed to their shareholders.

Justice Jacobs sitting in the High Court has provided the following keen observations which will go some way to assisting directors and shareholders unsure of whether one exists. Whilst presiding over Vald. Nielsen Holding A/S, Newwatch Limited v Mr Victor Baldorino, Mr Richard Bennett and Mr Julian Mantell, Jacobs J reviewed a number of key authorities from English, Australian and New Zealand precedents. The claim in question was that the shareholders of a newco set up to facilitate a management buy-out were misled by the directors of the company and consequently sold to the newco at an undervalue. They claimed this was a breach of fiduciary duty.

Where a fiduciary relationship exists, the remedies for a breach of such a relationship can be onerous and far out weight those granted where just a contractual relationship is found. This guidance should therefore be noted.

Jacobs J posited the following:

1. Firstly, he reiterated that “there is no doubt that the general position is that directors of a company do not, solely by virtue of their office of director, owe fiduciary duties to shareholders.” Fiduciary duties are special relationships and therefore require special circumstances. There must be an event, occurrence or happening that elevates the relationship beyond that of the legal one.
2. “The directors’ superior knowledge of the business, compared to that of the shareholders, is not a special circumstance. It is the usual feature of the ordinary relationship between directors and shareholders.” Jacobs J observed that there is an inherent inevitability that the directors will know more about the company’s affairs than the shareholders – this is not, therefore, special.
3. A fiduciary duty did not automatically arise when directors purchased shares from the shareholders, as was the case here. Referring to a New Zealand Court of Appeal decision that did find a fiduciary duty present during a director-shareholder-share purchase, the defining factor was, in fact, the closeness of the relationship amplified by its familial nature.
4. In his concluding paragraphs Jacobs J found that: “the cases where such duty has been held to exist mostly concern companies which are small and closely held, where there is often a family or other personal relationship between the parties, and where, in almost all cases, there is a particular transaction involved in which directors are dealing with the shareholders.”

Given the above, Jacobs J found the relationship in Vald. Nielsen Holding A/S v Baldorino to be some way off one of a fiduciary one. Whilst this guidance from Jacobs J is useful and helps to clarify when a duty might exist, this remains a distinctly grey area of the law. Furthermore, we will have to wait and see how this decision is used by other Justices.