The first shareholder class action claim to be brought before the English courts, Sharp v Blank  EWHC 3078 (Ch) has been dismissed from the High Court of Justice Chancery Division. The claim, which is on behalf of over 5,000 Lloyds shareholders, is against Lloyds and five former directors. It relates to Lloyds’ 2008 acquisition of HBOS.
Essentially, the claim was brought on two alternative grounds:
- that the directors were negligent to recommend that shareholders approve the acquisition in a circular prior to an Extraordinary General meeting; and
- that the circular itself with made negligent misstatements or failed to disclose material information.
It was alleged that, the shareholders would not have approved the acquisition of HBOS, but for the directors’ recommendation and/or that had they had disclosure of the relevant material facts they would not have allowed the acquisition to go ahead.
The High Court ruled against the shareholders on both grounds. In respect of the first ground, it was found that the directors had acted in a manner in which a reasonably competent director of such a bank could act. A notable element of the court findings emphasized that in the circumstance when a director honestly holds the belief that a proposal is in the best interests of the company then the claimant has the burden of showing that no reasonably competent director could have reached that view. Directors are also to be comforted by the obiter that they are entitled to rely on the advice of professional advisers unless there is obvious error in that advice. Interestingly, in respect of the second ground, the Court found that shareholders should have been informed of HBOS’ use of emergency funding from the Bank of England, and of a £1 billion loan facility from Lloyds, but the Court was not satisfied that the shareholders would not have prevented the transaction even if such disclosure had taken place. Therefore,
There have been calls for the increased use of class action claims, a type of claim more commonly seen in the US, than in the English courts. The High Court’s decision in this case highlights that such claims are subject to particular hurdles, and may serve to dampen that enthusiasm, at least in relation to class action claims on behalf of shareholders.
Please contact Ronnie Preiskel should you have any questions regarding the above.