Fiduciary Duty

Director to shareholders

A Fiduciary Duty is a legal obligation of one party to act in the best interest of another. The obligated party is usually someone entrusted with the care of money or property.

The High Court considered the circumstances in which directors owe fiduciary duties to a company’s shareholders, in the case of Vald Nielsen Holding A/S v Baldorino [2019] EWHC 1926 (Comm).

The case revolved around the sale of shares back in 2009 in a company Updata UK (U) to a new company pursuant to a management buy-out led by the three defendants, who were members of U’s executive management team.  Usually when the courts deal with cases such as this, the allegation is that a far too optimistic picture is painted. However, in this case, the claimants argued that U’s shareholders were misled into selling to a new company  at a substantial undervalue due to false representations made by the defendants regarding U’s financial position.  Indeed the claimants stated that they would not have been willing to sell at that time at the price which was being offered. Among other claims (primarily fraud and deceit), the claimants sought to recover an account of profits from the defendants for breach of fiduciary duty.

The court considered 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. Although there are circumstances in which such duties can be owed by way of exception to the general rule, there must be something unusual in the relationship that gives rise to the duty, and requires special circumstances replicating the important features of well-established categories of fiduciary relationships.
• The previous legal authorities show that the mere fact that a director has a better knowledge of the company’s state, or that the actions of a director have the potential to affect the shareholders, does not amount to the necessary special circumstances, or give rise to the necessary special relationship between the directors and shareholders. These are usual, features of the relationship between directors and shareholders of a company.
• The fact that a director is purchasing shares from a shareholder is not in itself enough to create a fiduciary duty. English law is clear that even in a situation where a director is purchasing shares from a shareholder, the existence of a fiduciary duty depends upon the existence of special circumstances.
• Generally, the cases where a fiduciary relationship has been held to exist mostly concern small companies, often with a family or other personal relationship and where there is a particular transaction involving director and shareholder.

On the facts of this case the high Court found the scenario in question to be a long way from the circumstances of other cases where a fiduciary relationship has been held to exist between director and shareholder. The court found that there were no special circumstances present which reproduced the established categories of fiduciary relationships. As a result, no fiduciary duties arose between the Defendants and U’s shareholders, and so the Claimant’s claim for breach of duty failed. However, the claimants were successful in respect of their claims of fraud and deceit and were awarded just over £6.5 million.

If you have any questions on this article or related matters, please contact Stephen Foote on 01244 312 166 or [email protected]