The end of 2019 saw the High Court give judgment in the first shareholder class action in the English courts: Sharp v Blank [2019] EWHC 3096 (Ch). The claim, which alleged that directors of Lloyds Bank breached their duties to shareholders when advising them on the acquisition of HBOS in 2009, was dismissed. It remains to be seen whether the judgment will be the subject of an appeal.
The claim concerned the actions of the Lloyds' directors in 2008 during the financial crisis when banks were under severe strain. On 18 September 2008, Lloyds and HBOS jointly announced Lloyds' intended takeover of HBOS. They also stated that each board would be unanimously recommending the acquisition to their shareholders. Shortly thereafter, on 25 September 2008 and on 2 October 2008, Lloyds made a facility of £9.9 billion available to HBOS to assist with its immediate funding requirements (the "Lloyds Repo"). In addition, on 1 October 2008, the Bank of England provided HBOS with emergency liquidity assistance (the "ELA").
Lloyds was required to seek shareholder approval of the takeover of HBOS. Therefore, on 3 November 2008 it issued a shareholder circular that provided information about HBOS and recommended shareholders approve the acquisition. However, the circular did not mention either the Lloyds Repo or the ELA.
The Lloyds shareholders approved the acquisition on 19 November 2008 and the HBOS shareholders approved it one month later. The acquisition completed on 16 January 2009. As the financial crisis deepened, however, it quickly became clear that HBOS' financial position was much worse than realised. The Lloyds' shareholders claimed that this caused significant losses to Lloyds and, consequently, to their shareholdings.
As summarised in the judgment, there were two main allegations in the proceedings:
- That 'The Lloyds directors should not have recommended the Acquisition because it represented a dangerous and value-destroying strategy which involved unacceptably risky decisions ("the recommendation case")'; and
- That 'The Lloyds directors should have provided further information about Lloyds and about HBOS, in particular about a funding crisis faced by HBOS and the related vulnerability of HBOS's assets ("the disclosure case")'.
The Lloyds' shareholders alleged that, had the directors either not made the negligent recommendation or had provided further information about Lloyds and HBOS, the acquisition would not have gone ahead.
The judge, Mr Justice Norris, dismissed the claim finding, in summary, that:
- The 'recommendation case' failed because the Lloyds' shareholders had not demonstrated that no reasonably competent director could have made the recommendation. The choice by the directors at the time lay within a range of reasonable choices.
- In relation to the 'disclosure case', the judge agreed that shareholders should have been told about the Lloyds Repo and the ELA. However, he did not consider this causative of any loss as he was not persuaded that the shareholders would have voted differently in any event. Accordingly, the disclosure case also failed.
The judge also observed that, even if the claimants' case had been successful, he would not have awarded damages. This was on account of the principle of reflective loss, according to which any loss caused by an overpayment by Lloyds for HBOS could only be recoverable by Lloyds itself, not its shareholders. The judge did however observe "that that approach cannot provide a completely satisfactory answer".
Hannah Blom-Cooper, a Legal Director in the Fraud Defence and Business Disputes team, says: 'This lengthy and detailed judgment provides guidance for litigants involved on both sides of shareholder class actions and demonstrates the potential difficulties faced by the shareholder class in proving a claim and the damage caused. This includes the principle of reflective loss which provides that where a company suffers loss caused by a breach of a duty owed to it e.g. by a director, only the company can sue in respect of that loss; a shareholder cannot sue for loss suffered by the company unless the company has no cause of action. The scope of this principle is currently under review by the Supreme Court in the case of Sevilleja Garcia v Marex Financial Ltd, which is due to give judgment on the question of whether the rule applies to creditors of a company who are not shareholders.'
Sinéad Esler Patel, an Associate in the Fraud Defence and Business Disputes team, says: 'This judgment also provides guidance for litigants on the use of expert evidence. In describing the numerous experts involved in this litigation, the judgment identifies various issues including: (in certain instances) a lack of relevant experience/expertise; occasions on which an expert's evidence was based on a wrong premise/methodology; and conflicting written and oral evidence. Litigants must ensure that any experts they rely on in litigation are both properly suited to the job and provided with appropriate instructions.'