Do directors owe duties directly to shareholders?

However, the recent case of Vald Nielson Holding A/S v Baldorino [2019] considers whether there are in fact circumstances in which directors owe fiduciary duties to the company's shareholders.

A fiduciary relationship arises where A holds a position of trust or confidence with respect to B and who is therefore obliged to act solely for B's benefit. A has some discretion or power which affects B's interests; B in turn relies on A for information or advice. English law has long recognised (and indeed has codified in legislation regarding companies) the fiduciary relationship between a director and the company they hold office with, but not a general fiduciary relationship between a director and individual shareholders directly.

The Vald Nielson case involved the sale of shares in a company (Target) to a newly formed company (Buyer) pursuant to a management buy-out led by the defendants. The defendants were members of the Target's executive management team.

The claimants comprised the assignee of the Target's former parent company, and a current shareholder. They contended that the Target's shareholders sold their shares to the Buyer at a significant undervalue, in consequence of alleged fraudulent misrepresentations by the defendants as to the Target's financial position. Among other things, the claimants sought an account of profits on the basis of the "circumstances of the negotiations and sale", which the claimants contended gave rise to the defendants owing them fiduciary duties.

Ultimately, the High Court held that the facts of the case were a long way from the circumstances of other cases where a fiduciary relationship had been held to exist, and there were no special circumstances which replicated the salient features of well established categories of fiduciary relationships. Accordingly, the breach of fiduciary duty claim was dismissed.

In reaching this decision, the Court ran through the authorities and offered some useful guidance on fiduciary duties in the context of directors and shareholders:

• the general position is that directors of a company do not, solely by virtue of their office, owe fiduciary duties to shareholders. That being said, case-law establishes that there are circumstances in which duties can be owed. Such circumstances are dependent on establishing a special factual relationship between the directors and shareholders in any particular case: it must be something over and above the usual relationship that any director of a company has with its shareholders. In the context of the acquisition or disposal of shares, a fiduciary duty may be found if directors hold themselves out as agents for shareholders, make material representations to shareholders, fail to make material disclosures to shareholders, or provide specific information and advice on which shareholders rely. This is especially so in cases where directors, for their own benefit, use their position and/or inside knowledge to take improper advantage of shareholders
• the mere fact that a director has more knowledge than the shareholders of the company's affairs, or that the directors' actions have the potential to affect the shareholders, does not amount to "special circumstances" and does not give rise to a "special relationship" between the directors and shareholders. Such features are typical of the relationship between directors and shareholders: directors manage the affairs and assets of the company, shareholders do not
• the mere fact that a director is buying shares from a shareholder is not in itself sufficient to create a fiduciary duty
• the cases where such duty has been found mostly concern companies which are small and closely held, often in a family or personal context, and where, in almost all cases, there is a particular transaction involved in which directors are dealing with the shareholders

The Vald Nielson case will be welcome to managers on a typical management buy-out: generally speaking, they will not be held to owe fiduciary duties to selling shareholders.

That said, it is important that directors in this situation proceed with caution with the information they provide to shareholders, particularly if they have a family or personal connection with any of the sellers.