England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		12 November 2015

Mr Justice Nugee:

Introduction

1. This is the last in a series of judgments or rulings that I have given either orally or in writing in relation to the Defendants' application for summary judgment under CPR 24.2 and/or a strike out under CPR 3.4(2)(a) in relation to various parts of the Particulars of Claim. The background is well known to the parties and briefly summarised in my judgment on the LIBOR allegation and I need not repeat it. This judgment deals with a number of points of law raised by the Defendants as to the Claimants' pleading of fiduciary and tortious duties owed by the Defendant directors to the Claimants as shareholders in Lloyds.

The pleadings

2. The generic Particulars of Claim contain the following allegations under the heading "the Duties owed to the Shareholders of Lloyds"

"37. The directors of Lloyds had had the benefit of detailed disclosure by the directors of HBOS and, through the teams carrying out due diligence, full access to the books and records of HBOS. In the premises, the knowledge of the directors of Lloyds of the financial circumstances of HBOS was vastly superior to the knowledge of the Lloyds shareholders. The Lloyds shareholders relied on the directors of Lloyds to provide them with information. The directors of Lloyds, including the Defendants, advised the shareholders of Lloyds that (a) Lloyds' acquisition of HBOS and (b) the recapitalisation of Lloyds through participation in the Recapitalisation Scheme were in their best interests and recommended that they approved both transactions. Further, the directors of Lloyds provided disclosure of information in various forms relating to the proposed transactions. In giving such advice, making such recommendations and providing disclosure of information the Defendants voluntarily undertook responsibility for:

(1) The correctness of the advice and recommendations given to Lloyds shareholders;

(2) The completeness and accuracy of all material information provided to the Lloyds shareholders in respect of the proposed transactions.

38. In advising the shareholders of Lloyds in relation to the merits of the acquisition of HBOS and recapitalisation, in providing information to the shareholders to enable them to make an informed decision as to whether or not to approve the acquisition of HBOS and the recapitalisation of Lloyds, in procuring and/or permitting the transactions to be put before the Lloyds shareholders for approval and in procuring the completion of the transactions the Defendants owed the shareholders of Lloyds (including, for the avoidance of doubt, the holders of Lloyds ADRs), including the Claimants, both fiduciary duties and a common law duty of care in tort.

39. The fiduciary duties owed to the shareholders of Lloyds (including the Claimants) by the Defendants included, inter alia, the following duties ("the Fiduciary Duties"):

(1) A duty to act in good faith;

(2) A duty to act in the best interests of the Claimants and to prevent them from suffering loss;

(3) A duty not to mislead the Claimants or conceal material information from them;

(4) A duty not to place themselves in a position where their duties to the Claimants conflicted with their personal interests or their duties or obligations to any third party;

(5) A duty to act for a proper purpose;

(6) A duty to advise and inform the shareholders of Lloyds in clear, and readily comprehensible terms.

40. Further, the common law duty of care owed to the shareholders of Lloyds (including the Claimants) by the Defendants included, inter alia, the following duties ("the Tortious Duties"):

(1) A duty to use reasonable care and skill when providing advice and information to the Claimants;

(2) A duty to ensure that the information provided to the Claimants was complete and did not contain any material omissions;

(3) A duty to ensure that any advice provided to the Claimants was reasoned and supported by the information available to the Defendants;

(4) A duty not to mislead the Claimants or conceal information from them.

(5) A duty to take all reasonable steps to prevent the claimants from suffering loss and damage."

3. So far as tortious duties are concerned it is admitted in the Defence (at paragraph 37(e)(1)) that the Defendant directors owed the shareholders a duty to take reasonable care and skill in insofar as they made any written statements and/or provided any recommendations in certain documents (the Announcement, Revised Announcement and Circular, which included the Chairman's Letter). It is not admitted that that extended to oral statements in the course of meetings and conference calls, but that is not a matter that has been argued before me.
4. Only one issue was raised by Ms Davies on this application in relation to the tortious duties pleaded and I will deal with that here. It concerned the plea in paragraph 40(5) of the Particulars of Claim that the tortious duties involved a duty to take all reasonable steps to prevent the Claimants from suffering loss and damage. It became apparent however in the course of argument that Mr Steinfeld did not attempt to support the duty pleaded in paragraph 40(5) as a free-standing head of duty. He said that it had really been meant to plead that the loss that had been suffered was within the scope of the tortious duties relied on, so as to satisfy the requirement in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 that a claimant must not only show a breach of duty but that "it was a duty in respect of the kind of loss which he has suffered". If that is what it was attempting to do it was not a particularly informative or successful way of doing it as paragraph 40(5) did not identify any particular kind of loss at all; but I need not take up any time with this as Mr Steinfeld in effect accepted that it was not pleaded as tidily as it might have been. As I suggested in argument the effect that Mr Steinfeld said the plea was intended to achieve would be more accurately expressed by deleting paragraph 40(5) as it currently stands and adding instead at the end of paragraph 40 a plea that the scope of the tortious duties pleaded in paragraphs 40(1)-(4) above included a duty in respect of the kinds of losses which the claimants claim to have suffered as pleaded below, with a cross-reference to where the plea of loss and damage can be found. I did not understand Mr Steinfeld to dissent from that or Ms Davies to object in principle to an amendment along those lines. No formal application to amend to that effect was before me but the Claimants intend to tidy up their pleading in any event and I assume that this is one of the matters that will be addressed. In those circumstances I do not propose to say any more about that aspect of the application.
5. The remainder of this part of Ms Davies' application concerned the plea of fiduciary duties. The Defence admits at paragraph 37(f) that the Defendant directors owed a duty in equity in these terms:

"It is admitted and averred that between the date of the Announcement and the date of the EGM the Director Defendants owed a duty in equity to the shareholders in Lloyds (including the Claimants) to provide them with sufficient information as to enable them to make an informed decision as to how to vote at the EGM in relation to Lloyds' acquisition of HBOS and its participation in the Recapitalisation Scheme."

I will call this the "sufficient information duty".

6. Although the application notice sought to strike out the whole of paragraph 39 where the Fiduciary Duties are pleaded out, in the light of the Defendants' acceptance that they owed the sufficient information duty, Ms Davies accepted that she could not really dispute the duties pleaded at paragraphs 39(3) (duty not to mislead or conceal material information) and 39(6) (duty to advise and inform the shareholders in clear and readily comprehensible terms); and although she said that the authorities suggested that the better description of the sufficient information duty was a "duty in equity" rather than a "fiduciary duty" she did not seek to argue which was correct, and was content to proceed on the basis that the duty was arguably a fiduciary one. I agree that what is important is the content of the duty, not the label put on it.
7. She did however object to the other duties pleaded. Her submission in summary was that directors of a company do not in general owe fiduciary duties to the company's shareholders, and that there is nothing in the facts relied on here that warrants the conclusion that the directors owed any other equitable duty than the sufficient information duty.
8. I accept this submission and I will now try and explain why.

Fiduciary duties owed by directors

9. The general principles are well established:

(1) The directors of a company owe fiduciary duties to the company. This is unexceptionable and flows from the fact that the directors are agents of the company and stewards of its affairs. As Mummery LJ puts it in Peskin v Anderson [2001] 1 BCLC 372 at [33] the fiduciary duties owed by directors to the company "arise from the relationship between the directors and the company directed and controlled by them"; it is the fact that they are directors of the company's affairs which by itself gives rise to their fiduciary duties.

(2) But in general the directors do not, solely by virtue of their office of director, owe fiduciary duties to the shareholders, collectively or individually: Peskin v Anderson at [29]. As pointed out by Handley JA in the New South Wales Court of Appeal in Brunninghausen v Glavanics (1999) 32 ACSR 294 at [40], this is in essence no more than an application of the principle established by Salomon v A Salomon & Co Ltd [1897] AC 22 that a company is distinct from its members. The directors direct and control the affairs and assets of the company; they do not direct or control the affairs or assets of the members.

(3) The general principle that directors do not owe fiduciary duties to shareholders has also been said to be supported by a number of policy considerations. Handley JA in Brunninghausen referred to the fact that only the company, not its members, can sue for wrongs done to the company (under the rule in Foss v Harbottle (1843) 2 Hare 461), and the principle that where a wrong has been done to a company, individual shareholders are not able to sue for losses which are merely derivative or reflective (as exemplified by Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 and Stein v Blake [1998] 1 AER 724) – this is of course not a complete explanation as some losses claimed by shareholders go beyond merely reflective loss (as indeed in the present case). Handley JA also said that if the directors owed fiduciary duties to the shareholders they would be liable to harassing actions by minority shareholders, and exposed to a multiplicity of actions, each shareholder having his own personal claim. This latter point was also made by Mummery LJ in Peskin v Anderson at [30] where he said that it was important that directors are not over-exposed to the risk of multiple legal actions by dissenting minority shareholders. At first instance in the same case Neuberger J said that to hold that a director owed some sort of general fiduciary duty to shareholders would involve placing an unfair, unrealistic and uncertain burden on a director, and would present him frequently with a position where his duty to shareholders would be in conflict with his undoubted duty to the company: [2000] 2 BCLC 1 at 14. The idea of a potential conflict between the directors' duty to the company and their supposed duty to shareholders can also be found in Perceval v Wright [1902] 2 Ch 421, often regarded as the origin of this line of authority, where Swinfen Eady J referred to the fact that if directors owed a duty to disclose negotiations to shareholders it would place them in a most invidious position, as premature disclosure of negotiations might well be against the best interests of the company.

(4) The actual decision in Perceval v Wright has had a chequered history which it is not necessary to recount; whatever the merits of the actual decision, the general principle that directors do not owe fiduciary duties to their shareholders is confirmed by Peskin v Anderson and is not in doubt.

10. There are however circumstances where directors have been held to owe particular fiduciary duties to shareholders. The duties that arise in such cases are dependent on establishing a "special factual relationship" between the directors and the shareholders in the particular case: Peskin v Anderson per Mummery LJ at [33]. Examples put before me are as follows:

(1) Allen v Hyatt (1914) 30 TLR 444, a decision of the Privy Council in a Canadian appeal, where it was held that directors who had acquired shares from shareholders in order to sell them to a third party had made themselves agents for the shareholders, and hence were accountable for the profits they had made.

(2) Coleman v Myers [1977] 2 NZLR 225, a decision of the Court of Appeal of New Zealand, where the company was an old established private company in which many of the shareholders, individually or through trusts, were relatives, and two directors (father and son) engineered a takeover, persuading some members of the family to sell, and seeking to compel a reluctant minority. It was held that in the particular circumstances the directors owed fiduciary duties. Woodhouse J said (at 325) that in deciding the standard of conduct required from a director in relation to dealings with a shareholder it was not possible to lay down any general test, but some factors would usually be influential , including:

"dependence upon information or advice, the existence of a relationship of confidence, the significance of some particular transaction for the parties and, of course, the extent of any positive action taken by or on behalf of the director or directors to promote it."

Cooke J thought it obvious that a fiduciary duty was owed in the particular circumstances of the case, summarising the facts which gave rise to the duty as being (at 330):

"the positions of father and son in the company and the family; their high degree of inside knowledge; and the way they went about the take-over and the persuasion of shareholders."

Casey J (at 371) referred in particular to the fact that it must have been obvious to the son that other shareholders were reposing trust and confidence in him; and that the father was in everyone's eyes the head of the family group and its associated shareholders:

"whom they respected to look after their personal interests in the management of the company."

(3) re Chez Nico (Restaurants) Ltd [1992] BCLC 192, where Sir Nicolas Browne-Wilkinson V-C referred to Coleman v Myers and said (at 208):

"Like the Court of Appeal in New Zealand, I consider the law to be that in general directors do not owe fiduciary duties to shareholders but owe them to the company; however in certain special circumstances fiduciary duties, carrying with them a duty of disclosure, can arise which place directors in a fiduciary capacity vis-à-vis the shareholders. Coleman v Myers itself shows that where directors are purchasing shares in the company from outside shareholders such duty of disclosure may arise dependent on the circumstances of the case."

On the facts of the case he did not in fact have to decide whether such a duty arose or not.

(4) Platt v Platt [1999] 2 BCLC 745, a decision of David Mackie QC, sitting as a Judge of the High Court. He held, following Coleman v Myers and the obiter comments in re Chez Nico, that a fiduciary duty was owed where the oldest of 3 brothers, who was the only director of the company, bought out his younger brothers who held preference shares. The Court of Appeal dismissed an appeal without expressing any views on this particular point.

(5) I was not referred to any other English case where such a fiduciary duty had been held to arise, although there are a number of other cases from overseas. It is not necessary to refer to them in any detail: see Dusik v Newton (1985) 62 BCLR 1 (where the Court of Appeal of British Columbia held that a special relationship existed between a director and the only other shareholder); Brunninghausen (also concerning a company with only two shareholders, where the sole director bought out the other shareholder); Crawley v Short [2009] NSWCA 410 (where one of three shareholders was bought out); and Valastiak v Valastiak [2010] BCCA 71 (misappropriation by director of company property held to be a breach of fiduciary duty to his wife who was the beneficial owner of half the shares). All these cases concerned small closely-held companies.

11. By contrast in Peskin v Anderson both Neuberger J and the Court of Appeal held that directors of the Royal Automobile Club Ltd who were contemplating a sale of the company's motoring services business did not owe a fiduciary duty to members who had resigned, or not renewed, their membership in ignorance of the proposals and who had thus missed out on substantial payments made to those who were members when the transactions completed. Mummery LJ said (at [59]) that there was "nothing special" in the factual relationship between the directors and the members, and no relevant dealings or negotiations between them.
12. I take it therefore to be established law, binding on me, that although a director of a company can owe fiduciary duties to the company's shareholders, he does not do so by the mere fact of being a director, but only where there is on the facts of the particular case a "special relationship" between the director and the shareholders. It seems to me to follow that this special relationship must be something over and above the usual relationship that any director of a company has with its shareholders. It is not enough that the director, as a director, has more knowledge of the company's affairs than the shareholders have: since they direct and control the company's affairs this will almost inevitably be the case. Nor is it enough that the actions of the directors will have the potential to affect the shareholders – again this will always, or almost always, be the case. On the decided cases the sort of relationship that has given rise to a fiduciary duty has been where there has been some personal relationship or particular dealing or transaction between them.
13. I do not find this surprising. A fiduciary, as explained by Millett LJ in his classic judgment in Bristol & West Building Society v Mothew [1998] Ch 1 at 18A-F, is someone who has undertaken to act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence. That is why the distinguishing obligation of a fiduciary is the obligation of loyalty: someone who has agreed to act in the interests of another has to put the interests of that other first. But the relationship between directors and shareholders is not in general like that. A director is a fiduciary for his company: by agreeing to act as director, he necessarily agrees to act in the interests of the company. But he does not have, by virtue of his appointment as director, any direct relationship with the shareholders: no doubt the interests of the shareholders and the company are in general aligned but this does not mean that a director has agreed to act for the individual shareholders or has a direct relationship with them – his relationship is with the company. If he is to be held to owe fiduciary duties to the individual shareholders, there must be something unusual in the nature of the relationship which gives rise to it. That no doubt explains why the cases where such a 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, from which the directors often stand to benefit personally. The imposition of a fiduciary duty in such circumstances reflects the fact that directors who have a close family or other personal relationship with shareholders, and are entering into transactions with them, may be tempted to exploit that relationship to take unfair advantage of the shareholders for their own benefit.

Application of principles

14. The present case is a long way removed from that paradigm case. It is therefore necessary to consider what is said by the Claimants to give rise to fiduciary duties nevertheless being owed. That is found in paragraph 37 of the Particulars of Claim. What is there said is effectively (i) that the directors had vastly superior knowledge to the shareholders and (ii) that the shareholders relied on the directors to provide them with information. To this is added the plea that in giving advice, making recommendations and providing information, the Defendants "voluntarily undertook responsibility" for the correctness of advice and recommendations and the completeness and accuracy of information. The language of voluntary undertaking of responsibility suggests that what the pleader had in mind was the well-known line of authority that the voluntary assumption of responsibility can be a factor in deciding whether a tortious duty of care is owed, and this part of the plea reads as if it is directed primarily at establishing a tortious duty. I will assume however that it is also directed at establishing fiduciary duties.
15. But even on this basis the facts relied on do not seem to me to plead any special relationship between directors and shareholders such as the authorities require. All that the pleaded facts really amount to is that the directors, who knew more about the company than the shareholders (the addition of "vastly" does not seem to me to change the analysis), were giving the shareholders advice and information to enable them to decide how to vote at the forthcoming EGM. That is the only relationship pleaded. It is not disputed that such a relationship – that is the relationship between directors who invite shareholders to vote at an EGM and give them advice and information in that connection, and the shareholders – does give rise to a duty, namely the sufficient information duty, which is expressly accepted to include a duty not to mislead or conceal material information, and a duty to give advice and information in clear and readily comprehensible terms. But once this duty is accepted, what other duty do these facts give rise to ? In my judgment there is none. The relationship is one of giving advice and information for a particular purpose: there is nothing here which as far as I can see comes close to a relationship where the directors have in any more extended sense undertaken to act for or on behalf of the shareholders in such a way as to give rise to a duty of loyalty, or have undertaken an obligation to put the interests of shareholders first, or are themselves entering into transactions with the shareholders, or where there are any of the other hallmarks of a fiduciary relationship.
16. In my judgment the facts pleaded in paragraph 37 of the Particulars of Claim do not amount to a special relationship which give rise to any fiduciary duties being owed by the directors to the shareholders beyond the sufficient information duty.

Mr Steinfeld's argument

17. Mr Steinfeld's argument did not really dispute the principles to be derived from the English and overseas authorities. His position was the simple one that once it was accepted that there was a fiduciary duty, the other duties pleaded in paragraph 39 were all part of that duty as they were inherent in any fiduciary duty. He referred to the exposition in Mothew's case of what the distinguishing duty of loyalty means: this includes acting in good faith and not putting oneself in a position of conflict.
18. This seems to me to fall into the error of starting by labelling a particular duty as a fiduciary duty and then using that label to determine what the content of the duty is. This is the wrong way round. One should first identify what the content of the duty owed by a person in particular factual circumstances is; it is then possible to characterise that duty as being fiduciary or not – and indeed to characterise the person as a fiduciary or not. As Millett LJ said in Mothew (at 18C):

"As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p.2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary."

19. It seems to me therefore that rather than starting with whether the sufficient information duty is a fiduciary duty and arguing for its content from that, the correct starting point is to identify what the content of the sufficient information duty is. This can be found conveniently set out in the judgment of Neuberger J in re RAC Motoring Services Ltd [2000] 1 BCLC 307, an earlier round of litigation arising out of the disposal by the RAC of its motoring services business. At 327a-c, he cites from the Australian decision of Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 14 ACLR 375 at 377-8 where White J said:

"The directors have a duty in equity to give to shareholders sufficient information for them to make informed decisions about proposals to be put them at meetings."

and

"The essence of the duty is reasonableness or fairness in the circumstances having regard to the interests of the company as a whole."

20. White J referred in that case to the duty being of long standing, and Neuberger J himself cites at 326a-i from two cases from the end of the 19^th century, Kaye v Croydon Tramways Co [1898] 1 Ch 358, and Tiessen v Henderson [1899] 1 Ch 861. Both cases characterise the rule as a rule of ordinary fairness: in the former case Sir Nathaniel Lindley MR refers to "ordinary fairness of language" and Rigby LJ to the purpose of the meeting being "fairly and in language that could be understood by ordinary people disclosed"; and in the latter case Kekewich J refers to the shareholder having "fair warning of what was to be submitted to the meeting."
21. I do not find in these citations – or in anything else that I was shown – any suggestion that the sufficient information duty shares the characteristics typical of fiduciary duties owed by those who have undertaken to act in the interests of others and who have agreed to serve the interests of others with loyalty. The wellspring of this duty is not that the directors have agreed to put the interests of the shareholders first, but the much more simple one that if they are going to invite the shareholders to a meeting, common fairness requires that they explain what the purpose of the meeting is. That includes being clear and comprehensible and not misleading or tricky; but the reason for this is one of fairness, not of loyalty.
22. In these circumstances I am very doubtful if it is appropriate to describe this duty as a fiduciary duty at all, but whether or not that is so (and as I have already said Ms Davies accepted that this was arguable), it does not seem to me that the duty includes all the usual attributes of fiduciary duties as set out in Mothew's case.
23. Specifically as to the duties pleaded in paragraph 39:

(1) Paragraph 39(1) pleads a duty to act in good faith. The expression "good faith" is unfortunately an ambiguous one. In most cases to accuse someone of a breach of a duty of good faith is to accuse them of acting in bad faith, which itself connotes acting with some conscious improper motive. In the present case the Claimants did initially plead that the Defendants in some respects acted in bad faith, but they do not wish to pursue those allegations and have agreed that they will amend to delete them (although as appears below at least one seems to have survived, in paragraph 121(5), I assume inadvertently). In those circumstances "good faith" in this sense is not in issue. In some contexts however, including that of fiduciary duties, the context of "good faith" is used as a shorthand for certain duties, including in particular the duty of a fiduciary to disclose material facts before entering into a transaction with his principal, and it is possible to breach a duty such as that without conscious or deliberate impropriety. As Mr Steinfeld made clear, it is that extended sense of "good faith" which the Claimants seek to invoke here, but for the reasons I have sought to give, that type of good faith obligation does not in my judgment form part of the sufficient information duty.

(2) Paragraph 39(2) pleads a duty to act in the best interests of the Claimants and to prevent them from suffering loss. That duty cannot in my judgment be derived from the sufficient information duty.

Ms Davies also objected to this duty on the basis that fiduciary duties are always proscriptive not prescriptive, citing Breen v Williams [1997] 1 LRC 2121 at 250-1 and Pilmer v Duke Group Ltd (in liquidation) [2001] 2 BCLC 773 at [69]-[83], both decisions of the High Court of Australia. I do not intend to embark on a discussion of this point, which seems to me to raise quite difficult issues – for example express trustees (who are certainly fiduciaries) are in some respects under a positive duty to act in the best interests of their beneficiaries, and one would have thought this was an example of a prescriptive fiduciary duty; it is sufficient to say, as I have, that whatever the scope of the sufficient information duty it does not extend to a positive duty to act in the best interests of the shareholders or prevent them from suffering loss.

(3) Paragraph 39(3) pleads a duty not to mislead the Claimants or conceal material information from them and is not disputed.

(4) Paragraph 39(4) pleads a duty not to place themselves in a position of conflict. Again I do not think this can be derived from the sufficient information duty.

Without finally deciding anything at this stage, I may add that it is not clear to me that this conclusion has any practical significance. I was referred to paragraph 120(4) where it is pleaded that the Defendant directors put themselves in a position of conflict between their duties to the shareholders not to conceal information from them and the interests of third parties such as the UK government and others in maintaining secrecy in various matters. I do not see that this adds anything of substance to the allegation that the directors did not disclose what they should have done. Either the sufficient information duty required them to disclose something more to shareholders or it did not. If it did, then they were in breach of duty and it does not I think matter what their reasons were for failing to disclose. If it did not, the question falls away and the reason why they did not disclose is equally irrelevant.

(5) Paragraph 39(5) pleads a duty to act for a proper purpose. It is trite law that any powers (whether fiduciary or not) can be exercised only for the purposes for which they are conferred, and not for any extraneous or ulterior purpose, and this is certainly true of the powers conferred on directors. But the duty of directors to use their powers for a proper purpose is a facet of the duties owed by directors to their company. (This has now in fact been put on a statutory footing: see s. 170(1), s. 171(b) of the Companies Act 2006). I do not see that this is a duty separately owed to the shareholders; nor do I see it as encompassed within the sufficient information duty.

(6) Paragraph 39(6) pleads a duty to advise and inform the Lloyds shareholders in clear and readily comprehensible terms, and is not disputed.

Save for the duties pleaded at paragraphs 39(3) and (6) therefore, the other duties pleaded in paragraph 39 do not in my judgment form part of the sufficient information duty, and on the facts pleaded in paragraph 37 are not sustainable in law. I will therefore strike them out under CPR 3.4(2)(a) on the basis that they disclose no reasonable grounds for bringing the claim (CPR 3.4(2)(a) refers to striking out a statement of case but by CPR 3.4(1) this includes part of a statement of case).

Calling of the EGM

24. Ms Davies also sought to attack one other aspect of the Particulars of Claim, namely paragraphs 121, 122(2) and 127. These read as follows:

(1) Paragraph 121:

"In the light of the Directors' Knowledge, the Written and Oral Representations, the Omissions and, in particular, the Concealment, it was a breach of the Fiduciary Duties and/or Tortious Duties for the directors of Lloyds, including the Defendants, to (a) put the proposed acquisition of HBOS and participation in the Recapitalisation Scheme to shareholders and/or (b) permit the EGM to take place and the Lloyds shareholders to vote on the Resolutions on the basis of what they knew to be incomplete and misleading information, statements and advice."

This is followed by Particulars of Breaches. Sub-paragraphs (1) to (4) of these plead certain things that the Defendant directors are said to have known. It continues

"(5) In the premises, in putting the proposed transactions to shareholders and/or permitting the EGM to take place and Lloyds shareholders to vote on the Resolutions, the Defendants were acting in bad faith and contrary to the best interest of shareholders.

(6) Alternatively, if it be alleged that the Defendants did not know or understand any of the matters detailed at subparagraphs (1) to (4) above, the Defendants ought to have known and understood those matters and, therefore, acted negligently in permitting the EGM to have taken place."

(2) Paragraph 122:

"In the premises set out above, the Defendants, acting in accordance with the Fiduciary Duties and/or the Tortious Duties rather than breaching them, would have either

(1) Disclosed to Lloyds shareholders the fact that HBOS had received a £10 billion loan from Lloyds and was wholly reliant on covert financial support from the Bank of England and the Federal Reserve to enable it to pay its debts as they fell due and to continue to trade; or

(2) Declined to proceed with the acquisition of HBOS."

(3) Paragraph 127:

"In breach of the Fiduciary Duties and/or the Tortious Duties, the directors of Lloyds, including the Defendants, procured that the EGM took place on 19^th November 2006 in accordance with the Notice."

25. Ms Davies' submission is that the allegation that it was a breach of duty to go ahead with the EGM must on analysis be based on the supposed duties to prevent loss to the shareholders, as the other duties all relate to the provision of information and advice to shareholders. It became clear in the course of argument that her particular concern was that an allegation that it was a breach of duty to permit the EGM to go ahead would enable the Claimants to run the argument on causation that (i) the Defendants were in breach of duty in allowing the EGM to proceed; (ii) if the Defendants had not been in breach of duty the EGM would not have taken place; (iii) if the EGM had not taken place the acquisition of HBOS would not have happened; and therefore (iv) damages (or equitable compensation) should be assessed on the basis of the position the Claimants would have been in had the acquisition not gone ahead.
26. This is not I think an argument that is open to the Claimants on the current pleadings. The allegation that the Defendants' various breaches of duty caused the Claimants loss is found firstly in paragraphs 122 to 125. Paragraph 122 (set out above) does not simply plead that the Defendants would not have gone ahead with the EGM had they complied with their duties: as can be seen, it pleads that the Defendants would either have disclosed certain matters or not gone ahead. In principle I can see nothing illogical or wrong in such a plea. It is accepted that the duty of directors when calling an EGM is or includes the sufficient information duty. Suppose that the Court holds that this duty required the disclosure of a particular fact. It follows that for the directors to go ahead with the EGM without disclosure of that fact was a breach of duty. It seems to me true and unobjectionable to say that in those circumstances if the directors were to avoid being in breach of duty they either had to disclose the fact or not proceed with the EGM. To put it another way the formulation of the sufficient information duty by White J in the Residues Treatment case (adopted by Neuberger J in re RAC Motoring Services Ltd) is a duty to give shareholders:

"sufficient information for them to make informed decisions about proposals to be put them at meetings."

It follows that if no proposals are put, no information needs to be provided, so directors can avoid being in breach either by not putting proposals or by providing the requisite information. I am not therefore persuaded that paragraph 122(2) or any part of paragraph 122 falls to be struck out.

27. What however this does not do is answer the question how one assesses the loss caused by the breach. That depends on what would have happened had the directors not acted in breach of duty. Paragraph 123 pleads that if the matters referred to in paragraph 122(1) had been disclosed this would have been picked up by the financial press and market analysts and they would have written extensively on the folly of Lloyds' acquisition of HBOS on the proposed terms, and Lloyds would have been forced to pull out of the acquisition; paragraph 124 then pleads an alternative case that no shareholder properly informed of the true financial circumstances of HBOS would have voted in favour of the acquisition. Paragraph 125 then pleads that it necessarily follows that if the Defendants had acted in accordance with their duties, the acquisition would not have gone ahead and the Claimants would not have suffered the loss and damage for which the claim is made.
28. None of this seems to me to assert that the Claimants can establish causation on the simple basis that it was a breach of duty to call the EGM and hence that loss should be assessed by reference to what would have happened had the EGM not been called. On the contrary, it seems to me plain that to make good the plea at paragraph 125 that the Claimants would not have suffered the loss claimed, the Claimants will have to establish not only a breach of duty, but also that if there had been disclosure either the acquisition would not have gone ahead for the reasons pleaded in paragraph 123 (the directors being forced to pull out of the acquisition as a result of press and market commentary on the folly of proceeding), or for the reasons pleaded in paragraph 124 (the shareholders not voting in favour of it). As I understood it, Mr Steinfeld accepted that in the course of argument, but whether he did or not, I am clearly of the view that the current pleading does require the Claimants to establish causation by establishing what would have happened had the directors made the disclosure which they say should have been made.
29. There is a further plea of causation in paragraphs 130 to 133: paragraph 130 pleads that the Lloyds shareholders relied on various representations and other matters; paragraph 131 that they were misled as to the true merits by various representations and omissions; paragraph 132 that if they had not been misled:

"the majority in number and by value of the Lloyds shareholders would have voted against the Resolutions at the EGM on 19^th November 2008 and would not have suffered the loss and damage in respect of which this claim is made"

and paragraph 133 then adds that although some of the Claimants in fact voted against the Resolutions or abstained they too have suffered loss because the Defendant directors misled the vast majority of shareholders into voting in favour of them.

30. As can be seen there is no suggestion in those paragraphs either that the Claimants can establish causation on the basis that it was a breach of duty to call the EGM and hence that loss should be assessed by reference to what would have happened had the EGM not been called. It is firmly tied to the question how the majority of shareholders would have voted had they not been misled by the alleged misrepresentations and omissions which are said to constitute a breach of duty.
31. In these circumstances Ms Davies' concerns about this point largely I think fall away. But taking the 3 paragraphs that are attacked on their merits, my views are as follows:

(1) I have already said that there seems to me nothing wrong with paragraph 122.

(2) Paragraphs 121 and 127 can be taken together. Although paragraph 127 taken by itself appears to plead simply that it was a breach of duty to hold the EGM, Mr Steinfeld accepted that this was not intended to go beyond what was alleged in paragraph 121 and should be read as a reference back to what was said there.

(3) Paragraph 121 alleges a breach of both fiduciary and tortious duties (as does paragraph 127). So far as tortious duties are concerned, this has to be read with paragraph 121(6) which pleads that it was negligent of the Defendants to permit the EGM to take place when they ought to have known certain matters. I agree with Ms Davies that this can only be understood as a breach of the particular duty pleaded at paragraph 40(5), as the other tortious duties are all concerned with a duty to take care in giving advice and I do not see how it can be a breach of a duty to take care in giving advice not to hold the EGM. But with the clarification that paragraph 40(5) is not intended to plead a freestanding duty and is only intended to plead that the scope of the duty of care extended to the losses claimed, it can be seen that there is no duty which will support this particular allegation of negligence. It does seem to me therefore that Ms Davies is right that the references to tortious duties in paragraphs 121 and 127 are unsustainable and should be struck out.

(4) That leaves the allegation of breach of fiduciary duties. As I read it (and Mr Steinfeld did not suggest to the contrary) the words at the end ("on the basis of what they knew to be incomplete and misleading information, statements and advice") are intended to qualify both limb (a) (putting the proposed acquisition to shareholders) and limb (b) (permitting the EGM to take place) as no sensible distinction can be drawn between them. On this assumption the statement in the body of the paragraph that it was a breach of duty to allow the EGM to go ahead without full information seems to me merely another way of saying that their duty was to provide sufficient information if the matter was to go ahead. I do not think that by itself it is objectionable.

(5) However the particulars of breach given under this paragraph, which are found in sub-paragraph (5), refer to the directors acting in bad faith and contrary to the best interests of Lloyds shareholders. These are clearly pleaded as breaches of the duties in paragraphs 39(1) and (2) which I have already held to be unsustainable. Since this is the only basis for the plea of breach of fiduciary duties in paragraph 121, I think it logically follows that the plea of breach of fiduciary duties is unsustainable.

(6) Since I have held that neither the plea of breach of tortious duties nor the plea of breach of fiduciary duties is sustainable, I consider that this paragraph (and paragraph 127 which is dependent on it) do also fall to be struck out pursuant to CPR 3.4(2)(a).

Conclusion

32. It may be helpful if I summarise my conclusions:

(1) Paragraph 40(5), which is not intended to plead a separate free-standing tortious duty, should be deleted and replaced by a statement that the duties in paragraph 40(1)-(4) included duties in respect of the kinds of losses which the claimants claim to have suffered.

(2) Paragraphs 39(3) and 39(6) are not objected to but paragraphs 39(1), (2), (4) and (5) should be struck out.

(3) Paragraph 122, including paragraph 122(2), is not objectionable and should be allowed to stand.

(4) Paragraphs 121 and 127 should be struck out.

33. Where I have held that parts of the pleading should be struck out, I have done so under the powers in CPR 3.4(2)(a). The application notice relies in the alternative on CPR 24.2 but in circumstances where I have held that the pleas do not plead a sustainable case in law, the powers in CPR 3.4 seems to me to be both adequate and fitting and I do not think that in those circumstances it is either necessary or appropriate to resort to the powers in CPR 24.2 as well.