Directors and Shareholders – Fiduciary Relationship
Do company directors owe fiduciary duties to shareholders?
What is a fiduciary relationship?
A Fiduciary Relationship arises in circumstances where one party, due to the nature of their position, owes a duty of loyalty, honesty, and trustworthiness to another party, usually because it has control over money or property belonging to that party. The party owing the obligation is known as the fiduciary. You might then believe that shareholders, as owners of a company, are owed fiduciary duties by directors given that directors are entrusted by shareholders to run the day to day affairs of a company. However, as a general rule company directors do not, solely by virtue of their position, owe fiduciary duties to shareholders. This principle has been revisited during the hearing of a recent case.
During the course of a management buyout, members of the management team of Updata Infrastructure UK Limited (UI) purchased shares in UI through a newly incorporated company (newco). The claimants for this case were the shareholders of UI prior to the sale in 2009. They claimed UI management had deliberately misled them about the company value, causing them to sell their shares to newco at a deliberately low price. They claimed that the management had breached fiduciary duties owed to them by providing false information about UI’s financial position. The court held that there was no doubt that the general common law position still applies, and that directors may only be deemed to owe fiduciary duties to shareholders where special circumstances arise.
The court did not provide an exhaustive list of when such exceptions to the rule may apply, however it did provide some guidance of when fiduciary relationships might exist between directors and shareholders:
“These 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 particular transaction involved in which directors are dealing with the shareholders”.
The quote was clear that when a director is purchasing shares from a shareholder that in itself is not sufficient to give rise to a fiduciary duty. The fact that a director has more knowledge of a company’s affairs, or that their actions have the potential to affect shareholders, does not amount to special circumstances, or amount to a special relationship between directors and shareholders.
The claimants were unable to satisfy the court that a special relationship existed between the shareholders and the directors of UI. However, the defendants were ultimately found liable in another cause of action for having provided false information to the selling shareholders.
If you need to speak a specialist solicitor who deals with director/shareholder matters, please contact Aaron Marshall on 01204 377600. Alternatively, you can send an email with your name, contact information and brief details as to the nature of your issue to email@example.com and one of our team will be able to help you.