Do Directors Owe Fiduciary Duties to their Shareholders?

Do Directors Owe Fiduciary Duties to their Shareholders?

Yes, in exceptional circumstances. In this article our corporate team look at the implications of the recent case of Vald Nielsen Holding A/S v Baldorino [2019] EWHC 1926 (Comm).

Jacobs J considered the circumstances in which directors owe fiduciary duties to its shareholders. The claim related to the sale of shares in one company (X Company) to another (Newco) in accordance with a management buy-out led by the directors of X Company.

The Claimants, who were the shareholders of X Company, contended that they were misled by the directors into selling their shares, at a substantial reduction, to Newco. It was the Claimants position that the directors made false representations regarding the financial state of X Company and as such the shareholders were deceived into the sale. Jacobs J examined a number of English, Australian and New Zealand case law and declared that as a general rule, directors do not owe fiduciary duties to its shareholders. However, this is subject to a caveat which relates to the nature of the relationship between directors and shareholders. Jacobs J found that the mere fact that a director has knowledge of the company's affairs does not give rise to a peculiar circumstance, this is an inevitable feature of being a director.

In addition, as far as case law is concerned, the fact that a director is purchasing shares from a shareholder does not in itself create a fiduciary duty. The existence of such duty depends upon the relationship between the directors and its shareholders.

The authorities demonstrate that a fiduciary relationship between a director and shareholder will more commonly arise in smaller companies, often between family members where there is a special relationship in existence.

On the facts, Jacobs J held that no special circumstances were present between the directors and shareholders. As such, no fiduciary duties arose and the Claimants claim for breach of duty failed.