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October 27, 2015

Questions over ‘duty of directors’ in Lloyds-HBOS pre trial hearing

By Franchesca Hashemi

Discussions about directors’ fiduciary duties were central to a three-day pre trial hearing brought against Lloyds by 6,000 shareholders over the HBOS deal in 2008, which resulted in a £20.5bn ($31.5bn) bailout from the UK government.

At the Royal Courts of Justice on Friday 23 October, lawyers for the shareholders argued that five former Lloyds’ directors – including ex-chairman Victor Blank – should have known the HBOS acquisition was not a good deal for investors.

The claim has been brought by 5,700 private shareholders and 300 financial companies, including pension funds and other invetsment entities, as they suffered losses due to Lloyds’ takeover of HBOS.

Lawyers for Lloyds disputed aspects of the claimants’ argument that the banks’ former directors breached "fiduciary and-or tortuous" duties when proposing the HBOS acquisition and recapitalisation scheme, and when they permitted the extraordinary general meeting (EGM) on 19 November 2008 on the basis of what claimants alleged the directors knew to be misleading or incomplete financial information.

The claimants asserted that Lloyds’ five former directors did not act in the best interests of shareholders, as they allegedly failed to reveal a £10bn loan facility Lloyds made to HBOS so that it could continue trading; that HBOS had been receiving emergency liquidity assistance of up to £25bn from the Bank of England and $18bn from the Federal Reserve.

Helen Davies QC, representing Lloyds, examined the claimant’s "formulation" of the scope of director duties and sustainability as a matter of law.

Specifically, she questioned whether the claimants’ lawyers categorisation of the calling or proceeding of an EGM was a breach of duty. Rather a breach of duty would come from a failure to provide proper information to shareholders, Davies continued.

While neither party sought to advance their case explicitly during the pre-trial hearing on the basis of director’s duties, the debate raised questions over the practical effect a director’s perceived duty has on shareholders.

However, Alan Steinfield representing shareholders later retorted that he could not understand the distinction between Lloyd’s former directors calling the EGM and putting forward misleading information. He said he would not go so far as to call it "semantic quibble", but from the claimant’s perspective the director’s breached their duty when allowing shareholders to vote to on inadequate information.

Davies explored the notion of directors having an "equitable" duty, in terms of a duty of disclosure and to provide proper information. She then suggested that just because a senior industry leader is said to have "fiduciary duties" it does not mean all "aspects of their activities are fiduciary duties owed to a particular class."

Lloyds’ lawyer then argued the claimant’s hadn’t made an adequate distinction between the fiduciary and tortuous duties that are allegedly owed by the former directors to the 6, 000 shareholders.

Of the broader scope of director duties which the claimants alleged were breached due to the HBOS deal was "duty to prevent loss".

Steinfield for the claimants accepted it would have been "tidier" to outline the particular losses suffered by the claimants for the purpose of the pre trial hearing.

Yet the fact does remain that Lloyds’ former directors recommended the HBOS deal to their shareholders in 2008, and Davies said this decision would be explained in Lloyds’ evidence.

Given the complex and preliminary nature of the pre-trial hearing, Judge Christopher Nugee (who was presiding over the pre trial hearing) said it made sense as a "general proposition" that there may be situations in which the director’s duty cuts across duties to the individual shareholder, he also suggested that "tortuous" duties put forward by the claimant’s had metamorphosed without definition of scope.

No rulings were given in this respect and the scope of director’s duty may prove an important issue when the case goes to court in 2016.

It was expected that the pre-hearing would also tackle whether IFRS provided a true and fair view of accounts regarding the value of HBOS, however discussions around this topic have been postponed.

Related storyIFRS under scrutiny in Lloyds’ HBOS acquisition court case


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