Can a director owe fiduciary duties to shareholders?
In a recent decision, Kelly and Anor v Baker and Anor  EWHC 1879 (Comm), the English High Court has considered the circumstances in which a director may owe fiduciary duties directly to a shareholder. This issue is of direct relevance to the Bermuda, British Virgin Islands and Cayman Islands Courts given the heavy amount of case law on directors’ duties in those jurisdictions.
This case concerns the sale of two companies in a family business. The claimant, Mr Kelly, is a member of the family that has formed the business, as well as a director and a shareholder of the companies concerned. Mr Kelly alleged that he was misled by the other directors, the defendants, as to the true nature of the sale, which was a management buy-out. Mr Kelly further alleged that as a result of the defendants’ interests in the buy-side, the companies were sold undervalue, and the defendants, whom he trusted implicitly because of the relationship between them, breached fiduciary duties to him and to the second claimant, a company which he owns and controls.
This is not a conventional case of a director owing fiduciary duties to a company. Nonetheless, the parties accepted that a fiduciary relationship may arise outside the archetypal circumstances. In considering in what circumstances a fiduciary relationship may exist between a director and a shareholder, the English High Court examined the English, New Zealand and Singapore authorities, and concluded that a fiduciary duty may arise in circumstances where there is an explicit undertaking or where there is a pre-existing relationship such that the shareholder is entitled to repose trust and confidence in the director. The Court said though fiduciary relationships are most likely to exist in cases of small and closely held companies, where there is often a familial or other personal relationship between the parties, the existence of the close relationship is not the hallmark. The hallmark is the legitimate expectation arising from the nature of the relationship between the parties that one will act in the interest of another.
The Court considered the facts at length and held that no fiduciary relationship was established. The Court found that there was no evidence that the defendants have the degree of control and influence over the financial and business affairs concerning the claimants sufficient to give rise to a fiduciary relationship. The evidence showed that Mr Kelly was closely involved in the transaction and did not rely on advice from the defendants in making the decision to sell the companies. Accordingly, the claimants’ claims failed.
This decision recognises that a director may owe fiduciary duties to shareholders in special circumstances, and underlines the difficulty of establishing such fiduciary duties even in the context of small and closely held companies.
Harneys practises BVI, Cayman Islands, Cyprus, Luxembourg, Bermuda, and Anguilla law. Harneys does not practise English law.