Sharp & Other Claimants Listed in the GLO Register v Blank & Ors

Factual and Procedural Background

This judgment follows the trial of specific allegations brought by a group of shareholders of Company A against five former directors of Company A, seeking to hold them personally liable for losses of approximately £385 million related to the reverse takeover of Company B by Company A in 2008 during the financial crisis. The court’s task was limited to these allegations and did not extend to a full investigation of the takeover or its ultimate justification. The shareholders numbered over 5,800 and collectively held no more than 5% of Company A’s shares at the announcement date.

The takeover process involved a series of events beginning with initial discussions in mid-2008, the announcement of a recommended acquisition on 18 September 2008, followed by a recapitalisation weekend in October 2008 during which revised terms were agreed, including a reduced exchange ratio and a government recapitalisation package. Company A’s board unanimously recommended the acquisition, which was approved by shareholders on 19 November 2008.

During the acquisition process, Company B faced severe liquidity and funding difficulties, supported by emergency liquidity assistance ("ELA") from the central bank and a secured interbank facility ("the Repo") provided by Company A. These arrangements were not disclosed in the shareholder circular relating to the acquisition. The claimants contend that the directors breached duties of care and fiduciary duties in recommending the acquisition and failing to disclose material information, leading to shareholder losses due to dilution and overvaluation.

The factual evidence included extensive documentary material, witness statements from directors, shareholders, and experts, as well as detailed expert reports on valuation, banking practice, capital adequacy, and media reaction. The court carefully considered the challenges of retrospective assessment, the extraordinary market conditions, and the roles and responsibilities of the directors and advisers involved.

Legal Issues Presented

1. Whether the defendant directors breached their duty of care and fiduciary duties in recommending the Acquisition of Company B by Company A to shareholders.
2. Whether the defendant directors breached their duty of care and equitable duties by failing to disclose material information to shareholders, including the existence and nature of emergency liquidity assistance and interbank funding arrangements.
3. Whether the shareholders suffered loss as a result of any such breaches, and if so, the nature and extent of recoverable damages.

Arguments of the Parties

Claimants' Arguments

• The Acquisition was a dangerous and value-destroying strategy involving unacceptably risky decisions.
• The defendant directors failed to disclose material information about Company B’s funding crisis, including the emergency liquidity assistance and the secured interbank facility provided by Company A.
• The directors negligently recommended the Acquisition and misled shareholders by omission and misstatement in the shareholder circular and presentations.
• The Acquisition caused shareholder losses by dilution and overpayment for Company B, which was effectively valueless due to liquidity support.
• The directors owed a direct duty of care to individual shareholders to provide accurate advice and complete disclosure in relation to the Acquisition.
• If the information had been properly disclosed, the Acquisition would not have proceeded or would have been rejected by shareholders, avoiding losses.

Defendants' Arguments

• The directors owed their duties to Company A and not directly to individual shareholders; any claim should be derivative.
• The recommendation to shareholders in the circular was made honestly and on reasonable grounds based on extensive due diligence and expert advice.
• The emergency liquidity assistance and interbank facility were properly regarded as ordinary course interbank transactions or closely related to the Acquisition, with no obligation to disclose them specifically.
• The circular and presentations fairly and candidly disclosed the risks inherent in the Acquisition, including capital and liquidity risks, consistent with regulatory requirements.
• The shareholders were adequately informed to make a decision, and the majority voted in favour of the Acquisition on a fully informed basis.
• The claimants have not shown causation or loss, and the alleged losses are too remote or reflective of company losses.

Table of Precedents Cited

Court's Reasoning and Analysis

The court acknowledged the extraordinary complexity of the case, the volume of evidence, and the difficulties inherent in retrospective evaluation of commercial decisions made in the context of an unprecedented financial crisis. It emphasized the need to avoid hindsight bias and to assess the directors’ conduct by the standards of reasonably competent directors at the relevant time, taking into account the information and constraints they faced.

Regarding the recommendation case, the court held that the directors owed a duty of care to Company A and not directly to individual shareholders, except in limited circumstances not present here. The directors conceded a duty of care in relation to the shareholder circular, but denied such a duty in relation to the initial announcements and presentations. The court agreed that the announcements and presentations were made on behalf of the company to the market and did not constitute personal advice to shareholders.

The court found that the directors had reasonable grounds, based on extensive due diligence, expert advice, and regulatory input, to conclude that the Acquisition was in the best interests of Company A and its shareholders. The risks identified, including capital and liquidity risks, were disclosed in the circular and presentations, and the directors did not ignore or conceal material risks. The directors’ economic and capital forecasts, though ultimately proven optimistic, were within a range of reasonable judgments at the time.

In relation to the disclosure case, the court held that the directors breached their equitable duty to disclose material information by failing to inform shareholders of (i) the existence and nature of the emergency liquidity assistance provided by the central bank to Company B, and (ii) the secured interbank facility ("the Repo") extended by Company A to Company B pending completion. These facts were known to the directors but were not disclosed in the circular, and the matter was not considered by the board or its advisers in preparing the circular.

The court reasoned that fair, candid and reasonable disclosure would have included reference to these facilities in a manner sufficient to inform shareholders of the liquidity position and funding risks of Company B pending completion, without causing undue alarm or speculation. The failure to disclose was a misstatement of the care exercised in preparing the circular.

However, on causation and loss, the court found that the claimants failed to prove that disclosure of these matters would have caused the Acquisition not to proceed or the shareholders to reject the Acquisition. The directors would not have terminated the transaction on account of such disclosure, and the market reaction to the later leak of the Repo facility was muted. Expert evidence indicated that disclosure would have been seen as incremental information but not one causing a collapse of share price or shareholder vote. The majority of shareholders voted in favour on the basis of the circular as issued, and the claimants failed to establish a real or substantial chance that a sufficient number of other shareholders would have voted differently.

On the pleaded losses, the court held that no damages could be awarded as the claimants had not proved loss. The alleged overpayment for Company B was not established, and any such loss would be reflective loss recoverable only by the company derivatively. The diminution in share value was not properly measurable on the evidence, and the claimants failed to prove any loss causally connected to the breaches pleaded.

Holding and Implications

DISMISSED

The court dismissed the claims against the defendant directors. It held that while the directors breached their equitable duty to disclose certain material information about emergency liquidity assistance and interbank funding arrangements, the claimants failed to prove that this breach caused them loss or that the Acquisition would have been rejected or terminated if the information had been disclosed. The directors’ recommendation of the Acquisition was found to be within the range of reasonable judgments, made on the basis of extensive due diligence and expert advice in extraordinary market conditions. No new precedent was set. The direct effect is that the claimants’ action for damages or equitable compensation fails, and the Acquisition stands as approved by the shareholders.