Shareholder class actions (Myer and Lloyds Bank)

In the last weeks of this year, two shareholder class actions (on in Australia and one in the UK) have attracted a lot of legal commentary.

In brief, an Australian Federal Court judgment that Australian department store owner Myer did not need to pay damages in a class action, despite finding that Myer had engaged in misleading or deceptive conduct over a four-month period in FY15, has provided some interesting learnings.  These include lessons about the interaction between a listed company’s (and its directors) obligations for continuous disclosure under the listing rules and [other] legal obligations – not to indulge in misleading and deceptive conduct.  The latter are directly relevant to the fair dealing obligations under the FMC Act.

The UK decision is a High Court judgement dismissing a claim brought by a group of Lloyds Bank shareholders against Lloyds and five of its former directors relating to the takeover (rescue) of HBOS during the GFC in 2008.  On a brief review, the Lloyds Bank case provides a number of important learnings.  Too many to be discussed in this short note.  For example, there are important lessons to be gained in relation to:

• The points of distinction about the relevant (legal) undertones affecting stock exchange announcements – where the judge agreed that the directors did not owe a duty to shareholders in respect of those announcements because they were for regulatory purposes – and made it clear that the shareholders could obtain more detailed information (on which to exercise a vote on the takeover proposal) in the meeting materials.  In a New Zealand context, against the backdrop of the fair dealing provisions in the FMC Act, it is conceivable that a New Zealand court may reach a different conclusion.
• Directors’ responsibilities in relation to the content of meeting materials (including board recommendations) distributed for the purposes of seeking shareholder approval for the transaction.  On this topic the judge made important comments about the need for directors to provide shareholders with a “…fair, candid and reasonable account…” of the circumstances to enable shareholders to make an informed decision.  This did not require provision of all of the information on which the directors’ recommendation is based – and that a, candid and reasonable account will include both the positives and negatives (but not necessarily emphasise the weaknesses).  Again, I suspect that the application of the fair dealing provisions in the FMC Act could have led to a different outcome.

The final takeaways are that of the reluctance, yet again, of UK courts to second-guess commercial decisions made by company directors.  By acquiring HBOS, Lloyds Bank bought a lemon.  The core of the shareholder claim was that the directors should not have recommended the takeover (and that the meeting materials were inadequate).  As a result, the shareholders claimed that had the takeover not gone ahead, then their shares in Lloyds Bank would have been worth considerably more, not least of which was as a result of Lloyds Bank not needing to make a (highly dilutive) recapitalisation to address the problems it inherited when it took over HBOS.

Effectively, the hurdle applied by the court to the directors’ duties in relation to the recommendations in the meeting materials was not whether a reasonable director could have come to a different conclusion (about the merits of the HBOS takeover) but, in effect, whether no reasonable director could have come to the same conclusion.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.