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High Court dismisses shareholder group action against Lloyds Banking Group


Mr Justice Norris has today handed down judgment in the Lloyds/HBOS Group Litigation, dismissing the claims which had been brought by about 5,800 shareholders against Lloyds and five of its former directors in relation to Lloyds’ acquisition of Halifax Bank of Scotland (“HBOS”) in 2008 and its participation in the UK Government’s bank recapitalisation scheme.

The acquisition of HBOS by Lloyds was announced to the market on 18 September 2008 (“the Announcement”), three days after the fall of Lehman Brothers, and in the midst of the global financial crisis.  Lloyds initially proposed to acquire all of the issued shares in HBOS by issuing 0.83 new Lloyds shares for every HBOS share. This valued HBOS at about £12.2 billion.

On 13 October 2008, Lloyds announced that the acquisition would proceed on revised terms, and that HBOS shareholders would receive 0.605 Lloyds shares for every HBOS share (the “Revised Announcement”).  In addition, Lloyds announced that the merged entity would raise £17 billion of new capital through participation in the bank recapitalisation scheme, of which £11.5 billion would be raised by HBOS and £5.5 billion would be raised by Lloyds.

On 3 November 2008, Lloyds published a shareholder circular (“the Circular”) in which the Board of Directors unanimously recommended that the Lloyds shareholders should vote in favour of the acquisition at an Extraordinary General Meeting (“the EGM”) which was scheduled to take place on 19 November 2008.  96% of the shares voted at the EGM were ultimately voted in favour of the acquisition.  The acquisition completed on 19 January 2009.

The Claimants in the Lloyds/HBOS Group Litigation are a mix of institutions and private individuals who each claim to have been shareholders in Lloyds at the time of the acquisition.  Collectively, they claim to have owned around 310 million shares in Lloyds at the time of the EGM, which was the equivalent of about 5% of the total number of shares then in issue.

By the time of the trial, the Claimants’ claims were put in two main ways.  They alleged that:

  1. The Lloyds Board had been negligent in recommending that the acquisition of HBOS was in the best interests of shareholders in Lloyds and that the shareholders should vote in favour of the acquisition at the EGM (the “Recommendation Case”);
  2. The Lloyds Board failed to disclose material information or made material misstatements about the merits of the acquisition, not only in the Circular itself, but also in a number of other documents which they published and other presentations which they made prior to the EGM (the “Disclosure Case”).

The Claimants claimed damages or equitable compensation for the alleged loss in the value of their shares as a result of the acquisition, in the total sum of approximately £385 million.

It appears that this is the first civil claim for compensation which has been brought by shareholders against the directors of a company in relation to the contents of a Circular or Announcements. 

Following a five-month trial, which was heard between October 2017 and February 2018, Norris J has dismissed each of the Claimants’ claims against Lloyds and its former directors.

In the course of his judgment, Norris J addresses a number of legal points, particularly in relation to the duties of directors, which are likely to be of wider interest to practitioners.

In particular, Norris J finds that, although the Directors of Lloyds owed a common law duty to shareholders to exercise reasonable care in relation to statements made in the Circular, and an equitable duty to ensure that the Circular provided shareholders with “sufficient information” to make an informed decision about the acquisition at the EGM, they owed no such duties in relation to the Announcement or the Revised Announcement, or any of the investor presentations which took place prior to the publication of the Circular.  The Directors had owed regulatory duties in respect of statements which they made in other contexts (in particular, under the Listing Rules, the rules of the LSE and the City Code), but such duties were not actionable in civil proceedings against directors by shareholders. 

In addition, although Norris J held that the Claimants had failed to establish that any of them had actually been caused any loss on the facts, the losses which they had claimed would have been reflective losses in any event, and therefore irrecoverable at the suit of a shareholder as a matter of law.  In this context, Norris J declined to follow the controversial decision of the High Court of Australia in Pilmer v Duke Group Ltd [2001] B.C.L.C. 773, which held that a company does not suffer any loss where it issues new shares at an undervalue, instead of paying cash for a new acquisition.

The judgment is here and the executive summary is here.

The hearing of consequential matters will take place at a later date.

Helen Davies QC, Tony Singla and Kyle Lawson of Brick Court Chambers acted for Lloyds and each of the five Director Defendants, instructed by Herbert Smith Freehills.