Introduction

• This case deals with the issue that the directors are not in a fiduciary relationship with each individual shareholder when they buy or sell shares from or to him.
• They can purchase shares without disclosing pending negotiations for the sale of the company’s undertaking.

Facts

• This case involved challenging a sale of shares in a limited company.
• The argument was that the buyers, who were also directors, should have informed the existing shareholders about ongoing negotiations to sell the company's business.
• According to the company's official documents, it was allowed to sell its property, but selling the coal mines required a special resolution.
• When the company's shares were priced low, one director, acting on behalf of the company, arranged to sell the business at a very favourable price.
• To take advantage of this, the directors bought as many shares as possible before the sale became public, making a significant profit.
• During this period, a person named Holden was approached by the chairman and the board of the company.
• Holden wanted to buy the entire business of the company and sell it later to another company for a profit.
  • He suggested different prices, all of which were much higher than £12.10 per share. However, Holden never made a firm offer that the board could present to the shareholders, and the negotiations didn't succeed.
• The plaintiffs, in this case, took legal action against the chairman and the two other directors who purchased the shares.
• They sought to nullify the sale, arguing that the directors should have disclosed their negotiations with Holden when buying the plaintiffs' shares because of their role as directors.

Issue Involved

• Whether directors stood in fiduciary position to disclose the negotiation to the shareholders of the company?

Observations

• The House of Lords emphasized that directors hold a fiduciary position as trustees for individual shareholders, particularly during negotiations for the sale of a company.
• However, the court acknowledged that this fiduciary duty does not prevent directors from engaging in dealings with shareholders before discussions about the sale arise.
• The court clarified that shareholders are presumed to be aware of directors' powers and have no reason to assume that negotiations for a sale are not underway.
• The House of Lords asserted that directors are not obligated to disclose unsuccessful negotiations to shareholder vendors.
• Requiring such disclosure would put directors in a difficult position, potentially harming the company's interests.
• The court argued that the directors, who were also purchasers, were not involved in unfair dealing, as they did not actively seek to acquire shares.
  • Instead, shareholders-initiated contact with the directors, specifying the desired selling price.
• Overall, the court concluded that the directors' actions did not constitute unfair dealings, and the shareholders approaching the directors for a sale set the terms themselves.

Conclusion

The House of Lords finally held that the directors are not in fiduciary relationship and not bound to disclose every information to each shareholder.