Occasionally, the directors of a company are approached by shareholders looking to sell their shares. This may come at a time when, unbeknownst to those shareholders, the directors are in confidential discussions with potential buyers for a sale of the company.
What should the directors do? They clearly cannot breach the terms of any confidentiality agreement relating to sale negotiations, but can they agree to buy those shares, knowing that they may be worth considerably more than the price at which the shareholders are willing to sell?
Historically, the established law has been that directors do not need to tell shareholders about any potential sale. In the 1902 case of Percival v Wright, shareholders approached the directors of a company asking them to buy their shares. The directors did so without informing them that a sale of the business was being negotiated, at a price per share which was vastly more than the shareholders were asking for. It was held that the directors were not liable to the shareholders, because their duties were owed to the company, not the shareholders. Furthermore there had been no misrepresentation or unfair dealing, and the shareholders had approached the directors and named their price.
However, this general principle has since been qualified in a number of more recent cases. In certain circumstances, directors may owe a duty to shareholders provided that this does not compete with any duty owed to the company. Where such a duty arises, the directors should disclose material information that might influence the judgment shareholders who are looking to sell their shares. Without disclosure, the shareholder is denied access to information about the company’s value and the director is effectively exploiting inside information.
In order for such a duty to arise, the director’s actions must be linked to the shareholder’s decision to sell and there must be a specific transaction for the sale of the company in existence, or contemplation when the shareholder’s shares are sold. In addition, there must be a personal or special relationship between the parties. This is much more likely to arise in the case of family businesses or other companies where there is a close personal relationship.
Difficulties regarding disclosure can still arise where the directors have signed confidentiality agreements and therefore they should take professional advice regarding how to resolve this dilemma should such a situation arise.
Jos Moule is a partner at award-winning law firm VWV. Jos can be contacted on 0117 314 5650 or at firstname.lastname@example.org.