Lloyds Bank shareholders class action is a warning to insurers

This article first appeared in Insurance Day, November 2020

The first shareholder class action ever to be brought in England and Wales has been defended successfully by Lloyds Bank and five of its former directors.

Following Mr Justice Norris’ monumental 280-page judgment handed down in November 2019, on 14 July 2020 he finally ordered the claims to be dismissed. The time limit for an appeal has expired, so this judgment is now final.

That concludes a lengthy case which involved more than 5,000 claimant shareholders and their funders, with important ramifications for D&Os and their insurers.

Emergency Liquidity Assistance

The acquisition of HBOS Bank by Lloyds completed in January 2009 in the midst of the financial crisis. Shortly after the acquisition was announced, on 1 October 2008 HBOS entered into a covert lending facility with the Bank of England. At its peak, HBOS utilised £25.4 billion of what became known as “Emergency Liquidity Assistance”.

While the judge considered it was essential for the Bank of England to be able to “act covertly to maintain the integrity of the financial system”, he found that “for a fair and candid account” of the acquisition the existence of this covert facility should have been disclosed to shareholders.

Lloyds Repo

On 25 September and 2 October 2008, Lloyds Bank entered into special lending facilities with HBOS (in the form of repurchase agreements or “Repos”) of up to £10 billion. The judge found that the Lloyds Repo facilities had “a number of extraordinary features” and formed part of a “systemic rescue package”, and held that these should have been disclosed to shareholders.

Directors’ duties

It was also held that Lloyds’ directors had breached their duties by failing to disclose to shareholders the existence of HBOS’s special Bank of England and Lloyds Repo lending facilities, which had been intended to provide HBOS with liquidity support pending completion of the deal.


Critically, the judge found that the directors’ recommendation for the shareholders to vote in favour of the acquisition had not been negligent.

There may have been a strong case in hindsight that the directors misjudged the depth of the impending recession, but such inaccurate forecasting was not a breach of duty.

Shareholder vote

The shareholders’ meeting to vote on the acquisition was held on 19 November 2008. On a turnout of just over 50%, almost three billion (circa 96%) of shareholders’ votes were cast in line with the directors’ recommendation to vote in favour of the acquisition. Only around 125 million (circa 4%) of the votes were against.

It was held that the additional disclosures about the existence of HBOS’s special lending facilities that the directors should have made would not have changed the outcome of the vote, and the shareholder claimants accordingly failed to prove causation.

The judge was also critical of the paucity of the shareholder claimants’ evidence as to the value of HBOS, and they failed to prove that they had actually suffered any loss.

Reflective loss

The judge also held – albeit tentatively – that the shareholders’ claim was bound to fail, because any loss caused by overpaying for HBOS had been suffered by Lloyds itself. Only the company, and not the shareholders, could claim to recover such loss.

The validity of this controversial “reflective loss” principle has recently been affirmed by the Supreme Court decision in Sevilleja v Marex Financial [2020]. That judgment has now rejected arguments that the reflective loss principle should be abolished, and confirmed that shareholders are not able to claim to recover loss suffered by a company where the company itself had a cause of action to recover that same loss.

Shareholder class actions come of age

In spite of advice from a phalanx of top M&A and legal professionals, in the unique circumstances of the financial crisis the Lloyds directors were ultimately found to have committed two breaches of the duties they owed directly to shareholders, and were forced to fall back on causation and loss defences.

This will further raise the profile of the duties that directors owe towards shareholders directly, and reflects the rise in the number of shareholder class actions as such claims increasingly come of age.

Shareholder claimants will continue to test the fault lines between directors’ duties -including as owed towards shareholders directly - and countervailing corporate law principles such as reflective loss. D&Os and their insurers need to be ready to meet those arguments.

D&Os should reduce risk by focusing on the accuracy of deal execution. It is important for D&Os to retain detailed records of the rationale for decision-making, for example minutes of board meetings should be saved together with complete copies of the document packs that were considered in preparation. Insurers should watch for any shift from claims brought by shareholders directly towards derivative claims brought by shareholders on behalf of the company under Part 11 of the Companies Act 2006. They should also prepare to rebut claimants’ arguments seeking to circumvent the reflective loss principle, and to face ever more expert witness evidence adduced by claimants hoping to prove their alleged losses.

This case will stand as a lasting monument to the need for comprehensive D&O cover, and in particular for Public Offering of Securities Insurance to protect from claims against companies and D&Os arising from securities placements.

Read other items in Professions and Financial Lines Brief - March 2021

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