A Blow for Lloyds Shareholders

25 November 2019

Mr Justice Morgan dismissed an action by a group of 5,803 former Lloyds shareholders (the “Claimants”) in Sharp v Blank[1]. The Claimants claimed that the Lloyds directors acted negligently in recommending the acquisition of HBOS – a bank burdened with bad mortgages.

The Claim

Broadly speaking, there were two key claims:

  1. that the Lloyds directors negligently recommended the acquisition of HBOS, failed to carry out sufficient due diligence and failed to take account of the funding and capital risks involved (the “recommendation case”); and
  1. that the Lloyds directors failed to provide shareholders with sufficient information about the risks of the acquisition, in particular about a funding crisis faced by HBOS and the related vulnerability of HBOS’ assets (the “disclosure case”).

The Claimants alleged that but for the negligent recommendation the acquisition would not have gone ahead, and/or had proper disclosures about HBOS been made, the directors would have been bound to recommend against the deal or the shareholders having been aware of the true financial circumstances of HBOS, would have voted against it. Either way, the shareholders would have avoided the loss in value caused by a dilution of their shareholding when the merged entity was recapitalised.

The Decision

The Recommendation Case

 The Court found that a reasonably competent chairman or executive director could have reasonably reached the decision that an acquisition was beneficial to Lloyds and its shareholders, therefore the directors were not negligent.

In making his decision Mr Justice Morgan placed emphasis on the fact that the entire board approved the proposal, and the fact that the Claimants failed to adduce expert evidence establishing that the directors were negligent in recommending the acquisition to the shareholders.

The Disclosure Case

 The Court found that:

  1. Emergency Liquidity Assistance provided by the Bank of England to HBOS (the “ELA”) was of potential concern to investors, and should have been disclosed; and
  1. A £10 billion loan facility provided by Lloyds to HBOS (the “Lloyds Repo”) was unusual, and ought to have been disclosed.

However, notwithstanding the two disclosure breaches, the Court considered that the Claimants had not established that on the balance of probabilities, if the ELA and Lloyds Repo disclosures had been made, the acquisition would not have been approved. In short, the Court felt that the Claimants were not able to demonstrate that had this information been available to the wider shareholder group, they would have voted against the deal. The Claimants were therefore unable to show that they have suffered any loss as a result of Lloyds’ failures to disclose information (despite the Court finding said information should have been disclosed).


The Court’s findings demonstrate the difficulty in proving loss to shareholders where there are deficiencies in a recommendation or disclosure, particularly in terms of the level of evidence that is required.

Mr Justice Morgan gave examples of the type of evidence he would expect, such as “structured survey evidence of those who voted in favour of the acquisition… which might establish some sort of factual basis for the drawing of inferences.

In this case over 3.1 billion votes were cast at an Annual General Meeting. In order to have succeeded in their claim the Claimants would have had to prove, not only that they would have voted differently had the information been disclosed, but that 1.4 billion votes would have also been cast differently.

Conceivably this places a very significant evidential burden upon claimants seeking to demonstrate a different course of events would have occurred but for the failures of the defendants.

The Claimants have indicated that they may appeal, and we will continue to provide updates.

[1] [2019] EWHC 3078 (Ch)

Leigh Callaway Author
Leigh Callaway
Senior Associate
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Yasmin Daswani Author
Yasmin Daswani
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