In a management buy-out, the management team have the potential to be surrounded by a number of conflicts of interest. The temptation to put their interests in pursuing the MBO ahead of all other duties and relationships may be huge. But as a recent case has shown, there can be serious consequences for those who do so. And if one member of the management team's behaviour falls short, the others must step up, otherwise they all risk being held liable.
The case involved the fallout from an MBO of the UK subsidiary of a Swedish parent. The management team were the current UK directors: the selling shareholders were wholly reliant on the management team for information about the target. Unfortunately, the court found that during the process, the management team had deliberately misled the sellers about the financial position of the target by giving them out-of-date information.
The selling shareholders won their claim for deceit against the directors, who were ordered to pay more than £6 million in damages. Crucially, although the emails with the misleading information were sent by only one of the management team, the court found all three directors to be guilty of deceit because on balance – given that none of them corrected the information – the court held they were likely to have been acting in concert.
However, the sellers did not succeed in their argument that the management team were in a fiduciary relationship with the selling shareholders – meaning that they would have to put the interests of the sellers ahead of their own interests. Instead, the court confirmed the general position in English law that - although the directors of a company do of course owe fiduciary duties to the company itself - they do not, simply by virtue of their office, owe fiduciary duties to directly to the shareholders.
They will only owe those duties where there is on the facts of the particular case a "special relationship" between the directors and shareholders. These circumstances most often occur where companies are small and closely held, where there is a family or other personal relationship between the parties, and where there is a particular transaction involved where the directors are dealing with the shareholders from which they stand to benefit personally. All three factors were not present in this case.
- If a member of the management team is aware that misleading information has been sent out, they should seek to correct it themselves: a failure to correct a misleading impression given by one of the team could lead to liability for the whole team.
- If the target company is closely held by members of a family, the directors may owe fiduciary duties directly to the shareholders meaning that they will be obliged to put the interests of the shareholders first.
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