Power Adhesives Ltd Case Highlights Director's Fiduciary Duties and Share Dilution Risks

Citation: [2017] EWHC 676 (Ch)
Judgment on

Introduction

Power Adhesives Ltd v Sweeney & Ors [2017] EWHC 676 (Ch) is an instructive case that surfaces critical questions about the fiduciary duties of company directors with respect to share issuance and the concomitant potential for dilution of share value. Central to the judgment is the application of the rule in Hastings-Bass and its interplay with directors’ decisions and the reliance on professional advice.

Key Facts

The facts revolve around the issue of B shares by the directors of Power Adhesives Ltd (“the Claimant”) as a mechanism to address concerns about the repayment of a director’s loan upon his death. This decision, however, led to a substantial dilution of existing shareholders’ equity and had severe, unintended tax implications. The court’s task was to determine whether this act, precipitated by the directors, contravened their fiduciary duties and, if so, whether such a decision could be set aside according to the legal principles at play.

The judgment hinges on the principles referred to as the rule in Hastings-Bass, originating from Re Hastings-Bass, deceased [1975] Ch 25. Under this principle, a fiduciary’s decision can be set aside if they failed to consider matters they ought to have considered, or considered irrelevant matters. The justices in Futter and Pitt v HMRC [2013] UKSC 26 further refined this by determining that if fiduciaries had sought and relied on proper advice, they would not have breached their duties, even if that advice was incorrect.

The court also looked at the degree of care and diligence expected of the directors in obtaining advice, which is informed by the size and sophistication of the company. The ruling distinguishes between the trustees’ conduct in Futter and Pitt, who had acted on specialist advice and identified the relevant issues, and that of the directors in Power Adhesives Ltd who failed to take into account the ramifications of their actions regarding share value and tax implications.

Outcomes

The High Court determined that the directors of Power Adhesives Ltd breached their fiduciary duties by not fully comprehending the consequences of issuing 490,000 B shares, a miscalculation that led to the gross dilution of the Claimant’s existing share capital and unintentional wealth transfer. The transaction was deemed voidable, and a declaration was granted to set aside the resolution issuing the B shares. It was found that, while professional advice was sought, it was insufficiently diligent or comprehensive in respect of the specific transaction in question.

Conclusion

The judgment in Power Adhesives Ltd v Sweeney & Ors [2017] EWHC 676 (Ch) serves as a striking reminder of the fiduciary responsibilities of directors when making decisions potentially affecting company value and shareholding structure. It reaffirms the application of the Hastings-Bass principle and elucidates the threshold of care and diligence required, especially for directors of substantial companies. Directors must thoroughly understand the implications of their decisions and ensure that they have taken into account all relevant considerations, extending beyond relying on professional advice. The ruling also underscores that such decisions are not only crucial for rightful corporate governance but also for protecting the interests of all stakeholders and warding off unwanted tax consequences.