Did the Lloyds board act with sufficient care on the HBOS deal? Manifest takes a look at the legal aspects of directors' duties in the context of one of this century's most politically charged takeovers.

The 2006 Companies Act for the first time codified a number of long established common law principles relating to the duties of directors and their responsibilities for the decisions they take. The Act, which received Royal Assent on the 8th November 2006, created a statutory statement of seven general duties for directors which took full force in October 2008.

On 18 September 2008, Lloyds Bank announced the proposed acquisition of HBOS. At the time the directors’ duties were those of fiduciary duties of loyalty and good faith (owed to the Company alone) and duties of care and skill.

On 11 February 2009, Lloyd's CEO (Daniels) told the Treasury Select Committee that the Company did not put in as much due diligence on the HBOS acquisition as it would normally do for a transaction of this nature: ‘We probably would have put in somewhere around three to five times as much time as we put in’. [Source - p268]

Irrespective of the political pressures surrounding the transaction at the time, Daniels' admission raises fundamental questions in our mind as to whether the directors' actions would meet the objective test set out by Hoffman J. in Norman v Theodore Goddard [1991], i.e. that an assessment of what the director should have done or known is to be based on what ‘a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company and (b) the general knowledge, skill and experience that the director has’.

It's a given in business that directors must take risks in an attempt to earn profits for the company, and that there are occasions where a business transaction will fail or lead a company into financial difficulties. However, the failure to conduct the typical level of due diligence for a transaction of this nature, publicly acknowledged, may leave the directors open to negligence suits.

Although Lloyds' chairman, Victor Blank recently announced that he would step down ahead of the 2010 AGM, and so avoid what would probably be a humiliating defeat at the ballot box, this may not be enough to satisfy shareholders. Manifest has significant concerns about the continued service of those directors who sat on the Board during September 2008 when the deal was proposed and subsequently transacted.

Resolutions to discharge directors from their liability are common in many other European countries, but are not required in the UK. Were such a resolution to be required in the UK, we doubt that the Company would win such a vote in these circumstances.

Update: Sunday 24 May 2009

Simon Watkins of the The Financial Mail has revealed that  the UK Sharehoders Association has been taking legal advice from leading UK law firm Carter Ruck for the past month on this very issue. For more details Click Here >>