A recent decision of the UK’s High Court — Stobart v Tinkler  EWHC 258 (Comm) — has been released following a dispute between directors of a large infrastructure company (the “Company”). The decision, and the circumstances preceding it, serve as a cautionary tale about the duties of a dissident director and of board members in the context of proxy contests.
The board dispute was initiated by a founder and significant shareholder of the company (the “Dissident Director”). After his resignation from the office of CEO in 2017, the Dissident Director remained with the Company as a director and employee. Shortly thereafter his relationship with the rest of the board, and in particular with the board’s independent chairman, began to break down. These tensions boiled over in the months leading up to the company’s 2018 AGM. During this period the Dissident Director had numerous private discussions with shareholders without the board’s knowledge or consent. At these meetings, he aired his grievances about the board and particularly the manner in which the company was being run under the leadership of the chairman. He also wrote an open letter to the Company’s shareholders in his capacity as “executive director” expressing similar views. The other members of the board took steps to deal with the dissident: They established a board committee (independent of the Dissident Director and the chairman) to address the Dissident Director’s conduct, made two public communications to shareholders regarding the issues, and authorized transfers of treasury shares into an employee benefit trust, with the expectation (revealed later) that the independent trustee of the trust would vote the shares in favour of the recommendation of the board and the proxy advisory firm Institutional Shareholder Services.
At the AGM, the incumbent board was re-elected, including the Dissident Director and the chairman whom he had sought to displace. The following day the board voted to remove the Dissident Director as a director. Subsequently, the dispute was brought into the courts, with the Company claiming that the Dissident Director had breached his fiduciary duty to the company. The Dissident Director counterclaimed for a declaration that the vote to remove him from the board was invalid. When the dust had settled, the court made a finding that both the Dissident Director and the board had breached their fiduciary duties in the course of their infighting. The “guerrilla tactics” that the Dissident Director used to reassert control over the company (including the private meetings and the “seriously misleading” letter to shareholders) were deemed to constitute a “serious” breach of the duties the Dissident Director owed to the Company as a director and employee. For the board’s part, their decision to allocate shares with the intention to influence the results of the election also constituted a breach of their fiduciary duty, as they clearly acted with an improper, self-interested purpose.
This decision, while not binding in Canada, is an interesting refresher on basic corporate governance principles. Among the most important takeaways is that the duties a director owes to a company places constraints on that director’s ability to act as a dissident. Directors, of course, should feel free to think independently and dissent from the majority viewpoint. However, directors should carefully reflect on their response and approach before proceeding with any actions.
The authors would like to thank Eric Vice, articling student, for his assistance in preparing this legal update.