The 15 February 2019 judgment in the case of Stobart Group Limited v William Andrew Tinkler [2019] EWHC 258 (Comm) raises “some elementary principles of corporate governance” and notably, some interesting themes regarding the duties of directors. In particular, the judgment considers the actions required of a dissenting director to comply with his duty to exercise independent judgment.
Background
The essential questions of the case stem from a confrontation between the majority of directors on the claimant’s board and the dissenting director, who generated support from a simple majority of shareholders (sufficient to influence the composition of the board). The dissenting director in question was William Andrew Tinkler, and the claimant was Stobart Group Limited (SGL), a company incorporated in Guernsey and listed on the London Stock Exchange.
In July 2017, Tinkler stepped down as CEO of SGL but continued to act as an executive director of SGL. In late January 2018, Tinkler became increasingly dissatisfied with the management and direction of SGL and set out on a process of “briefing against the board” to SGL’s major shareholders.
On 14 June 2018, the board resolved to remove Tinkler from his office as an employee and (under a term in his service agreement) as a director of SGL. On 6 July 2018, Tinkler was reappointed to SGL’s board by a majority of the members at the AGM. The following day, the other directors of SGL again purported to remove Tinkler from the board pursuant to a provision in the company’s articles.
SGL alleged that Tinkler’s dismissal as an employee and director was valid and that he had acted in breach of certain fiduciary and/or contractual duties to the company. On the other hand, Tinkler contended that the other four SGL directors had breached their duties and that the decision to remove him as an employee and director was unlawful.
Whilst Guernsey company law applied, it was recognised that the duties owed by directors were “fundamentally the same” as those established under English common law.
The Decision
The High Court found that Tinkler had committed four serious breaches of directors’ duties. Consequently, his removal as an employee and director (in each instance) had been lawful.
Breach 1 – Private discussions with major shareholders
Tinkler held private discussions with SGL’s major shareholders during which he criticised the chairman (advocating for his removal), the board’s management and the strategy of the company.
Tinkler maintained that he had a duty as a director to reach his own, independent judgment on board matters and was entitled to impart his views to those shareholders.
The Court rejected Tinkler’s submissions on independent judgment and raised certain issues with Tinkler’s conduct, notably that: (i) he had gone directly to the shareholders without first addressing his concerns with the board (providing reasoned justification for his position); (ii) he had engaged in selective communications with the personal aim of inciting shareholder dissatisfaction; and (iii) the discussions were with chosen, and not all, shareholders.
The Court reiterated the proper actions required of a dissenting director to comply with the duty of independent judgment. Namely, in the first instance, the director should raise and reflect upon any matters in issue at board level. Then, if the question is so serious as to justify an open conflict with the board, the director can raise the matters in dispute at a general meeting. In any event, communications to shareholders should be in the presence of the board or with the prior approval of the board, and the director should express his views to all shareholders (or at least those who attend the general meeting).
Breach 2 – Improperly sharing confidential information
Tinkler shared commercially sensitive and confidential information with third parties.
Tinkler argued that in sharing the information he was doing his job, not breaching the company’s confidence. He submitted that a key objective of SGL was to sell an investment and that, as a director of the company which held the investment, he was entitled to explore a potential disposal.
The Court again rejected Tinkler’s submissions. It held that there was no evidence to suggest that Tinkler raised with his fellow directors the business case for disclosing the information. Rather, this appeared to the Court to be part of Tinkler’s plan to secure change within SGL.
Breach 3 – Writing to shareholders and employees regarding the disagreement between the directors
Tinkler, in his capacity as director, wrote to the shareholders and employees of SGL regarding his disagreement with the other directors.
The Court found that Tinkler’s letter was misleading. The letter suggested that there had been an attempt to remove him from the board in early 2018. In fact, Tinkler had initiated the discussion of his departure only to go behind the board’s back by briefing against it. It also suggested that there was justification for the removal of the chairman (that a new chairman was needed to stabilise operational management), when it was Tinkler who had created instability within the company. In light of the duty to exercise independent judgment, the Court criticised Tinkler for going directly to the shareholders rather than the board. The Court held that the letter was another example of “briefing against the board.”
Breach 4 – Orchestrating a “petition” to replace the chairman
Whilst Tinkler denied orchestrating the “petition” and executive leadership team letter of support to replace the chairman, the Court held that Tinkler was involved in its content (through its co-ordination with the letter sent to shareholders in Breach 3).
Comment
In the judgment, His Honour Judge Russen QC reiterates the position that the duty to exercise independent judgment is one that exists to support the board’s management of the company. It does not entitle an individual director to act independently of the board. Where there is conflict between members of a board in relation to certain matters, the various steps a dissenting director may consider include: (i) raising the matter at board level; (ii) ensuring that any continuing opposition is minuted; (iii) if the questions are serious, raising the matter at a general meeting; and (iv) resignation. In practice, these steps can be challenging to navigate and a dissenting director will need to carefully consider his position.