Percival v. Wright (1902)

Every discussion of directors' duties begins by asking to whom the duty is owed, and this is the case that answers it. The headnote states the rule in one sentence: "The directors of a company are not trustees for individual shareholders, and may purchase their shares without disclosing pending negotiations for the sale of the company's undertaking."

It is worth stressing what the case does not say. It does not say that directors owe no fiduciary duties; the judgment sets out at length the duties they do owe. It says only that the beneficiary of those duties is the company. That distinction runs through the whole of company law — it explains the rule in Foss v. Harbottle, it explains why oppression and mismanagement needed a statutory remedy, and it explains why insider dealing had to be dealt with by legislation rather than by the general law of fiduciaries.

In and prior to October 1900 the plaintiffs were the joint registered owners of 253 shares of £10 each, with £9 8s. paid up, in a colliery company, Nixon's Navigation Company, Limited.

Two constitutional features mattered. The objects clause included the disposal by sale of all or any of the company's property, and the board could exercise all powers not reserved to general meetings — but no sale of the collieries could be made without the sanction of a special resolution. The shares were in few hands, transferable only with the board's approval, had no market price, and were not quoted on the Stock Exchange.

The sale sequence was begun by the shareholders, not the directors:

| Date (1900) | Event | |---|---| | 8 October | The plaintiffs' solicitors wrote to the company secretary asking if he knew of anyone disposed to purchase shares | | 15 October | Asked what price they wanted, the solicitors said the plaintiffs would entertain offers of £12 5s. per share, a figure based on an independent valuation obtained some months earlier | | 17 October | The chairman wrote that he would take the shares at £12 5s. | | 20 October | Having taken a fresh valuation, the solicitors replied that the plaintiffs would accept £12 10s. | | 22 October | The chairman accepted, saying the shares would be divided into three lots | | 24 October | The chairman wrote that 85 shares were to go to himself and 84 apiece to two other named directors |

The transfers were approved by the board and the transaction completed.

What the plaintiffs did not know. Before and during their own negotiations, the chairman and the board were being approached by one Holden, who wanted to buy the entire undertaking and resell it at a profit to a new company. The prices Holden successively suggested all represented considerably more than £12 10s. per share. But no firm offer was ever made which the board could put to the shareholders, the negotiations ultimately proved abortive, and the court "was not in fact satisfied on the evidence that the board ever intended to sell."

The plaintiffs sued the three purchasing directors to set the sale aside.

For the plaintiffs. There was no suggestion of unfair dealing or purchase at an undervalue. But the directors were in a fiduciary position towards the plaintiffs and ought to have disclosed the Holden negotiations, in which case the plaintiffs would have kept their shares on the chance of the sale going through. The argument conceded that the ordinary obligation of a purchasing director to disclose is "tacitly released as to information acquired in the ordinary course of management" — a director need not disclose "a large casual profit, the discovery of a new vein, or the prospect of a good dividend" — but said the release did not cover the special information acquired in negotiating a sale of the whole undertaking. At the start of those negotiations the directors became trustees for sale for the company and the shareholders, and a trustee for sale cannot buy out a beneficiary without disclosure. Incorporation, it was said, affects the shareholders' relations to the external world but does not alter their rights inter se, which remain those of partners.

For the defendants. Even if the directors were trustees for sale of the undertaking, they were not trustees for sale of the plaintiffs' shares. The suggested equity had never been applied between a director and a shareholder, although a director buying shares must always buy from a shareholder; and the company is a legal entity quite distinct from its shareholders.

Action dismissed with costs. The purchasing directors were under no obligation to disclose to their vendor shareholders the negotiations, which ultimately proved abortive.

Directors stand in a fiduciary position towards the company, and are treated as trustees of its money and property and as its agents in the transactions they enter into on its behalf. They do not stand in a fiduciary position towards individual shareholders, and negotiations for the sale of the company's undertaking do not convert them into trustees for sale for the members. A director may therefore buy shares from a member without disclosing such negotiations, at any rate where the member approached him and named the price and there is no unfair dealing.

What directors are — the three classical statements

Swinfen Eady J assembled the orthodox description of a director's position from three earlier judges, and these passages are the ones to quote in any question on the nature of the office.

Lord Selborne LC in Great Eastern Ry. Co. v. Turner on the twofold position:

"The directors are the mere trustees or agents of the company - trustees of the company's money and property -agents in the transactions which they enter into on behalf of the company."

Jessel MR in In re Forest of Dean Coal Mining Co., limiting the trust analogy:

"Again, directors are called trustees. They are no doubt trustees of assets which have come into their hands, or which are under their control, but they are not trustees of a debt due to the company. The company is the creditor, and, as I said before, they are only the managing partners."

Lindley LJ in In re Lands Allotment Co., on why the analogy is used at all: although directors are not properly speaking trustees, they have always been treated as trustees of money in their hands or under their control, and have been held liable to make good moneys they have misapplied "upon the same footing as if they were trustees", and are denied the benefit of the old Statute of Limitations because they have committed breaches of trust.

From that point of view, the judge said, come the duties that do bind: directors "must dispose of their company's shares on the best terms obtainable, and must not allot them to themselves or their friends at a lower price in order to obtain a personal benefit. They must act bona fide for the interests of the company." Nothing in Percival v. Wright weakens any of that.

Why the plaintiffs' extension failed

The plaintiffs' argument required a line to be drawn at the moment negotiations for sale began: before that, no duty of disclosure between director and shareholder; after it, a duty. Swinfen Eady J refused to draw it, and gave three reasons.

No authority. None was cited for the proposition, and he was "unable to adopt the view that any line should be drawn at that point."

The line is arbitrary. The plaintiffs conceded that a director buying shares need not disclose a large casual profit, a new vein or a good dividend in prospect, and that a director selling need not disclose losses, all being incidents of ordinary management. The judge's answer is a single word — "Why?" — followed by the true rule:

a shareholder is fixed with knowledge of all the directors' powers, and has no more reason to assume that they are not negotiating a sale of the undertaking that to assume that they are not exercising any other power.

Since a sale of the undertaking is a power the shareholder knows the directors have, he cannot claim to have been misled by silence about its exercise.

Incorporation does matter. The judge rejected the partnership analogy outright: shareholders' positions inter se are affected by incorporation, and are not the same as those of partners.

The practical objection

The closing reason is the one that has kept the case alive:

The contrary view would place directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure of which might well be against the best interests of the company.

A duty of disclosure to individual members would force directors to leak, to the company's detriment, exactly the information that must be kept confidential while a transaction is being negotiated.

The facts that limit the case

Swinfen Eady J was careful to record that there was no unfair dealing: "The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling." Add to that the court's finding that no firm offer was ever made and that it was not satisfied the board ever intended to sell.

So the case is authority for the absence of a general duty, not for a licence. Where directors solicit the shares, misstate facts, or deal on the strength of a concluded transaction, the reasoning does not protect them, and the general law of misrepresentation, the duties owed to the company, and the statutory regime against insider trading all remain in play.

Section 166 of the Companies Act 2013 codifies the duties of a director, and its language keeps the Percival orientation. A director "shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment" (s. 166(2)), and he "shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates" (s. 166(7)). The duty is owed in the performance of the office; it is not a duty owed severally to each member as a counterparty in a share sale.

The consequences of the rule are dealt with elsewhere: unfairly prejudicial conduct by those in control is met by ss. 241-242, wrongs to the company by the derivative and class remedies, and dealing on unpublished price sensitive information by the securities regulator's prohibition on insider trading.