Principals, Agents and Fiduciary Relationships

Posted: November 6, 2006

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This article is reproduced with the permission of W Green & Son Ltd (law publishers).

Introduction
Halton was a complex decision involving the formation of an airline company and its extensive capital restructuring but the critical events surrounded a voting agreement which the pursuer and defender, as shareholders, made with other shareholders in relation to a franchise agreement which the company entered into with British Airways (’BA‘).  The legal issue was whether that voting agreement gave rise to fiduciary duties.  In holding that fiduciary duties were not owed Patten J in the Chancery Division usefully reviewed the principal authorities and their application to the commercial relationship of principal and agent. 

The Facts
The pursuer H and the defender G were shareholders of 20% stakes in an English company BMed, borne out of the end of hostilities in the Lebanon in 1994, which operated scheduled air services between London and various destinations in Asia and the Middle East.  H and G were companies respectively controlled by two individuals.  Between 1994 and 1997 BMed made substantial losses and as a result entered into negotiations with BA for it to continue as a BA franchise in order to avoid going into liquidation.  BA required as a condition of the negotiations that it would only deal with a single shareholder, which led to the shareholders making a voting agreement which gave G a power of attorney to act as the agent of and to vote the shares of the other shareholders for the purposes set out in the agreement.  The critical provisions of the voting agreement were 4.1 “The parties agree and acknowledge that it is intended that [G] shall endeavour to procure that [BMed] obtain funding to provide adequate working capital for [BMed] to finance its business and to satisfy the requirements of [BA] which [BMed] shall do in any amount and upon whatever terms it thinks fit.” and 4.2 “The parties agree and acknowledge that G may seek to raise funding for [BMed] in any manner which G, in its absolute discretion, considers fit including for the avoidance of doubt funding raised pursuant to or in connection with a fresh issue of Shares (whether by way of rights or otherwise) or other securities in [BMed] or by way of bank borrowings or other borrowings of any nature whatever. For the avoidance of doubt in the event that new Shares are issued to the Granting Shareholders pursuant to a fundraising such Shares shall become subject to the terms of this Agreement and each Granting Shareholder shall forthwith comply with the provisions of clause 3.4 of this Agreement in respect of such Shares."

On 6 February 1997 an EGM of BMed was held at which G, in exercise of the powers in the voting agreement, passed a special resolution which introduced new articles of association under which the voting rights of the shareholders who had signed the option agreement, were suspended for the duration of the BA franchise and the voting rights of G were increased by the same number of votes, issued and allotted shares which made G the holder of 50.9% of the issued ordinary shares while H‘s holding was reduced to 2.2%.  In addition the pre-emption provisions contained in the articles and in ss 89 (1) and 90 (1)-(6) of the Companies Act 1985 were disapplied.  H and other shareholders objected to the way that G had used the powers in the voting agreement to obtain a majority shareholding without giving H and other shareholders any proper opportunity to participate in the share issue, since the only invitation to subscribe was contained in a faxed letter which they never received and which was designed to discourage its recipients from investing.  H and other shareholders raised proceedings for an order that G transfer to them part of its shareholding in BMed.

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