The Supreme Court has held that the proper purpose test applies to a decision by the directors of a public company to issue, under the terms of the company's articles, restriction notices which disenfranchise shareholders from voting. It is not enough that the directors have acted in what they believed to be in the best interests of the company.

Background

Part 22 of the Companies Act 2006 gives a public company the right to investigate who has an interest in its shares by sending out section 793 notices. Where a person fails to comply with a notice within a reasonable time, the company may apply to court for an order imposing restrictions on the shares. In practice, many public companies include provisions in their articles allowing the company itself to impose restrictions if a person fails to respond to a section 793 notice.

Facts

The appellants between them held around 39% of the share capital of JKX Oil & Gas plc (JKX). In 2013 the board of JKX considered that the company was the subject of a "corporate raid" by the appellants. The board therefore served notices seeking information about interests in the shares held by the appellants. JKX's articles allowed the directors to impose voting and transfer restrictions where information provided was known or reasonably thought to be false or materially incorrect. The board considered that it had reasonable cause to believe that the responses to its notices were false or materially incorrect. In response, it issued voting and transfer restrictions on the shares held by the appellants. An effect of these was to prevent the appellants from voting at the company's AGM.

The appellants challenged the propriety of the board's purpose in exercising its power to issue restriction notices. Under what is now section 171(b) of the Companies Act 2006, a director must only exercise his powers for the purposes for which they are conferred. The appellants contended that the predominant purpose of the board was to prevent the appellants from voting rather than information gathering. At first instance, the High Court accepted the appellants' arguments and decided that the board of JKX had acted for an improper purpose.

However, on appeal, the majority of the Court of Appeal considered that the proper purpose test had "no significant place" in the operation of the relevant articles or Part 22 of the Companies Act 2006. It was enough that the directors had acted in what they believed to be in the best interests of the company. They therefore overturned the High Court decision.

Decision

The Supreme Court rejected this view and restored the High Court decision. It found unanimously that directors who exercise powers in the company's articles to issue restrictions notices must do so for a proper purpose. It is not enough that the directors have acted in what they believed to be in the best interests of the company. The court identified three proper purposes for issuing restrictions notices. These are: inducing shareholders to provide information; protecting the company and shareholders against having to decide about their interests in ignorance of relevant information; and as a sanction for failure to provide the information.

Comment

Although the case concerns the exercise of a specific power, the decision also has wider implications. Notably, the members of the Supreme Court expressed views on how to decide whether a power has been exercised for a proper purpose where there is more than one purpose motivating the directors. Lord Sumption proposed a "but for" test. In other words, if without the improper purpose(s) the decision would not have been made, then it should not stand even if the directors also had other, proper considerations in mind. As there was no argument by the parties before the Supreme Court on the scope of the proper purpose rule, a majority of the court preferred to defer a final view on this "but for" approach. The test is therefore not binding on the lower courts, but may nonetheless be persuasive.

Eclairs Group Ltd and another v. JKX Oil & Gas plc [2015] UKSC 71

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