The Supreme Court has reaffirmed the "proper purpose"
rule holding that directors who had imposed restrictions on shares
pursuant to a legitimate power to do so had nonetheless imposed
them for an improper purpose.
In this case, the board was concerned that certain minority
shareholders (Eclairs and Glengary) were planning a corporate raid
on the company so issued disclosure notices under s.793 Companies
Act 2006 seeking information from the shareholders regarding the
number of shares held, the beneficial interests and any agreements
between them. Eclairs subsequently publicly urged shareholders to
oppose upcoming AGM company resolutions, which included resolutions
to re-elect certain directors.
Believing the responses to be inadequate, the board decided to
exercise its powers under article 42 of the Articles of Association
to issue restriction notices to Eclairs and Glengary for failing to
comply with the disclosure notice, which suspended their voting and
transfer rights. This was challenged by Eclairs and Glengary on the
grounds of section 171(1)(b) Companies Act 2006 - a director must
only exercise powers for the purposes for which they were
Mann J held, at first instance, that the proper purpose rule
applied and the restrictions should be set aside as the board had
exercised their power for the purpose of influencing the
resolutions at the AGM. The Court of Appeal rejected this, holding
that the rule did not apply as the shareholders could have
remedied their situation by providing fuller answers.
The Supreme Court, reversing the Court of Appeal decision, held
that the directors acted with an improper purpose and the rule thus
applied; whilst they had acted within their power, the purpose of
the power in Article 42 was largely to provide a sanction/incentive
to remedy a failure to comply adequately with a disclosure notice;
its purpose was not for influencing resolutions at an AGM.
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