It was recently decided that the board of a company had restricted the exercise by certain shareholders of rights attaching to their shares for an improper purpose. Businesses should take note that it didn't help that the directors had acted in what they perceived to be the company's interest – to fend off a corporate raid.

The directors of JKX Oil & Gas plc believed that two of its shareholders were attempting to exploit their minority shareholding to obtain effective control of the company at a cheap price in a "corporate raid". The two shareholders were encouraging other shareholders to vote against an equity fundraising being proposed at an upcoming shareholder meeting, which the board supported.

The board issued a disclosure notice on the two shareholders requesting information about the number of shares they held and any agreements or arrangements between people interested in the shares. The two shareholders denied that there was any such agreement or arrangement.

The board considered that it had reasonable grounds to believe that the responses were false or materially incorrect. Relying on the Company's Articles of Association, the board issued a "restriction notice" in relation to the shares in question, suspending the right to vote at general meetings.

The two shareholders challenged the restriction claiming it was being exercised for an "improper purpose" in order to influence the outcome of the shareholder meeting. Under the "proper purpose" rule in the Companies Act 2006, a director must only exercise powers for the purposes for which they are conferred.

The board argued that, once the shareholders had failed to provide the information, the power to make a restriction order could properly be exercised for the purpose of defeating their attempt to influence or control the company's affairs.

The Court considered that the power in the Articles to suspend rights attached to shares had three purposes, including as a sanction for refusal to provide the information.

The Court found that the board had not suspended the rights for one of the three proper purposes, and so it was held to have exercised its power to issue a restriction notice for an improper purpose. The restriction notice was "not itself a legitimate weapon of defence against a corporate raider."

The key takeaways for your business are as follows.

  • Don't forget, your board's duty to act in the interest of the company is separate from – and additional to – its obligation to use powers for their proper purpose.
  • Work out what the purpose of a power is before using it. A power which comes with strategic benefits should not be used for that strategic purpose.

Eclairs Group Ltd v JKX Oil & Gas plc: [2015] UKSC 71

Can't Do Right For Doing Wrong? – Supreme Court Tells Directors To Use Powers For Their "Proper Purpose", Not What They Think Is In The Company's Interest

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