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 conferred.

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.

Acting With Improper Purpose? The Supreme Court Considers The Proper Purpose Rule In Eclairs Group Ltd And Glengary Overseas Ltd V JKX Oil & Gas Plc (2015)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.