A new judgment was released by the Supreme Court on 2 December 2015, which emphasises the importance of directors acting with ‘proper purpose’.

The case was Eclairs Group Ltd v JKX Oil & Gas plc; Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71. A copy of the judgment can be found here.

Executive summary

  • The court considered the ‘proper purpose rule’ set out in section 171(b) of the Companies Act 2006 (the Act) – a director must “only exercise powers for the purposes for which they are conferred”.
  • When relying on an authority granted by a company’s articles of association, directors should in all cases be careful to ensure they are acting in the spirit of the company’s proper purpose (which is deduced from its express terms as well as the underlying legislative intention behind the provision and its effect). If they do not, they risk their decisions being overturned by the court.
  • While section 171(b) of the Act relates to public companies (section 793), the decision has a wider significance for all directors when carrying out their duties. As Lord Sumption noted, the proper purpose test is "particularly important when [a] company is in play between competing groups seeking to control or influence its affairs."

Facts

  • JKX perceived that it had become the target of a ‘corporate raid’; the minority shareholders were thought to be scheming to manipulate share price in an attempt to gain control of the company.
  • The directors issued a ‘disclosure notice’ under s.793-797 of the Act, calling for information about persons interested in its shares and arrangements between them.
  • The shareholders in question responded by admitting the existence of their interest in shares but denied any arrangement between them.
  • The directors sought to call an AGM at which shareholders would vote on matters including the re-election of certain directors.
  • The directors exercised their powers under the company’s articles to suspend the shareholders’ voting rights and rights of transfer where a statutory disclosure notice had not been complied with (which includes reasonable belief that the information provided is false or immaterial).
    1. The Shareholders Argued that the directors had breached the ‘proper purpose rule’ by acting on their motive to influence voting at the AGM; the article the directors sought to rely on could be exercised only to provide an incentive to remedy the default or a sanction for failing to do so.
    2. The Directors Argued that they had reasonable reason to believe there was an arrangement between the shareholders and were acting in good faith and in accordance with what they believed to be the best interests of the company.
    3. It Was Held that the directors’ predominant use of the power was to restrict the shareholders from voting in order to influence the outcome of a special resolution to be passed at the AGM. The directors had acted outside of any legitimate purpose and therefore improperly. Accordingly, the directors’ decision to suspend the shareholders’ voting rights was overturned by the court.