The Companies Act 2006 contains provisions enabling a public company to obtain information about interests in its shares from anyone whom the company knows, or has reasonable cause to believe to be, or to have been (within a specified period), interested in those shares. Such information may be sought by issuing a notice under section 793 of the Act (a s793 notice). Non-compliance with a s793 notice, is a criminal offence and the company may seek court orders imposing restrictions on transfer, voting and the payment of dividends in respect of shares in which the defaulter is interested. Many public companies supplement this statutory regime by bespoke provisions in their articles of association.
Such provisions often enable the company's directors to impose restrictions on defaulters similar to those in the Act, but without having to go to court. In addition, they frequently enable the company to treat information requested under a s793 notice as not having been provided where the directors know, or have reasonable cause to believe, that the information provided is false or materially incorrect.
A recent Court of Appeal case (JKX Oil & Gas plc and others v Eclairs Group Ltd  EWCA Civ 640) has clarified the scope of the questions that can be raised in a s793 notice and also the nature of the directors' intent when serving it.
The case in question
The case concerned shares held in JKX Oil and Gas Plc (the Company). Two shareholders held shares as nominees representing (approximately) 27% and 11% of the Company's share capital. The directors had reason to suspect that the beneficial owners of those shares may have had intentions to try and change the direction of the Company, including the make-up of its board. In order to clarify the position, the Company issued s793 notices seeking information on the persons interested in the two shareholdings and whether they were acting in concert. The notices were served shortly before the company's AGM was due to be held.
On receipt of responses to the s793 notices, the Company's directors determined that the information provided was incorrect. As provided for in its articles of association, the directors invoked provisions disenfranchinsing the shares in question meaning, that they could not be voted at the AGM. The beneficial owners of the shares challenged the imposition of the restrictions for a number of reasons including that:
- the s793 notices were invalid because they sought information beyond the scope of what was permitted by law or the articles (the validity claim),
- the directors were not entitled to impose restrictions for non-compliance because they did not have reasonable cause to believe that the responses were incorrect (the reasonable cause claim), and
- the directors imposed the restrictions for an improper purpose, namely to secure the passage of resolutions at the forthcoming AGM which they feared the claimants may be able to impede, rather than to enforce the demand for the information sought by the s793 notice (the improper purpose claim).
The Company counter-claimed on the ground that, having chosen to hold their shareholdings in the Company through nominees, the claimants lacked standing to pursue their claims (the standing claim).
At first instance, the judge ruled against the claimants in relation to the validity claim and the reasonable cause claim, but ruled in their favour on the improper purpose claim. The judge also ruled against the Company in respect of the standing claim by finding that the claimants were entitled to bring their claims.
On appeal, the Company challenged the conclusions as to standing and improper purpose, whilst one of the beneficial owners sought to resurrect the assertions as regards validity and reasonable cause. By a unanimous decision, the first instance findings relating to the validity claim, the reasonable cause claim and the standing claim were upheld, but, importantly, the decision as regards the improper purpose claim was overturned, albeit by a majority decision.
Principal reasons for overturning the improper purpose claim were that:
- the sanctions were not unilaterally imposed by the directors - as the judgment noted, a respondent to a s793 notice can prevent restrictions being imposed on it by providing full and correct answers and "even where a restriction … is imposed, the “victim” can undo its effect by telling the truth, as indeed the restriction notices in this case positively invited the “victims” to do. So a party who chooses not to answer the questions properly is a victim of his own choice, not a victim of any improper use of a power of the board of directors", and
- the statutory provision on which the provisions in the articles were based, does not specify that the sanction of restrictions on voting can only be imposed for any particular purpose - as the judgment noted, "we find it difficult to believe that Parliament intended a detailed inquiry into the minds of the directors of a company to be undertaken before the sanction can be imposed".
Whilst the above reasons seem sensible, it is worth noting that, at first instance, the need for a proper purpose was upheld and, on appeal, this was only overturned by a majority. As the beneficial owners have been granted leave to appeal the decision, we may not yet have reached a definitive position on the matter.
For companies issuing a s793 notice, the case usefully clarifies:
- that the scope of information that may be sought is not to be narrowly construed,
- what is likely to constitute reasonable cause as regards the exercise of restrictions contained in articles of association when directors believe a s793 notice has not been complied with, and
- that, pending any decision of an appeal to the Supreme Court (for which leave has been granted), directors can be reassured that restrictions contained in articles of association as a sanction for non-compliance with a s793 notice will be properly exercised where this is in respect of such non-compliance, even if this may give rise to other consequences which may be beneficial to the company or its board.
For persons interested in shares, the case makes it clear that, irrespective of their not being the registered/legal owner of the shares, they have standing to bring proceedings challenging the imposition of restrictions over such shares.
Although leave to appeal has been granted in respect of the improper purpose claim, the case gives comfort to companies issuing s793 notices, particularly when a general meeting is imminent and there may be concerns about the intentions of persons interested in shares and how they may vote those shares. Given the proposals to implement a requirement for private companies to maintain a register of beneficial interests (see the article in our May 2014 newsletter), the regime for which is likely to follow the Companies Act framework for public companies, the conclusions reached in this case may have wider implications than simply in respect of public companies.