In the recent case of Eclairs Group Limited & another v. JKX Oil & Gas Plc  UKSC 71, the Supreme Court considered the duty of directors to exercise powers “only for the purposes for which they are conferred” (s171 of the Companies Act 2006 (CA 2006)).
Eclairs and Glengary were shareholders in JKX Oil & Gas Plc (JKX) who became involved in a dispute with JKX’s board. They opposed the board’s proposals to issue additional capital and disapply pre-emption rights, and they also sought to remove certain individuals from JKX’s board.
The directors of JKX issued disclosure notices under JKX’s articles requesting information from Eclairs, Glengary, and their controlling persons about the number of shares held in JKX, their beneficial ownership, and any agreements or arrangements between the persons interested in those shares.
Eclairs and Glengary replied to the disclosure notices. However, the board perceived those replies to be inaccurate and suspended Eclairs’ and Glengary’s right to vote at general meetings, and restricted their ability to transfer of shares under rights granted to the board in JKX’s articles for failure to properly comply with a disclosure notice.
The Supreme Court allowed the appeal of Eclairs and Glengary and restored the Order of the trial judge. It held that the relevant provision of the articles on which the directors had relied had three closely related purposes: (i) to induce a shareholder to comply with a disclosure notice; (ii) to protect the company and its shareholders against having to make decisions about their respective interests in ignorance of relevant information; and (iii) as a sanction for a failure to comply with a disclosure notice. The use of this power by JKX’s board as a mechanism ultimately to seek to influence the outcome of shareholders’ resolutions or the company’s general meetings was not part of those proper purposes.
Although at the critical board meeting the majority wanted to receive information which they had requisitioned, once they were satisfied that it had not been provided and turned to consider the issue of restriction notices, the court found that they were only interested in the effect that this would have on the outcome of the general meeting.
JKX board’s use of the power for the purpose for which it had been used offended the constitutional distinction between board and shareholder because it involved the use of the board’s power to control or influence a decision which JKX’s constitution assigned to its shareholders.