COMPANY — Director — Shares — Restriction notices — Company’s board exercising statutory power to serve notices requesting disclosure of interests in shares and arrangements between shareholders — Board believing information disclosed to be materially inaccurate and imposing restrictions on shares pursuant to articles of association — Whether restrictions on shares imposed for improper purpose — Whether restrictions to be set aside — Companies Act 2006, s 793

Eclairs Group Ltd v JKX Oil & Gas plc

Glengarry Overseas Ltd v JKX Oil & Gas plc

[2015] UKSC 71; [2015] WLR (D) 497

SC(E): Lord Neuberger of Abbotsbury PSC, Lord Mance,Lord Clarke of Stone-cum-Ebony,Lord Sumption and Lord Hodge JJSC: 2 December 2015

Where a company’s board of directors was entitled under the company’s articles of association to issue a disclosure notice against a shareholder, pursuant to section 793 of the Companies Act 2006, and further entitled, in the event that they knew or had reasonable cause to believe that the statements given in response were incorrect, to restrict the shareholder’s right to attend or vote at any general meeting of the company, any such restriction would be invalid if the board’s purpose in making the restriction had been to prevent the shareholder voting at the meeting.

The Supreme Court so stated when allowing appeals by the claimants, Eclairs Group Ltd and Glengary Overseas Ltd, from a decision of the Court of Appeal (Longmore LJ and Sir Robin Jacob; Briggs LJ dissenting) [2014] Bus LR 835 to allow the appeal of the defendant company, JKX Oil & Gas plc from a decision of Mann J [2014] Bus LR 18 by which he had held, inter alia, that restriction notices imposed by the board on the voting and transfer of the claimants’ shares were invalid, having been imposed for an improper purpose.

The board of directors of the defendant company perceived that it was being “raided” by the claimants, two significant shareholders, which, it was feared, were seeking to destabilise the company by replacing senior management and obstructing necessary fund-raising processes with the ultimate aim of acquiring the company at less than its proper value. The board therefore served a notice under section 793 of the Companies Act 2006 on the claimants and others seeking disclosure of interests in shares and arrangements between shareholders. The company’s articles of association provided by article 42 that if the company issued a disclosure notice under section 793 of the 2006 Act, and the board knew or had reasonable cause to believe that the information provided was false or materially incorrect, it could issue a restriction notice subjecting those shares to certain conditions. Accordingly, since it considered the claimants’ responses to the disclosure notices to be materially inaccurate, the company served restriction notices which prevented the voting and transfer of the claimants’ shares. The claimants challenged the validity of the restriction notices, contending, inter alia, that the directors had acted for an improper purpose in imposing them, namely to prevent the claimants voting against resolutions at the company’s annual general meeting six days later.

LORD SUMPTION JSC (with whom LORD HODGE JSC agreed) said that the purpose of a power conferred by a company’s articles was rarely expressed in the instrument itself. However it was usually obvious from its context and effect why a power had been conferred, and so it was with article 42. It had three closely related purposes: (i). to induce the 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) a punitive purpose. The restrictions were imposed as sanctions on account of the failure or refusal of the addressee of a disclosure notice to provide the information for as long as it persisted, on the footing that a person interested in shares who had not complied with obligations attaching to that status should not be entitled to the benefits attaching to the shares. That was the natural inference from the range and character of restrictions envisaged in article 42(3), which affected not only the right to participate in the company’s affairs by voting at general meetings, but the right to receive dividends. Those three purposes were all directly related to the non-provision of information requisitioned by a disclosure notice. None of them extended to influencing the outcome of resolutions at a general meeting. That might well be a consequence of a restriction notice, but it was no part of its proper purpose. It was not itself a legitimate weapon of defence against a corporate raider, which the board was at liberty to take up independently of its interest in getting the information.

However difficult it might be to draw in practice, there was in principle a clear line between protecting the company and its shareholders against the consequences of non-provision of the information, and seeking to manipulate the fate of particular shareholders’ resolutions or to alter the balance of forces at the company’s general meetings. The latter were no part of the purpose of article 42. They were matters for the shareholders, not for the board. The imposition of restrictions under article 42 was a serious interference with financial and constitutional rights which existed for the benefit of the shareholder and not the company. In the case of listed companies such as the defendant a restriction notice was also an interference with the proper operation of the market in its shares, in which there was not only a private but a significant public interest. The rule that the fiduciary powers of directors could be exercised only for the purposes for which they had been conferred was one of the main means by which equity enforced the proper conduct of directors. It was also fundamental to the constitutional distinction between the respective domains of the board and the shareholders. Those considerations were particularly important when the company was in play between competing groups seeking to control or influence its affairs. The fact that a board would naturally wish to have predators disenfranchised was precisely why it was important to confine them to the more limited purpose for which their powers existed. Of all the situations in which directors might be called upon to exercise fiduciary powers with incidental implications for the balance of forces among shareholders, a battle for control of the company was probably the one in which the proper purpose rule had the most valuable part to play.

The argument, which the majority in the Court of Appeal had accepted, that the power to impose restrictions under article 42 was not a “unilateral” power because the addressees of the disclosure notices had only to answer the questions fully and truthfully to bring the restrictions to an end, was rejected. The limitation of the power to its proper purpose derived from its fiduciary character. If its exercise would otherwise be an abuse, it could not be an answer to say that the person against whom it was directed had only himself to blame. Moreover, that proposition assumed that that person was the only one whose interests were adversely affected. But that was not right: other shareholders who agreed with that person would be deprived of his support.

LORD CLARKE of STONE-CUM-EBONY and LORD MANCE JJSC (with both of whom LORD NEUBERGER OF ABBOTSBURY PSC agreed) delivered concurring judgments.

Appearances

David Mabb QC and Nigel Dougherty (instructed by Freshfields Bruckhaus Deringer LLP) for the claimant in the first case.

Andreas Gledhill QC and Paul Sinclair (instructed by Locke Lord (UK) LLP) for the claimant in the second case.

Michael Swainston QC and Tony Singla (instructed by Allen & Overy LLP) for the defendant company.

Reported by: Ms B L Scully, Barrister.

© 2015. The Incorporated Council of Law Reporting for England and Wales.