Company Director not Trustee but is Fiduciary
The Court was asked about an alleged ‘corporate raid’, an attempt to exploit a minority shareholding in a company to obtain effective management or voting control without paying what other shareholders would regard as a proper price.
Held: The appeal succeeded.
Lord Sumption said: ‘A company director differs from an express trustee in having no title to the company’s assets. But he is unquestionably a fiduciary and has always been treated as a trustee for the company of his powers. Their exercise is limited to the purpose for which they were conferred. One of the commonest applications of the principle in company law is to prevent the use of the directors’ powers for the purpose of influencing the outcome of a general meeting. This is not only an abuse of a power for a collateral purpose. It also offends the constitutional distribution of powers between the different organs of the company, because it involves the use of the board’s powers to control or influence a decision which the company’s constitution assigns to the general body of shareholders.’
and: ‘I am unable to accept the majority’s parting assertion, at para 143, that the application of the proper purpose rule would be an ‘encouragement to deceitful conduct’ by predators with ‘subversive but secret’ projects. There is, however, a more fundamental objection to it, which is that it is incoherent once the operation of the rule is properly understood. If the ‘deceit’ consists simply in the secrecy, ie in the withholding or deemed withholding of the information, a decision to impose restrictions which is based simply on that fact will be entirely consistent with the proper purpose of the power. But secrecy is one thing, subversion another. If the real objection is to the subversion, it is nothing to do with the issue or enforcement of disclosure notices. Directors owe a duty of loyalty to the company, but shareholders owe no loyalty either to the company or its board. Within broad limits, derived for the most part from Part 30 of the Companies Act 2006 (Protection of Members against Unfair Prejudice) and the City Code on Takeovers and Mergers, they are entitled to exercise their rights in their own interest as they see it and to challenge the existing management for good reasons or bad.’
As to the proper purpose rule: ‘The rule is not a term of the contract and does not necessarily depend on any limitation on the scope of the power as a matter of construction. The proper purpose rule is a principle by which equity controls the exercise of a fiduciary’s powers in respects which are not, or not necessarily, determined by the instrument. Ascertaining the purpose of a power where the instrument is silent depends on an inference from the mischief of the provision conferring it, which is itself deduced from its express terms, from an analysis of their effect, and from the court’s understanding of the business context.’
‘the imposition of restrictions under article 42 is a serious interference with financial and constitutional rights which exist for the benefit of the shareholder and not the company. In the case of listed companies such as JKX a restriction notice is also an interference with the proper operation of the market in its shares, in which there is not only a private but a significant public interest. One would expect such a draconian power to be circumscribed by something more than the directors’ duty to act in the company’s interest as they may in good faith perceive it.’
Lord Neuberger, President, Lord Mance, Lord Clarke, Lord Sumption, Lord Hodge
 UKSC 71,  WLR(D) 497,  2 All ER (Comm) 413,  3 All ER 641,  BCC 79,  BUS LR 1395,  1 BCLC 1, UKSC 2014/0179
Bailii, WLRD, Bailii Summary, SC, SC Summary
Companies Act 2006 793 794
England and Wales
Cited – Lane v Page 15-Jun-1754
Fraudulent execution of a power to jointure. A power to jointure having been executed under an agreement that the creditor of the husband should have part of the jointure, the appointment was set aside as far as the creditors were to benefit. The . .
Cited – Vatcher v Pault PC 17-Dec-2014
(Jersey) A fraudulent exercise of a trust power is constituted if it is exercised for a purpose or with an intention beyond the scope of the power. It was said that ‘it is not enough that an appointor or some person not an object of power may . .
Cited – Aleyn v Belchier 5-Jul-1758
Power of jointuring executed in favour of a wife, but with an agreement that the wife should only receive a part as an annuity for her own benefit, and that the residue should be applied to the payment of the husband’s debts : held, a fraud upon the . .
Cited – The Duke Of Portland And Others v Lady Mary E Topham And Others HL 6-Apr-1864
A power, to be validly executed, must be executed without any indirect object. The donee of the power must give the property which is the subject of it, as property, to the person to whom he affects to give it.
A created a power to appoint a . .
Appeal from – JKX Oil and Gas Plc and Others v Eclairs Group Ltd CA 13-May-2014
The court was asked as to important issues on the validity and constitutionality of restrictions imposed by the directors pursuant to Part 22 of the 2006 Act and the company’s Articles of Association, including the purported disenfranchisement of . .
Cited – Hindle v John Cotton Ltd HL 3-Jul-1919
Viscount Finlay said: ‘Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the . .
Cited – In re Ricardo Group Plc ChD 1989
The company had obtained a restrictions order under Part XV. An application was made to the court for relief.
Held: On the facts relief was refused. The respondent had secured discharge of the order under the liberty to apply, having provided . .
At First Instance – Eclairs Group Ltd and Another v JKX Oil and Gas Plc and Others ChD 30-Aug-2013
Challenge was made to restrictions on voting imposed on the directors under the company’s articles.
Held: The purpose of article 42 is to provide a ‘sanction or incentive’ to remedy a failure to comply with the disclosure notice. . .
Cited – In re TR Technology Investment Trust Plc ChD 1988
The court was asked whether the limition on the circumstances in which the court could remove restrictions imposed under section 794, applied to a merely interim order.
Held: It did not. Hoffmann J said of the powers t demand information given . .
Cited – Cannon v Trask 1875
The Court was asked as to the use of the directors’ powers to fix a time for the general meeting,
Held: It was improper to fix a general meeting at a time when hostile shareholders were known to be unable to attend. . .
Cited – Mills v Mills 1938
(High Court of Australia) Where the main purpose of the directors’ resolution (in this case to increase the share base) is to benefit the company it matters not that it incidentally also benefits a director.
Dixon J pointed out the difficulties . .
Cited – Birley v Birley CA 12-Mar-1858
An absolute appointment was made to an object of a power, under a prior ‘understanding’ between the appointor and appointee, to hold in ‘In trust ‘ for persons, some of whom were objects and some not.
Held: The whole was void. . .
Cited – Pryor v Pryor CA 29-Apr-1864
Parents having a power of appointing an estate to all or any of their children appointed it absolutely to two of their sons, upon the understanding that the appointments should resettle the estate upon certain trusts for the benefit of all the . .
Cited – Re Turner’s Settled Estates 1884
In the case of mixed motives the Court will apply a ‘but for’ test, namely whether the power to transfer would have been exercised but for the intent to achieve the ulterior purpose or whether the power would have been exercised in any event . .
Cited – Hogg v Cramphorn Limited ChD 1966
An honest belief that directors should seek to maintain their office for the good of the company did not prevent the motive for issuing additional shares to prevent a take-over from being an improper motive. The directors’ powers to issue shares . .
Cited – Fraser v Whalley CA 27-Feb-1864
The directors of a railway compriy are not justified in acting on an old resolution auithorising the issue of shares after the particular purpose for which the authority was given has ceased to be available.
Nor in issuing shares, supposing . .
Cited – Lloyds Bank plc v Bundy CA 1974
‘Broadchalke is one of the most pleasing villages in England. Old Herbert Bundy, the defendant, was a farmer there. His home was at Yew Tree Farm. It went back for 300 years. His family had been there for generations. It was his only asset. But he . .
Cited – Howard Smith Limited v Ampol Petroleum Limited PC 14-Feb-1974
(New South Wales) The court considered the use by directors of their fiduciary power of allotment of shares for a different purpose than that for which it was granted, and so as to dilute the voting power of the majority shareholding of issued . .
Cited – Anglo-Universal Bank v Baragnon CA 1881
If it was shown that the power to make calls was being exercised for the purpose of disqualifying hostile shareholders at a general meeting, that would be an improper exercise of the directors’ powers. . .
Cited – Whitehouse v Carlton House Pty 7-Apr-1987
High Court of Australia – Companies – Shares – Issue and allotment – Powers of directors – Bona fides of exercise – Ulterior purpose – Article vesting powers of directors in named governing director – Issue and allotment of shares by governing . .
Cited – Roadchef (Employee Benefits Trustees) Ltd v Hill and Another ChD 29-Jan-2014
Challenge to share transfer. . .
Lists of cited by and citing cases may be incomplete.
Updated: 05 August 2021; Ref: scu.556258