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 two of JKX’s shareholders, registered as the holders of 27.55% and 11.45% of the company’s ordinary shares, for the purposes of voting at JKX’s Annual General Meeting on 5th June 2013. At the expedited trial of the conjoined claims by the beneficial owners of those shareholdings, Mann J had declared that the Restrictions had been ineffective because the directors had, in imposing them, been motivated by an improper purpose. Held (majority): The appeal was allowed.
The proper purpose doctrine had ‘no significant place in the operation of article 42 or Part 22 of the 2006 Act’ Restrictions arising from a shareholder’s failure to comply with a disclosure notice did not reflect a ‘unilateral’ exercise of power by the board; the shareholder could avoid the restrictions by complying with the disclosure notice. ‘Why should the law protect him when all he had to do was tell the truth?’.
The restrictions on the voting and other rights attaching to the shares was the very thing that article 42 was designed to permit if the directors reasonably considered that the disclosure notices had not been complied with. So once the board had reached that conclusion, there was no further limitation on their power to issue a restriction notice.
No limitation on the proper purpose of a restriction notice was expressed, either in Part 22 of the 2006 Act or in article 42 of JKX’s articles. There was no room for the implication of such a purpose, because in the nature of things the statutory disclosure procedure was most likely to be operated at a time of controversy in the company’s affairs. The draftsman was unlikely to have intended a detailed enquiry into the minds of directors ‘in what may often be a rapidly changing scene’; and, in a battle for control against predators who were ‘up to something subversive but secret’ the directors would naturally want to see them disenfranchised. The result of applying the proper purpose rule would be to emasculate the statutory scheme and the corresponding provisions of article 42. Any other view ‘would only be an encouragement to deceitful conduct and not something which English company law should countenance’
Briggs LJ, dissenting, said that the purpose of article 42 was to encourage or coerce the provision of information which had been requested under section 793, with the rider that it was also to prevent the accrual of any unfair advantage to any person as a result of the failure to comply with such a request. Even with that limited expansion, on the judge’s findings of fact the directors’ decision to impose restrictions under article 42 was improper, and there were no satisfactory reasons why the rule should not be applied to the draconian powers conferred by article 42 of JKX’s articles: ‘Furthermore, I consider it important that the court should uphold the proper purpose principle in relation to the exercise of fiduciary powers by directors, all the more so where the power is capable of affecting, or interfering with, the constitutional balance between shareholders and directors, and between particular groups of shareholders. The temptation on directors, anxious to protect their company from what they regard as the adverse consequences of a course of action proposed by shareholders, to interfere in that way, whether by the issue of shares to their supporters, or by disenfranchisement of their opponents’ shares, may be very hard to resist, unless the consequences of improprieties of that kind are clearly laid down and adhered to by the court.’
Judges:
Longmore, Briggs LJJ, Sir Robin Jacob
Citations:
[2014] EWCA Civ 640, [2014] BUS LR 835, [2014] WLR(D) 204
Links:
Statutes:
Jurisdiction:
England and Wales
Citing:
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 . .
Cited – Re Geers Gross plc CA 1988
Nourse LJ said: ‘the clear purpose of [Pt VI of the 1985 Act] is to give a public company, and ultimately the public at large, a prima facie unqualified right to know who are the real owners of its voting shares.’ . .
Appeal from – 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 by:
Appeal from – Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil and Gas Plc SC 2-Dec-2015
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 . .
Lists of cited by and citing cases may be incomplete.
Company
Updated: 24 October 2022; Ref: scu.525471
