Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71

Directors of JKX Oil & Gas issued restriction notices under company articles to suspend voting rights of shareholders who allegedly failed to comply with disclosure notices. The Supreme Court held the restrictions were issued for an improper purpose – to influence AGM voting outcomes rather than to obtain information – and applied the proper purpose rule to set aside the notices.

Facts

JKX Oil & Gas plc, a company listed on the London Stock Exchange, faced what its directors perceived as a ‘corporate raid’ by two BVI companies, Eclairs and Glengary, which together held approximately 39% of JKX’s shares. The shareholders behind these companies were Ukrainian businessmen with a reputation as corporate raiders.

In March 2013, Eclairs requested an extraordinary general meeting to remove two directors and appoint three new ones. JKX’s board responded by issuing disclosure notices under section 793 of the Companies Act 2006, requesting information about share interests and any agreements between the shareholders. The responses denied any agreements or arrangements between the parties.

On 30 May 2013, just days before the scheduled AGM, the board issued restriction notices under article 42 of the company’s articles, suspending voting rights on approximately 66 million shares. The board believed the responses to the disclosure notices were false because they suspected undisclosed concert arrangements.

Issues

Primary Legal Questions

1. What are the proper purposes for which the board may restrict the exercise of rights attaching to shares under article 42?

2. Does the proper purpose rule apply to the exercise of powers under article 42?

3. Were the restriction notices issued for an improper purpose?

Judgment

The Supreme Court unanimously allowed the appeal and restored Mann J’s decision setting aside the restriction notices.

The Proper Purpose Rule

Lord Sumption, delivering the lead judgment, explained the proper purpose rule as stated in section 171(b) of the Companies Act 2006:

“a director of a company must ‘only exercise powers for the purposes for which they are conferred’.”

Lord Sumption traced the rule’s origins to the equitable doctrine of ‘fraud on a power’, citing Lord Parker in Vatcher v Paull:

“does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could be properly termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.”

Purpose of Article 42

Lord Sumption identified three closely related purposes of article 42:

1. To induce the shareholder to comply with a disclosure notice;

2. To protect the company and its shareholders against having to make decisions in ignorance of relevant information;

3. A punitive purpose – as sanctions for non-compliance.

He concluded:

“None of them extends to influencing the outcome of resolutions at a general meeting. That may well be a consequence of a restriction notice. But it is no part of its proper purpose.”

Application of the Rule

Lord Sumption rejected the Court of Appeal majority’s view that the proper purpose doctrine had ‘no significant place’ in article 42’s operation, emphasising:

“Of all the situations in which directors may be called upon to exercise fiduciary powers with incidental implications for the balance of forces among shareholders, a battle for control of the company is probably the one in which the proper purpose rule has the most valuable part to play.”

The Directors’ Purpose

Based on Mann J’s findings, the majority of directors did not have in mind protecting the company pending the provision of information; instead, they sought to secure the passing of resolutions at the AGM. As the judge found, the directors:

“took the opportunity of using the power to alter the potential votes at the forthcoming AGM in order to maximise the chances of the resolutions being passed in a manner which they thought was in the best interests of the Company.”

Implications

This case significantly clarifies the application of the proper purpose rule to directors’ powers, particularly in contested corporate situations. Key implications include:

1. Directors must exercise powers conferred by articles only for the purposes for which they were conferred, regardless of good faith belief that their actions benefit the company.

2. The power to impose share restrictions following non-compliance with disclosure notices cannot be used as a weapon to influence shareholder voting at general meetings.

3. The proper purpose rule is particularly important in battles for corporate control, where directors may be tempted to use their powers to favour particular outcomes.

4. The fact that shareholders could avoid restrictions by complying with disclosure notices does not exempt the board’s decision from scrutiny under the proper purpose rule.

The case reinforces the constitutional distinction between the respective domains of the board and shareholders in company governance.

Verdict: Appeal allowed. The Supreme Court restored Mann J’s decision setting aside the restriction notices and the board resolutions authorising them, holding that the notices had been issued for an improper purpose – to influence the outcome of resolutions at the AGM rather than to obtain information or protect the company pending its provision.

Source: Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71