Eclairs Group Ltd & Anor v JKX Oil & Gas Plc & Ors

This case concerned the validity of restriction notices issued under article 42 of JKX's articles of association following disclosure notices served under section 793 of the Companies Act 2006. The court held that the section 793-style disclosure notices sent by the company were a permissible exercise under the statute and that the board had reasonable cause to believe that answers to those notices were false or materially incorrect. However, the majority of the board imposed the article 42 restrictions substantially to prevent the claimants from voting at the imminent annual general meeting (to secure the passage of resolutions) rather than solely to compel proper disclosure. The restrictions were therefore imposed for an improper purpose and the board's exercise of the article 42 power was set aside.

Key legal principles applied included: (i) construction of section 793 and related provisions (sections 820–825) — the statutory definitions are wide, subsection (5) is illustrative rather than exhaustive, and a company may ask direct questions about third‑party interests where those particulars are germane to the addressee’s interest; (ii) article 42 may be used to suspend voting and transfer rights where the board knows or has reasonable cause to believe that required disclosure is false or materially incorrect; and (iii) directors must exercise powers for proper purposes — a power conferred to obtain disclosure may not properly be used predominantly to manipulate voting to secure corporate management outcomes.

Subsidiary findings included that natural justice did not require a pre-imposition hearing in the circumstances, that the restriction notices were sufficiently drafted as article 42 notices, and that the claimants (beneficial owners) could bring the claims in their names with the registered nominees joined. A separate interlocutory non‑disclosure complaint was not treated as grounds to treat the interim undertakings as discharged in this judgment.

Background and parties. JKX's board served article 42 restriction notices in respect of share blocks beneficially held by Eclairs and Glengary after issuing disclosure notices modelled on section 793 Companies Act 2006. The board believed a coordinated 'raid' was underway and that responses to the section 793 notices were false or materially incorrect. Eclairs and Glengary sought declarations that the restriction notices were invalid and that the board lacked power or acted improperly.

Nature of the application/relief sought. The claimants sought declarations and relief to set aside the restriction notices issued under article 42 and relief that their shares should not be subject to the restrictions imposed by the board.

Issues before the court. The core issues were: (i) whether the section 793/Article 42 disclosure notices were validly formulated under the statute and the articles; (ii) whether the board had "reasonable cause to believe" that responses were false or materially incorrect so as to justify restrictions; (iii) whether the board acted for an improper purpose (using article 42 to influence the outcome at the imminent AGM rather than to obtain disclosure); and subsidiary questions about estoppel/waiver, natural justice, sufficiency of the restriction notices' form, locus/standing of beneficial owners and the effect of alleged interlocutory non-disclosure.

Court’s reasoning and conclusions. On construction of section 793 the court concluded that the section and related definitions (sections 820–825) are broad; subsection (5) of section 793 provides illustrative examples and does not exhaust the company's right to require particulars. The reasonable-cause-to-believe qualification applies to identification of the addressee but does not preclude asking the addressee direct questions about third-party interests where such particulars are "in relation to" the addressee's shares. The court held the company’s notices were capable of being valid section 793 disclosure notices.

Turning to the facts, the board had a real and reasonable basis — a mosaic of matters, including prior conduct, transfers, the EGM requisition and the open letter — to conclude there was an undisclosed set of arrangements affecting voting rights and therefore had reasonable cause to believe that certain responses were inaccurate. The board was therefore entitled to issue restriction notices in principle.

However, on purpose the court found that a majority of voting directors adopted a substantial purpose of disenfranchising the claimants to secure passage of the company’s proposed resolutions at the AGM (not merely as a coercive sanction to secure disclosure). The court held that article 42 is to be exercised to compel disclosure (save for the limited statutory exception in the court’s powers on discharge) and not as a device predominantly to manipulate voting outcomes. The exercise of the article 42 power for the predominant improper purpose made the exercise voidable and the court set the restrictions aside.

Other findings. The court held that the principles of natural justice did not require a prior hearing before the board in the circumstances; the restriction notices were sufficiently compliant with article 42; the beneficial owners had standing to bring the claims joined with nominees; and the interlocutory non-disclosure points did not alter the court's conclusion in this judgment. The court declined to decide a late-raised contention that the outcome would have been the same absent the improper purpose for procedural reasons, although the judge indicated, on the evidence heard, he thought it likely the board would have imposed restrictions for proper reasons in any event.

The claim is allowed. The court held that, although the section 793-style disclosure notices were capable of validity and the board had reasonable cause to believe some responses were false or materially incorrect, the majority of the board imposed article 42 restrictions substantially in order to prevent the claimants voting at the forthcoming AGM (an improper purpose). The board's exercise of the article 42 power was therefore set aside.