JKX Oil & Gas Plc & Ors v Eclairs Group Ltd

This appeal concerned the validity of restrictions imposed by the directors of JKX under Article 42 of the company's articles and Part 22 of the Companies Act 2006 (sections 793–802). The principal issues were (1) whether the section 793 disclosure notices were within the statutory scope, (2) whether the board had reasonable cause to believe replies were false or materially incorrect, (3) whether the directors imposed restrictions for an improper purpose, and (4) standing of beneficial owners who held shares through nominees. The Court of Appeal (majority) held that the notices and board findings as to reasonable cause were lawful and that the misuse-of-power/improper-purpose doctrine had no significant application to Article 42 or Part 22 in circumstances where the recipient could have avoided disenfranchisement by full and accurate disclosure. The majority therefore allowed JKX's appeals against Mann J on the improper purpose point; two judges would have dismissed the appeals and upheld the judge's finding of improper purpose. The court also upheld the trial judge's conclusion that the beneficial owners had standing and that the board had reasonable cause to believe replies were false or materially incorrect.

This litigation arose from steps taken by the board of JKX to obtain information about interests in its shares and, ultimately, to impose voting and transfer restrictions on two substantial blocks of shares (beneficially owned by Eclairs and Glengary) shortly before an annual general meeting. The restrictions were said to flow from default or from responses to section 793 notices that the board knew or had reasonable cause to believe were false or materially incorrect.

Parties and procedural history

• Claimants/appellants: Eclairs Group Ltd and Glengary Overseas Ltd (beneficial owners).
• Respondents/appellants: JKX Oil & Gas plc and the two nominee companies.
• At first instance Mann J held (inter alia) that the disclosure notices were valid, the board had reasonable cause to believe answers were false or materially incorrect, but that the directors had imposed restrictions for an improper purpose; the restrictions were therefore ineffective.
• David Richards J had earlier put in place an interim regime enabling votes to be cast pending trial.
• The Court of Appeal heard cross-appeals and appeals from Mann J and delivered a split judgment.

Nature of the claim/relief sought

The beneficial owners sought declarations and relief to invalidate the restrictions imposed pursuant to Article 42 and Part 22, on grounds including invalidity of the disclosure notices, lack of reasonable cause to believe replies were false or materially incorrect, improper purpose in imposing the restrictions, and lack of standing.

Issues framed by the court

1. Whether the second wave of section 793 notices impermissibly sought information beyond the scope of the statutory power and so were invalid as disclosure notices under Article 42.
2. Whether the board had reasonable cause to believe the responses were false or materially incorrect, within the meaning of Article 42 and Part 22.
3. Whether the directors imposed restrictions for an improper purpose (principle of fiduciary powers and misuse-of-power doctrine).
4. Whether beneficial owners who held through nominees had standing to challenge the restrictions.

Court's reasoning (concise)

• On notices: the Court held that the second wave notices were, properly construed against the Part 22 scheme, within the ambit of section 793. Sub-paragraphs seeking particulars of agreements or arrangements about exercise of rights and concert-party arrangements were authorised by section 793(5) read with the wider definitions in Part 22.
• On reasonable cause to believe: the trial judge's factual findings that the board genuinely believed and had reasonable grounds for believing that replies were false or materially incorrect were upheld as open to the judge after hearing oral evidence and cross-examination.
• On standing: the Court endorsed a broad approach to standing where beneficial owners are economically affected by Part 22/Article 42 steps; Eclairs and Glengary had standing despite nominee arrangements.
• On improper purpose: the Court was split. The majority (Longmore LJ and Sir Robin Jacob) held the misuse-of-power doctrine had no significant application to Article 42/Part 22 where the recipient could have avoided disenfranchisement by providing full and accurate answers and where the articles/statute expressly contemplate disenfranchisement for false or incorrect replies. The majority therefore allowed JKX's appeals on that issue. Briggs LJ (dissent) would have applied the traditional equitable analysis (Howard Smith, Hogg, Re Ricardo) and found the restrictions vitiated by a predominant improper purpose to disenfranchise in order to pass resolutions.

The decision therefore turned on competing views about the scope and application of the proper-purpose doctrine to directors' powers to impose Part 22/Article 42 restrictions, with the majority resolving that the statutory/article regime permits disenfranchisement as a coercive sanction in the circumstances set out.

Appeal allowed (majority). The Court of Appeal majority concluded that Article 42 and Part 22 authorised disenfranchisement where the board knows or has reasonable cause to believe that information supplied in response to a section 793 notice is false or materially incorrect, and that the improper-purpose/misuse-of-power doctrine had no significant application where the recipient could have avoided disenfranchisement by giving full and accurate disclosure. Two judges (Briggs LJ dissenting) would have dismissed the appeals on the basis that the dominant improper purpose to disenfranchise to secure votes invalidated the restrictions.

Appeal from Mann J, High Court, Chancery Division (orders of 1 October 2013, HC13F02147 and HC13D02145). Interim regime by David Richards J permitted voting pending trial. Appeal heard in the Court of Appeal 2–4 April 2014; judgment handed down 13 May 2014 ([2014] EWCA Civ 640).