Eclairs Group Ltd v JKX Oil & Gas plc

This case concerns the proper purpose rule as applied to a board power in a company’s articles to impose restrictions on shares after a statutory disclosure notice under section 793 of the Companies Act 2006. The Supreme Court held that the power in article 42 of JKX’s articles is confined to purposes related to the non-provision of information: (i) to induce compliance with a disclosure notice, (ii) to protect the company and its shareholders from having to make decisions in ignorance of relevant information pending provision of that information, and (iii) to impose sanctions for non-compliance while it persists. The board may not properly use article 42 as an independent weapon to influence voting outcomes at a general meeting or to disenfranchise particular shareholders for the purpose of securing particular resolutions. The court restored the decision of Mann J, holding that on the judge’s findings the directors’ primary purpose in issuing the restriction notices was to affect the outcome of the forthcoming AGM and was therefore improper under the fiduciary duty in section 171(b) of the Companies Act 2006.

Background and facts:

• JKX Oil & Gas plc, a UK listed company, perceived a threatened "corporate raid" by two minority shareholders, Eclairs and Glengary, who together held c.39% of the shares and were perceived by the board to be acting in concert.
• After issuing statutory disclosure notices under what is now section 793 Companies Act 2006 seeking information about interests and arrangements, the board concluded the responses were inadequate and, under article 42 of JKX’s articles, issued restriction notices which suspended voting and transfer rights on the shares concerned.
• Eclairs and Glengary commenced Chancery Division proceedings to challenge the restriction notices; Mann J set them aside on the ground that the board had acted for a collateral purpose, namely to influence the outcome of the imminent AGM.

Nature of the claim and relief sought:

• The claimants sought declaratory and injunctive relief that the restriction notices and the board resolutions authorising them were void or should be set aside, on grounds including that the board had acted for an improper collateral purpose.

Issues framed by the court:

• Whether the proper purpose rule applies to a board power in articles such as article 42 which enables the imposition of restrictions consequent on the failure to comply with a disclosure notice.
• If it applies, what is the proper purpose of article 42?
• Whether the restriction notices in this case were imposed for an improper collateral purpose and, if so, whether they could be upheld on the alternative hypothesis that the board would have reached the same decision absent the improper purpose (the role of causation).

Court’s reasoning and conclusion:

• The Supreme Court held that the proper purpose rule applies to fiduciary powers conferred by articles; purpose is ascertained from the mischief the provision was intended to meet, its terms and business context. Article 42’s purposes were identified as inducement to comply, protection of the company and shareholders pending provision of information, and sanctions for non-compliance. Influencing the outcome of shareholder resolutions is not part of that purpose.
• On Mann J’s uncontested findings of fact, a majority of voting directors had the substantial purpose of disenfranchising the alleged raiders to secure the passage of resolutions at the AGM; that was an improper collateral purpose. The restriction notices were therefore invalid and the judge’s order setting them aside was restored.
• The court discussed the appropriate test where powers are exercised for mixed purposes and considered causation-based analysis (whether but for the improper purpose the decision would have been made). While Lord Sumption expressed support for a causation approach, other members (notably Lord Mance) preferred to reserve detailed conclusions on that point for fuller argument; the result here did not require a definitive new development of the law on causation.

Wider context:

• The decision emphasises the continuing application of the proper purpose rule to directors’ exercise of powers, especially where powers can affect the constitutional balance between directors and shareholders or interfere with market and voting rights of listed companies.

Appeal allowed. The Supreme Court held that article 42 is confined to purposes connected to the non-provision of information (to induce compliance, to protect the company pending provision of information, and as a sanction for non-compliance) and does not permit the board to restrict voting rights for the collateral purpose of influencing the outcome of shareholder resolutions; on Mann J’s findings the board acted for that improper purpose and the restriction notices were set aside, so the Court restored Mann J’s decision.

First instance: Chancery Division (Mann J) — restriction notices set aside. Court of Appeal: appeal allowed, [2014] EWCA Civ 640. Supreme Court: appeal allowed and Mann J’s order restored, [2015] UKSC 71.