Eclairs Group Ltd v JKX Oil & Gas plc

A director’s fiduciary power must be exercised only for its proper purposes. The purpose is inferred from the provision’s terms, effect, mischief and business context. A share-restriction power triggered by non-compliance with a disclosure notice may induce compliance, protect informed decision-making or sanction continuing default. It cannot be used to manipulate shareholder resolutions or alter the voting balance. The proper purpose rule applies even where compliance would end the restrictions and the directors honestly believe that disenfranchisement benefits the company. An exercise whose actual primary purpose is to secure a preferred outcome at a general meeting is invalid. The court did not conclusively determine whether but-for causation governs every decision influenced by mixed proper and improper purposes.

Eclairs Group Ltd and Glengary Overseas Ltd held substantial minority shareholdings in JKX Oil & Gas plc. After suspecting a concerted attempt to obtain control, JKX’s directors issued statutory disclosure notices under section 793 of the Companies Act 2006. The directors considered the responses inaccurate and used article 42 of the company’s articles to suspend voting and transfer rights attached to the appellants’ shares shortly before an annual general meeting.

Mann J found that the directors’ primary purpose was to improve the prospects of passing resolutions opposed by the appellants. He set aside the restriction notices and the board resolutions authorising them. The Court of Appeal, by a majority, reversed that decision: [2014] EWCA Civ 640.

The central issues were the proper purposes of article 42, whether the fiduciary proper purpose rule applied to its exercise, and whether the directors had used the power for a collateral purpose.

Lord Sumption delivered the leading judgment, with which Lord Hodge agreed. Lord Mance and Lord Clarke, in judgments with which Lord Neuberger agreed, accepted Lord Sumption’s reasons for allowing the appeals in paras 30–43. The court was unanimous as to the disposition and the application of the proper purpose rule, but not as to Lord Sumption’s wider analysis of mixed-purpose causation.

1. Disposition. The appeals were allowed unanimously and Mann J’s decision was restored. The restriction notices and the board resolutions authorising them were set aside.
2. Nature of the proper purpose rule. The rule was an equitable control upon the exercise of fiduciary powers, reflected in section 171(b) of the Companies Act 2006. It was not merely an implied contractual term in the company’s articles. Where the instrument did not state a power’s purpose, the court inferred it from the provision’s mischief, express terms and effect, informed by the business context.
3. Purposes of article 42. Article 42 served three closely related purposes: inducing compliance with a disclosure notice; protecting the company and its shareholders from making decisions without relevant information; and sanctioning a continuing failure to provide information. The automatic lifting of restrictions following satisfactory disclosure showed that the power was ancillary to section 793. The reasoning in In re Ricardo Group Plc [1989] BCLC 566 and In re TR Technology Investment Trust Plc [1988] BCLC 256 supported that conclusion.
4. Excluded purpose. Influencing particular shareholder resolutions or altering the balance of voting power was not a proper purpose of article 42. Disenfranchisement could be an incidental consequence, but it was not an independent defensive weapon against a perceived corporate raider. Decisions assigned by the constitution to shareholders remained matters for shareholders rather than the board.
5. Application of the rule. The power’s fiduciary character made the proper purpose rule applicable despite the argument that the affected shareholder could end the restrictions by complying. The restrictions also affected other shareholders, market operation and important financial and constitutional rights. The board’s honest belief that its actions benefited the company did not authorise interference with shareholder voting for a collateral purpose. The analogy with Anglo-Universal Bank v Baragnon (1881) 45 LT 362 reinforced that conclusion.
6. The directors’ purpose. Mann J had found that the directors’ actual primary purpose was to secure their preferred outcome at the forthcoming meeting. A hypothetical proper purpose which had not actually influenced them could not validate the decision. The company had not pleaded or tried an alternative case that the same restrictions would have been imposed for proper reasons alone, and there was no appeal against the judge’s refusal to permit that late case.
7. Mixed-purpose causation. Lord Sumption and Lord Hodge considered that a mixed-purpose decision should turn on whether it would have been made but for the improper purpose. Lord Mance, Lord Clarke and Lord Neuberger preferred to leave that question open because it did not arise for decision and had not received full argument. The relationship between primary purpose, but-for causation and relief under section 171(b) therefore remained unresolved.

1. United Kingdom Supreme Court: The court unanimously allowed the appeals in Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 and restored Mann J’s decision.
2. Court of Appeal: By a majority, the court allowed JKX’s appeal and held that the proper purpose doctrine had no significant place in the operation of article 42: [2014] EWCA Civ 640. Briggs LJ dissented.
3. High Court, Chancery Division: Mann J held that the board’s primary purpose was improperly to influence resolutions at the annual general meeting. He set aside the restriction notices and the board resolutions authorising them.