Monday 2 September 2013

UK: England and Wales: directors' power to restrict shareholder voting rights exercised for an improper purpose

Judgment was given last Friday by Mr Justice Mann in Eclairs Group Ltd v JKX Oil & Gas Plc [2013] EWHC 2631 (Ch). The decision is noteworthy because of the discussion it contains of sections 171 and 172 of the Companies Act 2006 in the context of a decision by the majority of a company's directors, shortly before its annual general meeting, to exercise a power in the articles of association restricting the voting rights of certain shareholders. The articles provided this power in respect of the failure by a member (or other person interested in shares) to provide information in response to a notice issued under section 793 ("Notice by company requiring information about interests in its shares") of the Companies Act 2006.

The judge accepted that the directors had acted in what they believed was the best interests of the company. However, he found that they had used a power given for a limited purpose - the disclosure of information in response to the section 793 notice - for the purpose of stopping certain shareholders from voting at the annual general meeting. In doing so they breached section 171 ("Duty to act within powers"), the provisions of which were not trumped by section 172 ("Duty to promote the success of the company"). The result was that the directors' exercise of the power to impose restrictions on the shareholders' voting was set aside.

One point that was not pleaded but which the judge raised at the final speeches stage, was whether the exercise of a power should be set aside if the directors would have acted in the same way taking only proper purposes into account. Having raised this point the judge then held that it was too late for it to form part of the proceedings. He did, however, offer an opinion: in his view it was possible that a decision tainted by an improper purpose might nevertheless be upheld in such circumstances. The facts of the present case were, he noted, very different from the leading cases on improper purposes (Hogg v Cramphorn Ltd [1967] Ch 254 and Howard Smith Ltd v Ampol Ltd [1974] AC 821). Moreover, he did not see why the logic of these two cases should necessarily be applied inexorably to the present case.

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