Directors' Duties And ‘Proper Purpose'

A recent Supreme Court case has explored the exercise of directors' duties as codified under the Companies Act 2006 (the Act) and in particular the application of the so-called proper purpose test, i.e. that directors can only exercise powers for the purposes for which they are conferred.

The facts of the case revolved around two shareholders (Eclairs Group Ltd (Eclairs) and Glengary Overseas Ltd (Glengary), together owning about 40% of the company's share capital) of JKX Oil & Gas Plc (JKX), an English company listed on the LSE, who tried to flex their shareholder muscle by blocking certain resolutions in respect of raising capital, calling for changes to the board, and making it publically known that they intended to block certain key decisions. The board of JKX responded by seeking information about the number of shares held and any agreement or arrangement between Eclairs and Glengary by issuing a statutory disclosure notice under Part 22 of the Act. The shareholders' replies to these notices denied any such arrangement and the board, considering these responses inadequate, exercised a power under JKX's articles of association to issue a restriction notice over the shares of Eclairs and Glengary to suspend their right to vote at general meetings and restrict their right to transfer the shares.

At first instance, Eclairs and Glengary successfully argued that the JKX directors had acted improperly in using the restriction notice to influence the outcome of AGM resolutions but this finding was reversed by the Court of Appeal.

Upon reaching the Supreme Court, the decision was once more reversed, with Lord Sumption noting that there may have been a proper purpose for issuing the restriction notices, had the motivation been to simply 'ensure the passage of the resolutions at the AGM'. However, in stating that the purpose was to defeat the attempts of Eclairs and Glengary to control the company's affairs, the...