Directors' Duties: The Proper Purpose Test

The Supreme Court has held that the proper purpose test applies to a decision by the directors of a public company to issue, under the terms of the company's articles, restriction notices which disenfranchise shareholders from voting. It is not enough that the directors have acted in what they believed to be in the best interests of the company.

Background

Part 22 of the Companies Act 2006 gives a public company the right to investigate who has an interest in its shares by sending out section 793 notices. Where a person fails to comply with a notice within a reasonable time, the company may apply to court for an order imposing restrictions on the shares. In practice, many public companies include provisions in their articles allowing the company itself to impose restrictions if a person fails to respond to a section 793 notice.

Facts

The appellants between them held around 39% of the share capital of JKX Oil & Gas plc (JKX). In 2013 the board of JKX considered that the company was the subject of a "corporate raid" by the appellants. The board therefore served notices seeking information about interests in the shares held by the appellants. JKX's articles allowed the directors to impose voting and transfer restrictions where information provided was known or reasonably thought to be false or materially incorrect. The board considered that it had reasonable cause to believe that the responses to its notices were false or materially incorrect. In response, it issued voting and transfer restrictions on the shares held by the appellants. An effect of these was to prevent the appellants from voting at the company's AGM.

The appellants challenged the propriety of the board's purpose in exercising its power to issue restriction notices. Under what is now section 171(b) of the Companies Act 2006, a director must only exercise his powers for the purposes for which they are conferred. The appellants contended that the predominant purpose of the board was to prevent the appellants from voting rather than information gathering. At first instance, the High Court accepted the appellants' arguments and decided that the board of JKX had acted for an improper purpose.

However, on appeal, the majority of the Court of Appeal considered that the proper purpose test had "no significant place" in the operation of the relevant articles or Part 22 of the Companies Act 2006. It was enough that the directors had acted in what they believed to be in the best interests...