Directors exercise of powers under Companies Act and articles held valid

Date Added 30.07.14

Directors of a public limited company did not want a particular corporate shareholder to be able to vote at a shareholders’ meeting. They suspected the corporate shareholder was owned by individuals who were trying to gain control of the plc. They feared those individuals would use the meeting to stop the company from passing shareholder resolutions to raise more capital. This would drive the price of the plc’s shares down.

The directors used their statutory powers under the Companies Act to ask the corporate shareholder whether any third parties held interests in its shares, and the nature of those interests. The effect of the Act, and the plc’s articles of association, was that if the shareholder did not give accurate replies its shares could be stripped of their votes.

The directors decided the corporate shareholder’s reply was materially inaccurate and stopped it from voting on the resolutions to raise more capital at the relevant shareholders’ meeting, in accordance with the provisions of the Act and articles.

The corporate shareholder claimed the directors’ actions breached their fiduciary duty to ‘only exercise [their] powers for the purposes for which they are conferred’, as set out in the Companies Act. It said the proper purpose of the rule allowing directors to disenfranchise shares if the shareholder failed to provide accurate replies to a request for information under the Act is to incentivise shareholders to provide the information requested. However, the purpose of the directors in disenfranchising shares in this case had been to try to stop the acquisition of the plc, which was an improper purpose.

The directors argued that they acted to satisfy another fiduciary duty – to promote the success of the company by acting in its best interests.

The High Court found in favour of the corporate shareholder ruling that:

  • even though the directors honestly believed what they were doing was in the company’s best interests, their acts had been an improper use of their powers and were therefore a breach of their duty to exercise their powers for the purposes for which they were conferred;
  • in this case the directors’ duty to act for proper purposes overrode their duty to promote the success of the company by acting in what they honestly believed to be its best interests.

It ordered that the corporate shareholder’s votes should be counted when deciding whether or not the resolutions to raise more capital had been passed.

On appeal, the Court of Appeal overturned that decision and ruled:

  • The corporate shareholder could have chosen to avoid the sanction by providing full and correct answers, but failed to do so. It was a ‘victim of [its] own choice, not a victim of any improper use of a power of the board of directors’.
  • The relevant provision in the Companies Act (on which the plc’s articles were based) does not say the sanction can only be applied for a particular purpose, and the Court found it ‘difficult to believe that Parliament intended a detailed inquiry into the minds of the directors of a company to be undertaken before the sanction can be imposed’.

Company directors and company secretaries should, however, note that leave has been granted to appeal this decision to the Supreme Court.

Recommendation

Directors considering whether to exercise statutory powers and/or powers given to them in their company’s articles of association should take legal advice before taking action to ensure the exercise of their powers does not breach their fiduciary duty to act only for proper purposes.

Case law: Eclairs Group Ltd v JKX Oil & Gas Plc [2014] EWCA Civ 640

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