UK Supreme Court Overturns Court of Appeal, Restores Trial Judge’s Decision in Glengary Overseas/Eclairs Group Case Against JKX Oil & Gas

December 7, 2015 -- The UK Supreme Court handed down a judgment last week, allowing appeals by Locke Lord UK LLP client, Glengary Overseas Ltd (Glengary) and co-shareholder, Eclairs Group Ltd (Eclairs), from a decision of the Court of Appeal ([2014] EWCA Civ 640), and restoring the decision of the trial judge ([2014] Bus. L.R. 18) in a matter involving London-listed JKX Oil & Gas plc (JKX). Glengary and Eclairs together hold 39 percent of the shares in JKX Oil & Gas.

At the trial, the judge had concluded that the board of directors of JKX had, in restricting the rights of these shareholders to vote their shares at an Annual General Meeting (AGM), infringed the proper purposes principle by acting predominantly for the improper collateral purpose of preventing the shareholders from voting at the AGM, and that it made no difference that the directors had honestly believed themselves to be acting in the company’s best interests. JKX appealed the trial judge’s decision to the Court of Appeal which overturned it (Briggs L.J. dissenting). The Court of Appeal held that the proper purposes principle had no application in the context of restriction notices under section 793 of the Companies Act 2006 (the Act) or (by extension) article 42 of the company’s articles.

Both Glengary and Eclairs appealed to the Supreme Court which issued its decision on December 2, 2015, re-instating the Trial Judge’s ruling.

“The Supreme Court reaffirms the relevance of the proper purposes principle in company law, and its decision gives important guidance on when the presence of an improper purpose will vitiate a decision by a company’s board of directors,” said Locke Lord Partner who led a team of Locke Lord lawyers – including Reem Ayad and Nicole Fry – that advised Glengary together with counsel team, Andreas Gledhill QC of Blackstone Chamber and Paul Sinclair of Fountain Court Chambers.

Background

A public company can issue a Notice pursuant to section 793 of the Act to any person whom it knows, or has reasonable cause to believe, is interested in that company’s shares, requiring that person to provide certain information about that person’s interests and the Act entitles the company to seek to have restrictions imposed by the Court on any person who fails to comply with such a Notice. Further, it is a common provision found in the articles of association of publicly listed companies that there are similar restrictions that the company may itself impose on a person failing to give that information, without the need for the company to apply to the Court. The restrictions that may be applied include disenfranchisement of the relevant shares thus preventing them from being voted at general meetings of the company.

JKX served such Notices upon Eclairs and Glengary in advance of its AGM scheduled to take place in June 2013 seeking information as to the beneficial owners of the shares held by Eclairs and Glengary respectively and the relationships and arrangements, if any, between those parties. Responses were given to the Notices, but the JKX board of directors imposed restrictions on the voting of the shares held by Eclairs and Glengary at the AGM in purported exercise of powers under the company’s articles, Eclairs and Glengary having given notice that they intended to oppose certain resolutions being proposed by the board.

Proceedings were issued in the High Court, and following the making of an interim Order allowing Eclairs and Glengary to attend and vote at the AGM, an expedited trial took place before Mr Justice Mann. The Trial Judge found that the actions of the company’s board were unlawful because the restrictions had been imposed for an improper purpose and not for the purpose for which the power to impose them had been vested. The board’s reasons for imposing the restrictions were found to be illegitimate, namely a desire to ensure that the board’s resolutions stood the best possible chance of being passed at the AGM rather than to compel the production of the information requested in the Notices.

JKX appealed to the Court of Appeal which overturned the trial Judge’s ruling. The Court of Appeal took the view that if the board had reasonable cause to believe the required information had not been provided, then it was entitled to impose the restrictions it was empowered to impose by the company’s articles without regard to the purpose for doing so. The Court of Appeal also found that the directors’ fiduciary duty to promote the success of the company does not entitle directors to exercise their powers beyond or outside the scope of the purpose for which they were given.

The UK Supreme Court overturned the Court of Appeal decision and restored the Trial Judge’s ruling. The complete text of the judgment and case summary are available here.

The decision in this case is likely to be relevant to all limited companies, both private and public, in view of the fact that the Government has indicated that it intends to introduce a requirement for companies to maintain records of the beneficial ownership of shares. In order that companies may have effective tools to elicit this information, an extension of the powers in Part 22 of the Act is proposed so that it will apply to all private limited companies. For additional information on this issue, please read Transparency & Trust: A Discussion Paper available here.

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