Directors must exercise their powers for the right purpose
By Clare Richards
The Supreme Court has recently given a judgment about the exercise of directors’ powers, in Eclairs Group Limited vs JKX Oil and Gas plc (the Company).
The facts of this case concerned the voting rights of shareholders in the Company. Acting by its directors, the Company issued disclosure notices under the Companies Act 2006 to various parties. These notices required parties to provide information about the numbers of shares that they held in the Company and about any agreements or arrangements between the persons interested in those shares. The replies denied that there were any such agreements or arrangements.
Prior to the Company’s AGM, Eclairs invited other shareholders to vote against certain shareholder resolutions proposed by the directors. The directors then exercised powers given to them under the Company’s articles of association to issue restriction notices in respect of the shares held by the relevant shareholders. Under these restriction notices, the voting rights attaching to the shares were suspended and share transfers were restricted.
The shareholders challenged the restriction notices on the grounds that there had been a breach of Section 171(b) of the Companies Act 2006. This says that a “director of a company must … only exercise powers for the purposes for which they are conferred”.
It was held that the directors’ power to disenfranchise shares was given for the purpose of providing an incentive to recipients to comply with a disclosure notice, or to provide a sanction for failure to do so. It was found that the directors had an improper purpose because they were concerned with whether shareholder resolutions would be passed at the AGM.
This case reminds directors that they must not abuse their powers by acting for an improper purpose. If an act is apparently within the directors’ powers but they have acted for an improper purpose, the directors’ act may be challenged. Directors’ powers should not be used for the purpose of influencing the outcome of a shareholders’ meeting. This is an abuse of their powers because it involves the use of those powers to control or influence a decision that should properly lie with the shareholders.
In conclusion, directors should remember that, just because they have certain powers, it might not be appropriate to exercise them. Directors should take care only to use a power for the purpose for which it is intended.
Clare Richards is a solicitor in the Business Services team