Directors' duties – exercise of powers for a proper purpose
15 July 2014
In the recent case of Eclairs Group Ltd & anr v JKX Oil & Gas plc & ors  EWCA Civ 640, 13 May 2014, the Court of Appeal considered the duty of directors to exercise powers "only ... for the purposes for which they are conferred" (s171 of the Companies Act 2006 (CA 2006)). The case involved the disenfranchisement of shareholders whom the directors of a listed company believed to be engaged in a "raid", pursuant to undisclosed agreements or arrangements, with the objective of destabilising the company to acquire more shares at less than fair value. When the allegedly collaborating parties failed to comply with statutory information requests, pursuant to s793 of the CA 2006, the directors imposed restrictions on their shares, preventing them from voting, in accordance with the company's Articles. Allen & Overy LLP acted for the successful appellants.
At first instance, Mann J found that the directors were justified in apprehending a raid in the above sense. However, he considered that the sole legitimate purpose for exercising the power was to extract information, and that the directors had gone beyond the permissible limits of the power because, primarily, they wanted to secure the passing of resolutions to reappoint the CEO and facilitate the raising of capital: in other words, to protect the company from the perceived raid, with the subsidiary objective of extracting information. He did, however, consider that protecting the company would have been a legitimate consideration alongside a primary motive of extracting information.
A majority of the Court of Appeal disagreed and said that the misuse of power doctrine had no significant place in the matter in these circumstances. If the activist shareholders wanted to avoid the imposition of voting restrictions, all they had to do was supply the information requested.
Briggs LJ dissented, but nonetheless considered that permissible purpose went beyond extracting information, and would include protection of the company pending provision of that information. However, he considered that a finding by Mann J that the directors wanted to protect the company full stop meant that the directors were outside this broader limit. However, the trial judge also found that the directors recognised that the restrictions would fall away upon provision of the information and, therefore, that the protection afforded by the restrictions would cease at that point. Briggs LJ's opposition to the result, therefore, turns on a distinction between the directors wishing to protect the company pending provision of the information and wishing to protect the company, recognising that restrictions could only do so until the information was provided.
The issue of proper purpose is being appealed to the Supreme Court.
The leading case on the "proper purpose" rule to date is the Privy Council judgment in Howard Smith v Ampol. In accordance with principles established by that case, in determining whether a power was exercised for a proper purpose, the court should: (i) identify the power whose exercise is in question; (ii) identify the proper purpose for which the power was vested in the directors; (iii) identify the substantial purpose for which the power was in fact exercised; and (iv) decide whether that purpose was proper. However, the case is less obvious in its application when all the purposes in play are legitimate. At first instance in this case, Mann J effectively came up with an improper "balance of" purpose doctrine, among purposes which, with different primacy, could be legitimate. The Court of Appeal rejected that approach, at least in the context of restrictions for non-provision of information in response to notice under s793. This may be regarded as fortunate. Where a power is not expressly constrained to be exercised for a specified purpose, it seems reasonable for directors to exercise it for reasons they may properly regard as pertinent, in the interests of the company as a whole. It would be unfortunate for the proper functioning of a company if directors' decisions were generally open to challenge, even where there is no suggestion of a bad or self-interested purpose, by cross-examining individual directors on their individual and overall aggregate balance of purpose between legitimate objectives.