11th February 2016
Section 171 of the Companies Act 2006 provides that directors may only exercise powers for the purposes for which they are conferred. That is widely known as the ‘proper purpose’ rule.
In Eclairs Group v JKX Oil & Gas , the directors of JKX Oil & Gas (the Company) suspected that two of its shareholders were acting in concert and planning a corporate raid. The Company had provisions in its articles which allowed directors to request information from any person interested in its shares via a disclosure notice, and to impose restrictions or suspend shareholders’ rights if such notices were not complied with. The Company issued disclosure notices to the shareholders in question, but the shareholders denied any agreement between them. The directors believed that the shareholders had failed to disclose their corporate arrangement and so the Company suspended the shareholders’ rights to vote and restricted their rights of transfer. The shareholders issued court proceedings, claiming that the directors had exercised their powers for an improper purpose. The shareholders argued that the only proper purpose for which the directors’ powers could be exercised was to extract information, but that the directors’ actual purpose in this case had been to stymie the shareholders’ rights at the Company’s forthcoming AGM.
The case went all the way to the Supreme Court, which ultimately found unanimously for the shareholders. The court noted that directors are fiduciaries and the proper purpose rule is an equitable principle which controls the exercise of their powers to shield shareholders from abuse.
Whilst there was no question that the articles did confer upon the directors the powers to suspend and limit shareholders’ rights in the event of non-compliance with a disclosure notice, the purposes of those powers were:
None of those purposes extended to influencing business done at an AGM. Whilst that might be a consequence of the valid exercise of the directors’ duties, directors could not properly use their powers as a defensive weapon for the direct purpose of restraining a suspected corporate raider.
It is clear from this case that:
However it is not entirely clear what the legal position is where members of a board have multiple purposes, some of which are proper and some of which are not. Here the Supreme Court was divided. Lords Sumption and Hodge, in the minority, considered that a ‘but for’ test of causation should be applied. Namely, one should ask whether the improper purpose really motivated the decision, i.e. ‘but for’ the improper purpose, would the directors still have exercised their powers? If not, then the decision should be set aside because any concurrent proper purposes were, effectively, irrelevant. As the majority did not adopt this approach, nor any alternative, this ‘but for’ test is not legally binding on lower courts, but it is likely to be influential.
So what does this mean for directors?
 Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc  UKSC 71