Proper Purpose rule is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason

Supreme Court of United Kingdom– Deciding on an appeal wherein the respondent perceived that it had become the target of a so-called “corporate raid” by the appellants- two minority shareholders and issued restriction notices in relation to the shares held by them thus suspending their right to vote at general meetings and restricting the right of transfer, the Court in a majority decision allowed the appeal holding that the proper purpose rule applies to the exercise of the power under Article 42, and that the directors of JKX acted for an improper purpose.

Under Sections 793-797 of the Companies Act 2006 (“the Act”), a company can issue a statutory disclosure notice calling for information about persons interested in its shares. The respondent company has a provision in its company articles (Article 42) empowering the board to impose such restrictions where a statutory disclosure notice has not been complied with. In the instant case the respondent company issued disclosure notices to the appellants, who admitted the existence of interests in the shares but denied that there was any agreement or arrangement. Later one of the appellants invited shareholders to oppose the resolutions proposed at the forthcoming AGM including resolutions for the re-election of certain directors. As a result the respondents decided to exercise powers under Article 42 to issue restriction notices in relation to the shares held by the appellants. Appellants challenged the restriction notices, relying on the proper purpose rule at Section 171(b) of the Act which states that a director must “only exercise powers for the purposes for which they are conferred”

The Court held that the proper purpose rule is concerned with abuse of power; a company director must not, subjectively, act for an improper reason. Giving reasons, the Court further stated under Article 42 in the present case, the power to restrict the rights attaching to shares is ancillary to the statutory power to call for information under Section 793. Moreover, seeking to influence the outcome of shareholders’ resolutions or the company’s general meetings is no part of those proper purposes. Allowing the appeal, the Court further observed that the proper purpose rule is the principal means by which equity enforces directors’ proper conduct, and is fundamental to the constitutional distinction between the board and shareholder. [Eclairs Group Ltd v JKX Oil & Gas plc, [2015] UKSC 71, decided on 2.12.2015]

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