A director must exercise his/her powers only for a proper purpose

7 December 2015

Many obligations are imposed on directors in exercising their duties.  A recent decision of the Supreme Court provides that when exercising your powers as a director you must always consider the actual purpose for which you propose to exercise those powers and ensure that purpose is proper.  It is not sufficient simply for directors to act honestly to promote the success of the company for the benefit of its members as a whole.

On 2 December 2015 the Supreme Court handed down a decision in which they considered the duty of a director to “only exercise powers for the purposes for which they are conferred” (section 171(b) Companies Act 2006), i.e. the purpose behind the exercise of a director’s powers.  The powers in question in this case relate to a provision of the Companies Act 2006 relating to public companies (section 793), however, the decision has a wider significance for all directors in carrying out their duties. 

In this case, in advance of a general meeting all shareholders were asked by the board to respond to notices enquiring into the interests in shares in the Company.  Two shareholders did not respond to these notices and, therefore, the board imposed restrictions on the voting and transfer of the shares held by those shareholders. The vote at the general meeting went ahead; these two shareholders were prevented from voting and, therefore, couldn’t block the proposed special resolutions.  The shareholders brought proceedings challenging the propriety of the purpose for which the board had acted in imposing those restrictions. 

At first instance the Judge held that the predominant purpose of the board in imposing restrictions on these shares was to maximise the prospects of the relevant special resolutions being passed.  The Judge held that this was an “improper purpose”, therefore, the restrictions and the decision of the board to impose these restrictions were set aside by the Court. 

The Company appealed and a majority of the Court of Appeal allowed the appeal stating that the High Court had been wrong to rule that the restrictions imposed on the shareholders were defective for the improper purpose of seeking to stop the shareholders from voting.  The purpose had in fact been to enforce a demand made by the board that all shareholders should provide the requested information.  This was a proper purpose. The shareholders were victims of their own failure to respond (properly or at all) to the notices, not victims of any improper use of a power of the board. 

On 2 December 2015 the Supreme Court allowed the appeal of the two shareholders and restored the decision of the High Court.  The Supreme Court held that although the range of “proper purposes” was wider than the High Court had held, that range was limited to some degree.  The board must use its powers only for legitimate purposes.  The predominant purpose of the use of this power was to influence the outcome of a general meeting; this was outside any legitimate purpose and was improper. 

If you have any queries about the exercise of your duties as a director and/or the purposes for which you are permitted to exercise those duties then please do contact a member of the dispute resolution team.

Eclairs Group Ltd v JKX Oil & Gas Plc and Glengary Overseas Ltd v JKX Oil & Gas Plc [2015] UKSC 71

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