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A QUICK LOOK AT…
This last in a series of four articles looks at how the UK Supreme Court has considered the duty of company directors to use their powers for the purpose for which they have been conferred in its statutory form (Companies Act 2006 s171).
This case concerned what was described by Lord Sumption as a “corporate raid”. The directors of JKX had the power under the company’s articles of association to disenfranchise shareholders who failed to respond to requests for information about their shareholding. This power was duly exercised in order to disenfranchise Eclairs (a company with a 27.55% shareholding in JKX). This was done in order to ensure that the general meeting would vote in favour of a resolution (which Eclairs would likely oppose) to issue more shares in the company in order to raise capital.
In the High Court, Mann J held that this was an unlawful use of the directors’ powers as being for an improper purpose. JKX successfully appealed this on the basis that Eclairs were only “victims” as a result of their own inaction, and that the “proper purpose” doctrine accordingly did not apply.
In determining Eclairs’ appeal, the Supreme Court had to consider whether the “proper purpose” doctrine applied and whether the directors of JKX were in breach of their s171 duty. All five Supreme Court Justices held it did, and they were – that Eclairs’ lassitude had enabled the directors’ use of the power was irrelevant. Lord Sumption went on to set out a test (requiring consideration of “the dominant purpose”) to determine whether the duty applied in a given case. However, only one of the other Justices (Lord Hodge) approved this test, thus giving it limited weight as precedent in future cases.