Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc

Factual and Procedural Background

Company B, a publicly-listed oil and gas corporation, suspected that two significant minority shareholders—Company A (the Appellant) and Company C—were mounting a “corporate raid” intended to obtain effective control without paying a premium. Relying on section 793 of the Companies Act 2006, Company B’s board served disclosure notices on Company A, Company C and related individuals (Individuals A–D) seeking information about their interests and any concerted arrangements. Although responses were provided, the board considered them inadequate and, on 30 May 2013, issued “restriction notices” under article 42 of Company B’s articles. Those notices suspended voting rights on 66 million shares (approx. 39 % of the issued share capital) immediately before the 5 June 2013 annual general meeting (AGM).

On 4 June 2013 Company A and Company C commenced proceedings in the Chancery Division to set aside the restriction notices. Judge Mann held that the board had acted for an improper, collateral purpose and invalidated the notices. A majority of the Court of Appeal reversed, finding the proper-purpose doctrine inapplicable. The Supreme Court (Judges Neuberger, Mance, Clarke, Sumption and Hodge) heard the further appeal and delivered judgment on 2 December 2015.

Legal Issues Presented

1. What is the proper purpose of the board’s power, under article 42 and section 793, to impose voting and transfer restrictions on shares when disclosure notices are not complied with?
2. Does the equitable “proper purpose” rule, now codified in section 171(b) of the Companies Act 2006, apply to the exercise of that power?
3. Where directors act with multiple concurrent purposes, some proper and some improper, what test determines whether the decision is invalid (dominant purpose versus causative purpose)?

Arguments of the Parties

Appellant’s Arguments (Company A)

• The sole legitimate purpose of article 42 is to induce compliance with a disclosure notice; using it to secure passage of AGM resolutions is collateral and therefore improper.
• The proper-purpose doctrine applies to all fiduciary powers of directors, including the imposition of restriction notices.
• The board’s dominant, indeed exclusive, motive was to prevent Company A and Company C voting against management at the AGM, as found by Judge Mann; the Court of Appeal erred in disregarding that finding.

Respondent’s Arguments (Company B)

• Article 42 confers a discretionary, self-executing sanction; once non-compliance is reasonably believed, directors may restrict voting rights in what they honestly perceive to be the company’s interests.
• The power is not “unilateral,” because shareholders can lift the restrictions by answering fully; therefore the proper-purpose doctrine has little or no role.
• Even if multiple purposes are relevant, the need to protect Company B from a covert takeover was a proper and sufficient motive.

Table of Precedents Cited

Court's Reasoning and Analysis

Judge Sumption, writing for the majority, began by reaffirming the equitable principle codified in section 171(b) of the Companies Act 2006: directors may exercise powers only for the purposes for which they are conferred. Drawing on historic trust law and company-law authorities, the Court stressed that article 42 is ancillary to section 793 and serves three related purposes:

• Inducing the shareholder to comply with a disclosure notice.
• Protecting the company and its members from making decisions without relevant information.
• Penalising continuing non-compliance.

Influencing the outcome of an AGM was not part of those purposes. The board’s decision therefore had to be tested against its actual motives. On uncontested findings by Judge Mann, the directors’ “moving cause” was to ensure that five resolutions—particularly those concerning authority to allot shares and approve remuneration—were passed, thereby thwarting the perceived raid. The Court rejected the Court of Appeal’s view that article 42 powers were effectively self-executing and outside the proper-purpose doctrine. It held that:

1. The fiduciary nature of the power automatically imports the proper-purpose limitation.
2. The fact that shareholders could lift restrictions by later compliance does not legitimise an improper initial decision, especially given the wider impact on other shareholders and the market.
3. Where multiple purposes exist, the critical question is causation: would the directors have made the same decision absent the improper purpose? Because Company B never contended that it would, the restriction notices could not stand.

Holding and Implications

APPEAL ALLOWED; the order of Judge Mann reinstated and the restriction notices declared invalid.

Immediate consequences are that Company A’s and Company C’s voting rights remain unaffected, and the contested AGM resolutions are not insulated by the now-invalid restriction notices. More broadly, the judgment confirms that directors of UK companies must use disclosure-related restriction powers solely to obtain information and protect decision-making integrity, not as tactical weapons in control battles. It clarifies the causative test for mixed-motive decisions and reinforces the constitutional division between board and shareholder functions without creating new statutory law.