Using directors’ powers for their proper purposes.

Doing the right thing for all the wrong reasons

One of the more subtle aspects of a director’s duties is the obligation to use his powers  only for the purpose for which they were granted. this duty was often known only to company law experts until it was codified in s171(b) Companies Act 2006.

The Supreme Court has just given a reminder of this duty in Eclairs Group v JKX Oil & Gas Plc. The company’s board served information disclosure notices on two major shareholders, holding 39% of the voting rights. they then decided that the responses were inadequate and exercised powers to remove the shareholders’ voting rights. The court concluded that the directors were motivated by the desire to stop these shareholders voting against the board’s proposals at a forthcoming meeting, and not by a wish to achieve disclosure the information they had requested – so the decisions were invalid.

How do you disentangle all the complicated motives that lead a single director, still less a whole board, to come to a decision? Lord Sumption said, “Directors of companies cannot be expected to maintain an unworldly ignorance of the consequences of their acts or a lofty indifference to their implications. A director may be perfectly conscious of the collateral advantages of the course of action that he proposes, while appreciating that they are not legitimate reasons for adopting it. He may even enthusiastically welcome them. It does not follow without more that the pursuit of those advantages was his purpose in supporting the decision. All of these problems are aggravated where there are several directors, each with his own point of view.” But he approved the formulations from earlier cases, “if, except for some ulterior and illegitimate object, the power would not have been exercised, that which has been attempted as an ostensible exercise of the power will be void, notwithstanding that the directors may incidentally bring about a result which is within the purpose of the power and which they consider desirable,” and “regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the [decision] will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, the power would not have been exercised.”

The most common abuse of powers for an improper purpose seems to be in the issue of shares, where the power to allot shares is used to dilute minority shareholdings or distort the voting control of the company. The power to issue shares is primarily for the purpose of raising capital for the company, and its use as a weapon in shareholder disputes will usually be illegitimate. Dressing it up as a rights issue, perhaps where you know the minority have no money to invest, will not help if the rights issue would not have happened but for the intention to bring about the change of control.

Disclaimer: Nothing in the Legal Insights section and this blog is intended to provide legal or other professional advice and, if readers are interested, they should consider taking separate legal or other professional advice accordingly.