COMPANY — Director — Shares — Restriction notices — Company directors perceiving claimant shareholders as raiding company — Directors seeking disclosure of interests from claimant shareholders — Directors imposing restrictions on voting and transfer of shares — Whether restriction notices valid — Whether directors having “reasonable cause to believe” responses to notices inadequate — Companies Act 2006 (c 46), ss 171, 172, 793, 800 Eclairs Group Ltd and another v JKX Oil & Gas plc and others [2013] EWHC 2631 (Ch); [2013] WLR (D) 373 Ch D: Mann J: 30 August 2013 The “reasonable cause to believe” provision in section 793 of the Companies Act 2006 operated for the purposes of all its subsections, but operated only in relation to the addressee of a notice. Questions directed to a person who had or was believed to have an interest in the company’s shares about the interests of another person had to be questions about interests in the addressee’s shares, not other shares. It was permissible to ask and receive an answer to the direct question “Does [the third party] have an interest?”. At issue was the validity of certain restrictions on voting and transfer, imposed by the board of directors of the defendant company, JKX Oil & Gas plc, on shares beneficially held by two significant shareholders, the claimants, Eclairs Group Ltd and Glengary Overseas Ltd. The board of the defendant company perceived that it was being “raided” by the claimants who, it was feared, sought to destabilise the company by replacing senior management and obstructing necessary fund raising processes with the ultimate aim of acquiring the company at less than its proper value. The board served a notice under section 793 of the Companies Act 2006 seeking disclosure of interests in the claimant’s shares. The board considered the responses to be materially inaccurate and served restriction notices imposing restrictions which prevented the voting and transfer of the claimants’ shares. The claimants challenged the validity of the restrictions, contending that (1) the notices did not comply with the statute; (2) the directors were not entitled to because they did not have reasonable cause to believe that the responses to the notices were inadequate and (3) the directors acted for an improper purpose in imposing the restrictions. Section 171 of the Companies Act 2006 sets out a director’s duty to act within his powers. Section 172 sets out a director’s duty to promote the success of the company for the benefit of its members as a whole. Section 793 of the 2006 Act provides: “(1) A public company may give notice under this section to any person whom the company … has reasonable cause to believe— (a) to be interested in the company’s shares …(4) The notice may require the person to whom it is addressed, where— (a) his interest is a present interest and another interest in the shares subsists … (b) … to give, so far as lies within his knowledge, such particulars with respect to that other interest as may be required by the notice. (5) The particulars referred to in subsections (3) and (4) include … (b) whether persons interested in the same shares are or were parties to … (ii) an agreement or arrangement relating to the exercise of any rights conferred by the holding of the shares.” Section 800 of the 2006 Act deals with the removal of restrictions and provides: “(3) The court must not make an order under this section unless— (a) it is satisfied that the relevant facts about the shares have been disclosed to the company and no unfair advantage has accrued to any person as a result of the earlier failure to make that disclosure.” MANN J said that the “reasonable cause to believe” provision in section 793 did not operate only for the purposes of subsections (1) and (2). It operated for the purposes of all subsections. It operated so as to describe the addressee of the notice, and that addressee was the addressee under all the sections. On the other hand, it operated only in relation to that addressee. It had no relevance to any third party about whom questions were asked. Questions directed to A (who had or was believed to have an interest) about the interests of another (Z) had to be questions about interests in A’s shares, not other shares. This flowed from the expressions “the shares in question” and “the same shares”. The words “where … another interest in the shares subsists” in subsection (4)(a), did not require the drafting of slightly indirect questions, the failure to answer which could lead to uncertainty. The company was entitled to ask, and to require an answer to, the direct question, “Does Z have an interest?”. The interests that could be asked about, and the interest which A had (or was reasonably thought to have) in order to justify questions could be any of the interests identified and elaborated in sections 820 to 824 of the 2006 Act. For the purposes expressed by Diplock LJ in British Basic Slag Ltd v Registrar of Restrictive Trading Agreements [1963] 1 WLR 727, 747 the word “arrangement” in section 793(5) was to be construed as including non-binding arrangements. Beyond that it was right to give it its ordinary or popular sense, but that did not necessarily require mutuality in the arrangement. It might be that some non-mutual “arrangements” were too loose and informal to be of any significance in relation to shares, but short of that they should be within the provision. What was required for the invocation of section 793 would vary from case to case. Any inquiry into whether the board could be held to have reasonable cause to believe had to bear in mind that the board did not have to carry out some sort of corporate equivalent of a public (or private) inquiry; nor did it have to conduct some sort of detailed trial of the addressee. While the seriousness of the consequences of restrictions had to be acknowledged, the board was operating as a board, and in a commercial environment where it did not have the full range of powers that might be available to a more elaborate inquiry, and where there remained room for uncertainty. In any given case where there was reasonable cause to believe the falsity of the information it might be reasonable to believe otherwise, so there would always be points to be made the other way. The fact that post-event litigation, with all the skills of lawyers deployed in the effort, managed to point up different ways in which things might have been done or thought about did not mean that a board could not have had, or did not have, reasonable cause to believe at the time. If proper information was disclosed in the first place then there was no basis for imposing restrictions no matter how desirable that might be thought to be from the point of view of the company and the other shareholders, and no matter how apparently aggressive the predator had been in the period leading up to the restriction notices. The non-provision of information was not to be taken as a justification for opening up a new front against the predator with the benefit of a new weapon. It was, subject to one point, to provide a sanction or an incentive to remedy the default, and the only default which was relevant for these purposes was the failure to provide information. The only qualification to this arose from section 800(3), which meant that even if full information was given the restrictions might be maintained if unfair advantage had been taken of the non-disclosure. However, this additional qualification was limited. It did not provide that the restrictions could stay in place if they were for the benefit of the company, or if they put useful obstacles in the way of an undesirable predator, or anything like that. They were to stay in place in order to prevent unfair advantage being taken of the non-disclosure — the maintenance was still closely related to the non-disclosure and not to anything else. Section 172 was in the nature of an overarching obligation which arose when the directors were considering the exercise of their powers. It could easily and properly co-exist with other limitations on powers, and did not, by itself, necessarily fill a gap if the purposes of certain powers are not actually articulated in the articles. Section 172 did not somehow trump the provisions of section 171. In relation to any given power, it was necessary to identify the purposes for which the power was to be exercised (so far as possible), and having identified that purpose one then had to see whether the directors had exercised it for that purpose, and also whether it was exercised so as to “promote the success of the company”. The first step was a necessary step, and was not rendered unnecessary by the existence of the second obligation. Accordingly, looking at the statutory regime, it could still be said that the imposition of the restrictions was to compel the production of information. The purpose of the section did not extend to allowing it to be used as an additional weapon to manipulate voting in a takeover battle. Accordingly, on the facts of the present case, the directors were entitled to conclude that the claimants had not made proper disclosure of the arrangements that existed and which affected their shareholdings but that the power to impose restrictions was exercised for a purpose which was not a proper one for the purposes of that power and that its exercise should therefore be set aside. Appearances: David Mabb QC and Nigel Dougherty (instructed by Freshfields Bruckhaus Deringer LLP) for the first claimant; Andreas Gledhill and Paul Sinclair (instructed by Locke Lord (UK) LLP) for the second claimant; Michael Swainston QC and Tony Singla (instructed by Allen & Overy LLP) for the first defendant. Reported by: Isabella Cheevers, Barrister.
Posted on: Tue, 15 Oct 2013 09:48:10 +0000
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