B e f o r e :
LORD JUSTICE LONGMORE
LORD JUSTICE BRIGGS
SIR ROBIN JACOB
| (1) JKX OIL & GAS PLC AND OTHERS
|ECLAIRS GROUP LTD
|(2) JKX OIL & GAS PLC
|GLENGARY OVERSEAS LTD
|(3) ECLAIRS GROUP LTD
|JKX OIL & GAS PLC AND OTHERS
(Transcript of the Handed Down Judgment of
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MICHAEL SWAINSTON QC and TONY SINGLA (instructed by ALLEN & OVERY LLP) for JKX OIL & GAS PLC
DAVID MABB QC and NIGEL DOUGHERTY (instructed by FRESHFIELDS BRUCKHAUS DERINGER LLP) for ECLAIRS GROUP LTD
PAUL SINCLAIR (instructed by LOCKE LORD (UK) LLP) for GLENGARY OVERSEAS LTD
Hearing dates : Wednesday 2nd April 2014 to Friday 4th April 2014
HTML VERSION OF JUDGMENT
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Lord Justice Briggs :
- These appeals, against orders of Mann J on 1st October 2013 in two conjoined claims, raise important issues as to the validity and constitutionality of restrictions imposed by the directors of JKX Oil & Gas PLC ("JKX") pursuant to Part 22 of the Companies Act 2006 ("the 2006 Act") and the company's Articles of Association ("the Restrictions"). The Restrictions included the purported disenfranchisement of two of JKX's shareholders, registered as the holders of 27.55% and 11.45% of the company's ordinary shares, for the purposes of voting at JKX's Annual General Meeting on 5th June 2013. I say 'purported' because, at the expedited trial of the conjoined claims by the beneficial owners of those shareholdings, Mann J declared that the Restrictions had been ineffective because the directors had, in imposing them, been motivated by an improper purpose.
- Part 22, headed "Information about Interests in a Company's Shares" contains, at sections 793 to 802, provisions enabling a public company to obtain information about interests in its shares, from anyone whom the company knows or has reasonable cause to believe to be, or to have been within a specified period, interested in those shares. Non-compliance with a notice requiring the provision of such information is a criminal offence. Further, the company may seek court orders imposing restrictions on transfer, voting and the payment of dividends in respect of shares in which the defaulter is interested.
- Many public companies, including JKX, supplement that statutory regime by bespoke provisions in their articles of association. In the present case, JKX's Article 42 contains provisions enabling the company by its directors to impose one or more of a set of restrictions upon defaulters similar to those in Part 22, but without having to go to court. In addition, Article 42 enables the company to treat information requested as not having been provided in circumstances where its Board knows or has reasonable cause to believe that the information actually provided is false or materially incorrect. It was pursuant to the powers conferred on the directors by Article 42 that the Restrictions were purportedly imposed in the present case.
- The two registered shareholders immediately affected by the Restrictions were nominee companies. The claimants in the conjoined claims were the beneficial owners of the shares, namely Eclairs Group Limited ("Eclairs") and Glengary Overseas Limited ("Glengary").
- Each of Eclairs' and Glengary's claims challenged the imposition of the Restrictions by JKX on a number of grounds. Those which have survived so as to raise issues on these appeals are:
i) That the disclosure notices by which the information was sought were invalid, because they sought information not permitted to be requested by Part 22 or Article 42;
ii) That the directors were not entitled to impose restrictions for non-compliance because they did not have reasonable cause to believe that the responses by then received were incorrect;
iii) That the directors imposed the Restrictions for an improper purpose, namely to secure the passage of resolutions at the AGM which they feared that Eclairs and Glengary would or might be able to impede, rather than for the purpose of enforcing the company's demand for the specified information.
- JKX defended all those allegations, and counter-attacked on the ground that, having chosen to hold their shareholdings in the company through nominees, Eclairs and Glengary lacked standing to pursue their claims.
- After hearing five days of evidence (including cross-examination of a number of JKX's directors) with a further two days of oral submissions, the judge ruled against the claimants in relation to the validity of the requests and the directors' reasonable belief as to the inadequacy of the responses. But he ruled in their favour on standing and, critically, on improper purpose. The result was that the claimants' challenges succeeded, and the purported disenfranchisement of their shareholdings failed. Since, in the meantime, an interim regime established by David Richards J had enabled those shares to be voted at the AGM, but without prejudice as to the validity of those votes, no lasting harm was occasioned to the claimants by their purported disenfranchisement.
- JKX has, by appeals in both claims, challenged the judge's conclusions as to standing and proper purpose. Eclairs has, by an appeal in its claim, sought to resurrect its assertion that the company's disclosure notices were invalid and that the directors had no reasonable cause to believe that they had been inadequately answered.
- Paragraphs 6-11 and 26-83 of the judgment of Mann J contain an admirably clear and sufficiently detailed account of the relevant primary facts, none of which are in dispute on this appeal. For present purposes I need only summarise the background, and set out those facts necessary to make sense of the reasoning for my conclusions on the issues which I have described.
- JKX is a publicly traded company, listed on the London Stock Exchange. Its business is the development of oil and gas reserves, and the sale of the resulting products. Its most important asset (at least for present purposes) is a Ukrainian oil and gas subsidiary called PPC.
- The 27.55% of JKX's shares of which Eclairs is the beneficial owner were registered in the name of Hanover Nominees Limited ("Hanover"), which held them for Eclairs through two intermediate nominees. 59.1% of Eclairs' shares were held by Trival Limited, a company owned by a Mr. Kolomoisky. The balance were held by Marigold Trust Fund Limited ("Marigold"), itself owned by a trust, the beneficiaries of which were a Mr. Bogolyubov and his family.
- The 11.45% of JKX's shares of which Glengary was the beneficial owner were registered in the name of Lynchwood Nominees Limited ("Lynchwood"). Glengary was owned as to 95% by a Mr. Zhukov and as to 5% by a Mr. Ratskevych, a close business associate of Mr. Zhukov.
- JKX had nine directors at the material time. The executive directors were Dr. Davies (CEO), Mrs. Dubin (Finance), Mr. Miller (Technical) and Mr. Dixon (Commercial). The non-executive directors were Mr. Moore (Chairman), Lord Oxford, Mr. Ferguson, Mr. Shah and Mr. Murray. All of them gave evidence, and all except Mr. Dixon were cross-examined (the omission in his case due only to exigencies of time).
- Mr. Kolomoisky and Mr. Bogolyubov together owned or controlled a financial organisation called Privatbank, which held a 42% stake in the Ukrainian state oil company Ukrnafta. Both Mr. Kolomoisky and Mr. Bogolyubov had a reputation as corporate raiders, by which the judge meant:
"a person who acquires shares (less than a majority) and then exploits that shareholding to lever his way to managerial or actual voting control by using methods such as inserting his own staff, pressurising or destabilising the current management and frustrating conventional methods of raising capital, all with the object of getting control without paying what the other shareholders would regard as a proper premium for their shares."
Like the judge, I shall use the words "raid" and "raider" as shorthand for that description of corporate high-handedness. It was common ground before the judge that Messrs Kolomoisky and Bogolyubov had that reputation, but the judge made clear (correctly in my view) that it was no part of his task to ascertain whether that reputation was well-deserved, by either of them. It was sufficient that the reputation existed, and that it was known about by a number of JKX's directors, and by all of them when the decision was taken to impose the Restrictions. Mr. Zhukov had no similar reputation, but was believed by Lord Oxford to have done business in the past with Mr. Kolomoisky. Mr. Ratskevych was known within JKX to be Mr. Zhukov's right-hand man, at least in relation to Mr. Zhukov's dealings with JKX.
- Mr. Zhukov started acquiring shares in JKX through Glengary in 2004, and by June 2006 had acquired about 25%. In December 2006 Mr. Kolomoisky acquired about half of Mr. Zhukov's stake through Ralkon, one of his corporate vehicles. By 2013, Ralkon had increased its holding to 27.55%, while Glengary's holding had declined slightly to 11.45%.
- By 2013 JKX had been trying, but without success, to raise further capital. Its lack of success was attributed by Mrs. Dubin and Dr. Davies in part to Mr. Kolomoisky's reputation and his links with the company as the ultimate beneficial owner of more than 25% of its shares. An attempt by Dr. Davies to negotiate with Mr. Kolomoisky for lending by Privatbank had been met with a demand that one of his nominees be given a shadow management role, sitting with the general director of PPC which, were it to prove unattractive to Dr. Davies' fellow directors, Mr. Kolomoisky suggested could be achieved without disclosure to them. Attempts to raise capital by the issue of further shares had been opposed by Mr. Kolomoisky. Since their issue for cash, otherwise than pro rata, would have required a special resolution, he controlled sufficient shares to prevent it happening.
- In March 2013, shortly after an enquiry by a Ralkon nominee as to how an EGM might be convened, JKX was notified of Ralkon's transfer of its beneficial shareholding to Eclairs, itself then beneficially owned by Mr. Kolomoisky. This came to be perceived by the board as the first step in a planned raid on JKX. The transfer was shortly thereafter followed by the service by Eclairs of a requisition notice for an EGM, on 15th March, for the purposes of resolutions to remove Dr. Davies and Mr. Dixon from the board, and to place three additional directors there, namely Mr. Ratskevych, a Mr. Yudin, and a Mr. Epshtein. Enquiries by Dr. Davies and Mrs. Dubin as to why the latter two (of which no-one at JKX had ever heard) were considered suitable for appointment elicited no response, but the requisition notice was treated by JKX as invalid on technical grounds, and Eclairs was so informed. In the meantime Mr. Ratskevych had informed Dr. Davies that Mr. Zhukov had agreed to support Mr. Kolomoisky in bringing about a change in JKX's top management on condition that his man (Mr. Ratskevych) sat on the board.
- On 20th March JKX began sending out a first wave of notices under Section 793 of the 2006 Act to Eclairs and others seeking information about interests in its shares. When, on the following day, JKX was informed by Eclairs that 40.9% of its shares were by then held by Marigold as trustee of a discretionary trust for the benefit of Mr. Bogolyubov and his family, JKX supplemented the first wave of Section 793 notices with notices sent both to Mr. Bogolyubov and Marigold. Thus by the end of March, Section 793 notices had been sent to Eclairs, Glengary, Mr. Bogolyubov, Mr. Zhukov, to all three proposed new directors, but not to Mr. Kolomoisky, because the company lacked an address for him at that time. These steps were taken because JKX's senior management apprehended that, following rejection of Eclairs' requisition for an EGM, a valid requisition would shortly be received, as the first effective hostile step in the feared raid. Dr. Davies had by then been sent a copy of a Ukrainian newspaper article suggesting that Mr. Kolomoisky was seeking control of PPC. In fact, no further or better requisition notice was sent by or on behalf of Eclairs.
- The replies which JKX received to its first wave of Section 793 notices contained no surprises (to management) save for the revelation, for the first time, that Mr. Ratskevych held a 5% stake in Glengary, and had done so at a time when JKX had earlier been informed that Mr. Zhukov was Glengary's sole beneficial owner. The first wave of notices had sought disclosure of agreements or arrangements about shares in JKX, designed to flush out any developing alliance between Eclairs and other shareholders to take control of the company. The responses uniformly denied that there were any such arrangements.
- No further hostile steps appeared to JKX to have been taken when, on 23rd April, it sent out notices of AGM to be held on 5th June. Among the twelve resolutions proposed were the following:
i) To approve the directors' remuneration report.
ii) To re-elect Mr. Murray as director, who was up for re-election as having been appointed since the last AGM.
iii) To re-elect Lord Oxford, who retired by rotation.
iv) To re-elect Dr. Davies, who retired by rotation.
v) (As special business) To authorise the directors to allot up to £5.7m odd of share capital (this required an ordinary resolution).
vi) Authorising the company to make market purchases of its shares (this required a special resolution).
vii) Disapplying statutory pre-emption rights on the allotment of shares (this required a special resolution).
- The directors were under no illusions that obtaining the passing of any of those resolutions would be easy. They feared not only that the special resolutions could without difficulty be prevented, even by Mr. Kolomoisky acting alone, but also that the re-appointment of the directors and the approval of their remuneration might not command sufficient shareholder support to overcome the 39% opposition represented by the Eclairs' and Glengary shareholdings voting together. They prepared a script to be read if the proposed re-election failed, announcing an intended reappointment of at least Dr. Davies. The draft script was circulated by Mr. Moore to the other directors under cover of an email of 9th May which read:
"Please find attached a draft statement I am planning to read out in the hopefully unlikely event of Paul (Davies), Raymond (Lord Oxford) and Richard (Murray) not being re-elected at the AGM.
Paul and the team are presently making huge efforts to try and ensure we carry the day, including the possibility of issuing new shares, contacting as many shareholders as possible to impress upon them the importance of voting at this AGM and looking at any possibility of the Eclair/Glengary votes not being valid."
The last of those tactics was understood by at least some directors by that time as a reference to the imposition of restrictions under JKX's Article 42. Four days later, on 13th May, JKX sent a second wave of Section 793 notices. The recipients included Eclairs, Mr. Kolomoisky, Mr, Bogolyubov, Glengary, and Mr. Zhukov and Mr. Ratskevych. They were all in broadly the same terms, to the detail of which I will return in due course. In summary, they sought particulars of the interests of the addressees in JKX's shares, and particulars of any agreement or arrangements relating to the acquisition of shares in JKX, or to the exercise of any rights conferred by the holding of such shares. Responses were sought by 28th May, and enquiries were made to see whether a board meeting could be held on 29th May in order to:
"consider whether we wish to take action in relation to any possible restriction in accordance with Article 42 of our Articles of Association."
In the event, the board meeting took place on 30th May.
- Meanwhile on 23rd May Eclairs circulated an open letter to shareholders of JKX, seeking their support in voting for changes to members of the board at the forthcoming AGM and:
"to invite you to join the JKX Action Group in order to restore the performance of the Company to acceptable levels."
The letter recommended that shareholders vote against the re-election of Dr. Davies, the resolution to approve the directors' remuneration report and the three resolutions seeking authority to allot shares, authority to purchase shares and the dis-application of pre-emption rights. The letter informed shareholders that Glengary also intended to vote against those resolutions. The letter identified Messrs Ratskevych, Epshtein and Yudin as potential replacements for Dr. Davies and Mr. Dixon, whom Eclairs blamed for poor management of the company, and the depressed price of its shares.
- On 29th May the Board sent a letter to shareholders refuting Eclairs' criticisms, recommending that shareholders vote in favour of all the resolutions and stating the Board's belief that what it described as the "Collaborating Parties" (namely Eclairs and Glengary) were intending to destabilise JKX, and indulging in an opportunistic attempt to secure control of assets without paying a premium to the shareholders.
- Meanwhile, Eclairs, Glengary and Messrs Zhukov, Ratskevych, Bogolyubov and Kolomoisky responded to the second wave of Section 793 notices on 27th and 28th May. They provided particulars of interests in JKX's shares but all denied the existence of any relevant acquisition or voting agreements, although Glengary admitted that there had been some discussions with Eclairs regarding JKX's performance.
- The board met to consider those replies on the afternoon of 30th May. Even before the meeting a letter had been written to the Takeover Panel by JKX's financial advisers alleging a concert party between Mr. Kolomoisky and Mr. Zhukov and asserting that:
"the Board has reasonable cause to believe that certain information provided in various responses to Section 793 notices from Eclairs, Glengary and their beneficial interest holders regarding agreements and arrangements between them is either false or materially incorrect and, as such, in accordance with JKX's articles, the Board is minded to issue restriction notices to Eclairs and Glengary (and their nominees) restricting such shareholders from being able to vote or count in the quorum at JKX's AGM next week."
- All the directors contributed to the meeting, some in person, some by telephone and one, Mr. Miller, by email. Mr. Miller's email concluded that the board had no option other than to take the strongest possible action to deter what he described as "these predators". It concluded:
"May I ask you to take my proxy and, in the event of a vote, cast my vote for the issue of a Restriction Notice to the Eclairs Group and Glengarry [sic] with the objective of preventing them from voting at the Annual General Meeting."
- The result of the meeting was that the directors concluded that the responses to the second wave of Section 793 notices contained inadequate disclosure about agreements or arrangements which they believed existed between the Eclairs' camp and the Glengary camp, and between Mr. Kolomoisky and Mr. Bogolyubov in relation to the Eclairs' shares. The directors unanimously resolved to issue restriction notices containing what I have labelled the Restrictions in issue in the proceedings. The Restrictions were imposed by notices issued on the following day. They prohibited both the voting and the transfer of Eclairs' and Glengary's shares.
- The judge concluded that, by the time of the 30th May Board meeting, the directors believed that the information which had been provided in response to the second wave of Section 793 notices was false or materially incorrect, by reason of the failure of all the addressees to provide particulars of the agreements or arrangements between them as to the exercise of voting rights which the directors believed then existed. Whether the directors had reasonable cause so to believe is an issue on this appeal, but it is not disputed that they did so believe.
- After hearing extensive cross-examination of most of the directors, the judge reached the following conclusion as to the purpose or purposes for which they resolved to impose the Restrictions. He said that they all shared a genuine desire to obtain the information which they felt had been withheld from them (paragraph 236 (i) of the judgment). But he decided that the predominant purpose of the majority of them was to bring about the disfranchisement of the Eclairs' and Glengary groups of shareholders, so as to maximise their prospects of having carried the resolutions proposed for the forthcoming AGM. It is worth quoting the whole of paragraph 189 of the judgment:
"Of most significance, therefore, is the evidence of the voting directors in cross-examination. Mr Mabb asked them (apart from Mr Murray, whom he did not cross-examine for want of time) various questions about their purpose or predominant purpose. Mr Ferguson clearly viewed the purpose of voting for the restrictions as one limited to the extraction of the information. Mr Shah had a "balanced" view, but it is apparent that he regarded that as an important factor, and while he regarded protecting the company in a more divorced sense as significant, he did not put it so far in the forefront of his thinking as to make it a dominant factor separate from the extraction of information. However, the other 4 voting directors did seem to adopt a line in which they put disenfranchisement as a useful objective, to enable all the resolutions to be passed, in a way which elevated it very materially above the purpose of extracting information and gave it a life of its own. While they may (and in all probability actually did) appreciate that the restrictions would have to be lifted if the information was provided, they did not regard the ability to impose restrictions as being one designed to protect the company pending the provision of information; they regarded it as one which they could use, and did actually use, to get an advantage (the opportunity to pass the resolutions) for its own sake, not linked to the extraction of information. Putting the matter another way, they did not regard the opportunity to get special resolutions passed which would otherwise not be passed (and the increased chance of getting the ordinary ones passed too) as an incidental benefit of imposing restrictions as an incentive to provide information; they elevated it in their minds, and in their purposes, to something with its own independent merit as a way of doing down the "raiders" for the benefit of the shareholders. Once the special resolutions were passed, and the re-elected directors were in post, the company would be better equipped to resist the raid, and would have put obstacles in the way of the "raiders"."
- Those findings as to the directors' predominant and other purposes in imposing the Restrictions are not challenged on these appeals, as findings of fact.
- The imposition of the Restrictions led directly to the commencement of Eclairs' and Glengary's claims. Since the challenge to the validity of the Restrictions plainly could not be resolved before the AGM, David Richards J imposed (as I have said) an interim regime which enabled the Eclairs' and Glengary shares to be voted notwithstanding the Restrictions, but upon the basis that the effectiveness or otherwise of their votes would be resolved at a speedy trial, as soon as possible thereafter. In the event, the trial took place in July and August 2013. Meanwhile the ordinary resolutions were carried at the AGM notwithstanding the opposition of the Eclairs' and Glengary camps. The special resolutions would also have been carried, but only if the disenfranchisement of those two blocks of shares had been valid.
- The judge decided that Eclairs and Glengary did have standing to bring their claims, that the second wave of Section 793 notices was not invalidated by reason of the scope of the requests for information therein contained, that the directors had reasonable grounds to believe that the information provided in response had been false or materially incorrect but that the Restrictions were invalid, having been imposed for an improper purpose. Each of those findings is challenged in these appeals, and I will deal with each in turn.
- The standing issue arises in this way. Companies are, in general, both entitled and obliged to deal only with those who are registered as having the legal ownership of their shares. Companies are, in general, entitled to decline to deal with mere beneficial owners.
- In the present case, the immediate legal consequence of the Restrictions was that Eclairs' and Glengary's respective nominees, Hanover and Lynchwood, were disabled from voting or transferring their shares. Eclairs and Glengary commenced their respective claims in the form of derivative actions, joining the two nominee companies as defendants, on the basis that they anticipated that it would be difficult if not impossible to galvanise the nominee companies into action in time to obtain the urgent interim relief sought (successfully in the event) ahead of the AGM. Both David Richards J, at the hearing of the interim application and Mann J, at the trial, permitted them to do so notwithstanding JKX's objection at trial. The objection was not based upon any issue or even uncertainty about the status of Eclairs and Glengary as beneficial owners of the shares. It has always been common ground that the interests of Messrs Kolomoisky, Bogolyubov, Zhukov and Ratskevych have been confined to interests in the shares of Eclairs and Glengary. Rather, the objection was based (both at trial and on JKX's appeal) on the fact that the nominee agreement between Eclairs and Hanover contained provisions entitling Hanover to refuse to act upon instructions which might contravene Stock Exchange rules, and that the nominee agreement between Glengary and Lynchwood (which had not been disclosed) might be expected to contain similar provisions. Mr. Michael Swainston QC submitted for JKX (both here and below) that having chosen to hold their shares through reputable nominees, the alleged raiders should be required to litigate about those shares through those nominees, or not at all.
- The judge did not find it necessary to examine, still less decide, whether the nominee companies had declined to sue, and if so on what grounds. It was sufficient in his view that Eclairs and Glengary were the undisputed beneficial owners, that the application before David Richards J for interim relief had been urgent, and that the law about when beneficiaries may or may not sue was not based on any public policy which would lead to the beneficiary being saddled with the judgment of the trustee, especially where the trustees were, as here, mere nominees.
- I have been no more persuaded by JKX's submissions in relation to standing than was the judge. Indeed, I would go further. Part 22 of the 2006 Act is a remarkable exception to the general principle that companies are only concerned with the legal owners of their shares. It is specifically designed to enable public companies to inform themselves about interests in their shares (and make that information known to their shareholders generally), pursuant to a statutory code in which the concept of 'interest' is very widely defined, extending way beyond what the law, and even equity, would recognise as conferring proprietary interests. The statutory powers enable the company to seek information from all persons interested in that broad sense in its shares, and to seek from the court restrictions which, while bearing primarily upon the legal rights of the registered shareholder, plainly have, and are intended to have, important economic consequences for the wide class of those with interests in the shares as defined. JKX's Article 42 is designed to have much the same effect, and since restrictions may be imposed by the company's directors, without having to go to court, the company's ability to impose those economic consequences is even greater.
- In these circumstances it seems to me plain that, where a genuine dispute arises as to the validity or regularity of steps taken under the Part 22 or Article 42 regimes, the law ought to afford the widest scope for persons economically affected by the taking of those steps to challenge them in court. Eclairs and Glengary have the most substantial proprietary interests in the shares affected, being respectively the sole beneficial owners of each block of them. The economic consequences of the Restrictions for Eclairs and Glengary are large indeed.
- I would therefore reject JKX's challenge to the standing of Eclairs and Glengary to bring these proceedings.
Validity of the S.793 notices
- JKX's Article 42 empowers its Board to impose specified restrictions if:
"(a) a disclosure notice has been served on a member or any other person appearing to be interested in the specified shares, and
(b) the Company has not received (in accordance with the terms of such disclosure notice) the information required therein in respect of any of the specified shares within fourteen days after service of such disclosure…"
By Article 42(1)(a):
""disclosure notice" means a notice issued by or on behalf of the Company requiring disclosure of interests in shares pursuant to Section 212 of the Act,"
Provision is made in JKX's Articles for references to the Companies Act to refer to the most recent of them. Section 212 of the Companies Act 1985 ("the 1985 Act") was the predecessor to section 793 of the 2006 Act, so that Article 42(1)(a) now refers to section 793.
- Both at trial and on this appeal Eclairs claimed that the second wave of section 793 notices contained questions outwith the scope of those permitted by section 793, so that they did not constitute valid disclosure notices within the meaning of Article 42, with the consequence that the Board had no power to impose the Restrictions. Glengary made broadly the same claim at trial, but has not pursued an appeal in relation to the judge's dismissal of it.
- The Claimants' submissions on the scope of section 793 were presented at a level of sophistication and complexity that led the judge to say that the consideration of Mr. David Mabb QC's arguments (for Eclairs) "requires the application of many cold towels in order to understand them". I agree. They were deployed with similar sophistication on appeal, both in writing and orally. The judge described them fully in his meticulously careful judgment and I hope I may be forgiven if I confine myself to what I regard as the key points of them, in explaining my reasoning.
- It is sufficient for my purposes to focus on the second wave section 793 notice served on Eclairs. This is because the notices served on Glengary, and upon all the persons interested in JKX's shares behind Eclairs and Glengary were in substantially the same form albeit, necessarily, not quite identical. The material parts of the Eclairs section 793 notice were as follows:
Notice issued pursuant section 793 of the Companies Act 2006
In accordance with section 793 of the Companies Act 2006 (the Act), please notify us as soon as possible, but not later than 5 pm (London time) on Tuesday 28 May 2013, with the following information:
1. In relation to any of the shares in JKX Oil & Gas plc (JKX) in which you have, or during the last three years had, an interest (the Shares), please provide the following information:
(a) the number of Shares in which you have or had an interest;
(b) the nature of your interest in the Shares (e.g. beneficial owner, trustee, option);
(c) the date(s) you acquired and cased to hold such interest, in each case, if applicable;
(d) whether you are party to any agreement or arrangement (whether written or unwritten, formal or informal, direct or indirect):
(i) which includes provision for the acquisition by you and/or any other person of shares in JKX and which imposes obligations or restrictions on the use (including exercise of rights, control or influence arising from such shares) or on the retention or disposal of such shares;
(ii) relating to the exercise of any rights conferred by the holding of shares in JKX (e.g. a shareholders' agreement which governs (directly or indirectly) how the voting rights in the shares of Eclairs Group Limited are to be exercised); or
(iii) with Mr Alexander Zhukov, Mr Oleksandr Ratskevych and/or Glengary Overseas Limited (or their respective companies or nominees), which relates to the exercise of JKX share voting rights (either directly or via yours and/or their respective companies and nominees)?
If so, please provide full particulars of such agreements or arrangements (including the names of all parties thereto)."
The notice concluded by requesting that the information be sent to Mrs. Dubin at the company's address, warning Eclairs that it was an offence to fail to comply with the notice, warning of the company's right to issue a restriction notice upon failure to comply by the specified deadline, and recommending that Eclairs seek legal advice about compliance with it.
- Mr. Mabb's criticisms of the Eclairs section 793 notice were focussed entirely on paragraph 1(d), relating to agreements or arrangements. He said that each of the three numbered sub-paragraphs within paragraph 1(d) was separately objectionable, but he focussed his critique on sub-paragraph (ii). He further submitted that the request for full particulars of such agreements or arrangements (including the names of all parties thereto) at the end of paragraph 1(d) was itself separately objectionable.
- Mr. Mabb submitted that the confined effect of those defects was sufficient to invalidate the notice as a whole, as a section 793 notice, and therefore a valid disclosure notice under Article 42. But even if they were not, he said that since JKX's Board's conclusion that Eclairs and others had provided responses which were false or materially incorrect related entirely to the questions raised by paragraph 1(d), the defects in that sub-paragraph were sufficient to deprive the company's Board of any power to rely upon such falsity or inaccuracy as a ground for imposing the Restrictions.
- To understand Mr. Mabb's detailed submissions, it is necessary to start by looking closely at section 793 itself, set in its context as part of the scheme re-enacted by Part 22 of the 2006 Act. Part 22 is headed "Information about Interests in a Company's Shares". Section 793 is itself headed:
"Notice by company requiring information about interests in its shares."
It provides as follows:
"(1) A public company may give notice under this section to any person whom the company knows or has reasonable cause to believe-
(a) to be interested in the company's shares, or
(b) to have been so interested at any time during the three years immediately preceding the date on which the notice is issued.
(2) The notice may require the person-
(a) to confirm that fact or (as the case may be) to state whether or not it is the case, and
(b) if he holds, or has during that time held, any such interest, to give such further information as may be required in accordance with the following provisions of this section.
(3) The notice may require the person to whom it is addressed to give particulars of his own present or past interest in the company's shares (held by him at any time during the three year period mentioned in subsection (1)(b)).
(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, or
(b) another interest in the shares subsisted during that three year period at a time when his interest subsisted,
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-
(a) the identity of persons interested in the shares in question, and
(b) whether persons interested in the same shares are or were parties to-
(i) an agreement to which section 824 applies (certain share acquisition agreements), or
(ii) an agreement or arrangement relating to the exercise of any rights conferred by the holding of the shares.
(6) The notice may require the person to whom it is addressed, where his interest is a past interest, to give (so far as lies within his knowledge) particulars of the identity of the person who held that interest immediately upon his ceasing to hold it.
(7) The information required by the notice must be given within such reasonable time as may be specified in the notice."
- Section 794 enables the company to seek restriction orders from the court where the recipient of a section 793 notice fails to give the information required by the specified time. Section 795 makes such a failure, or the provision of a statement known to be (or recklessly) false in a material particular a criminal offence, unless the recipient can prove that the requirement to give information was frivolous or vexatious.
- Section 797 sets out the consequences of a restriction order, which include the avoidance of any transfer of the shares, disenfranchisement, the prohibition on any further issue of shares in right of the specified shares and the prohibition of payments (whether of capital or otherwise) due from the company on the shares, save in a liquidation. Evasion of the restrictions is, by section 798, also a criminal offence. Under section 799 the court has power to relax restrictions where they would otherwise unfairly affect the rights of third parties in respect of the shares. Section 800 provides for the removal of the restrictions on further applications to the court. By sub-section (3) the court is prohibited from making an order under section 800 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, or
(b) the shares are to be transferred for valuable consideration and the court approves the transfer."
- Section 801 empowers the court to make an order for the sale of the shares subject to restrictions, but only on the application of the company. Section 802 makes provision for the proceeds of such a sale to be paid into court, and distributed to the persons beneficially interested in the shares.
- Sections 808 to 819 make detailed provision for the keeping by public companies of a register of information disclosed pursuant to requests under section 793, and for that register to be open to public inspection, with provision for court intervention where a request for inspection is alleged to have been made for an improper purpose.
- Sections 820 to 825 provide a far-reaching and detailed scheme for the identification of persons having interests in shares for the purposes of Part 22. It includes all beneficiaries of any trust where an interest in shares forms part of the trust property. A person whose spouse, civil partner, infant child or stepchild is interested is himself taken to be interested in shares. A person who has contracted to acquire shares is interested in them, as is a person who, not being the registered holder, is entitled to exercise any right conferred by the holding of the shares, or to control the exercise of any such right: see section 820(4). Such rights qualify even if conditional, and even if they arise only by reason of the fulfilment of a relevant obligation: see section 820(5).
- Section 823 makes broad provision in relation to persons who control corporate bodies interested in shares. Such persons include shadow directors (see section 823(1)(a)), persons entitled to exercise or control the exercise of one-third or more of the voting power of general meetings of the body corporate (section 823(1)(b)), including persons with such power over an intermediate body corporate which itself has the relevant control of the voting power of the body corporate: see section 823(2). All those persons are deemed to have interests in the shares. A similar formula bringing in persons whose rights in those respects are subject to condition, or which arise upon the fulfilment of an obligation, is included at section 823(3).
- Sections 824 and 825 extend the definition of interest in shares even wider in the case of a type of share acquisition agreement generally known as a concert party. So far as relevant section 824 provides as follows:
"(1) For the purposes of this Part an interest in shares may arise from an agreement between two or more persons that includes provision for the acquisition by any one or more of them of interests in shares of a particular public company (the "target company" for that agreement).
(2) This section applies to such an agreement if—
(a) the agreement includes provision imposing obligations or restrictions on any one or more of the parties to it with respect to their use, retention or disposal of their interests in the shares of the target company acquired in pursuance of the agreement (whether or not together with any other interests of theirs in the company's shares to which the agreement relates), and
(b) an interest in the target company's shares is in fact acquired by any of the parties in pursuance of the agreement.
(3) The reference in subsection (2) to the use of interests in shares in the target company is to the exercise of any rights or of any control or influence arising from those interests (including the right to enter into an agreement for the exercise, or for control of the exercise, of any of those rights by another person).
(5) In this section—
(a) "agreement" includes any agreement or arrangement, and
(b) references to provisions of an agreement include—
(i) undertakings, expectations or understandings operative under an arrangement, and
(ii) any provision whether express or implied and whether absolute or not.
References elsewhere in this Part to an agreement to which this section applies have a corresponding meaning.
(6) This section does not apply—
(a) to an agreement that is not legally binding unless it involves mutuality in the undertakings, expectations or understandings of the parties to it; or
Section 825(1) provides that each party to any section 824 concert party is treated as interested in all the shares of the target company in which any other party to the agreement is interested apart from the agreement, whether or not the interest of the other party was acquired in pursuance of the agreement.
- Both sides to this dispute place reliance upon the exceptional size and fineness of mesh of the net cast by Part 22 for the purpose of treating persons as interested in a public company's shares. For JKX Mr. Swainston submitted that a similarly broad interpretative approach should be applied to section 793 itself. Mr. Mabb submitted that the very breadth and precision of the definition, coupled with the constantly repeated headings relating to the obtaining of "information about interests in its shares" meant that section 793 should be rigidly construed as permitting, and permitting only, the compulsory provision of information of a type which would, if answered in a particular way, go directly to the question whether a person was so interested.
- Mr. Mabb sought to bolster his submission that section 793 should be strictly or narrowly construed by reference to the undoubted fact that default in response gives rise to criminal sanctions and to civil penalties in the form of restriction orders. Mr. Swainston submitted that the addressee was sufficiently protected by the defence that a particular request was frivolous or vexatious, and by the court's discretion not to impose restrictions, under section 794. Further, Mr. Swainston urged us not, when becoming enmeshed in all the detail, to lose sight of the broad overall objective of Part 22, namely to serve the public interest that the exercise of shareholder rights in relation to the affairs of a public company should, as far as possible, be conducted transparently.
- I accept that all the opposing considerations pressed upon us by Mr. Mabb and Mr. Swainston arising from setting section 793 in its broader context are relevant to the interpretation of its precise scope. Plainly, many of those considerations pull in opposite directions, the public interest in transparency and the requirement that conduct enforced by criminal sanctions be clearly defined being perhaps the most obvious example. In my judgment the balance that Parliament must be taken to have struck between those frequently opposing considerations is best identified by a careful consideration of the words used in section 793, against a background which treats those wider considerations as informative, but none of them as individually conclusive.
- Before returning to a close analysis of section 793, it is material to mention two cases which, while not directly in point, contain dicta relied upon by counsel as being of some assistance. The first is Re Lonrho PLC (no.2)  BCLC 309. The company (Lonrho) served notice under section 212 of the 1985 Act on two New York resident individuals believed to have interests in its shares, demanding a response within, in effect, one working day. They responded after five days, but not before Lonrho had obtained an interim restrictions order. No complaint was made as to the accuracy of the response and the order was therefore shortly afterwards discharged. On the issue who should pay the individuals' costs of obtaining that discharge, Vinelott J held that the specification of an unreasonably short time for response rendered the section 212 notices invalid. Mr. Mabb relied upon the case as an indication of the strict approach which should be taken by the court in confining a company's powers to issue section 793 notices albeit, as he accepted, it said nothing at all about the proper scope of such a notice in terms of the information requested.
- The second case was Re TR Technology Investment Trust PLC  BCLC 256. It was mainly about the question whether the predecessor to section 800(3), limiting the circumstances in which the court could remove restrictions imposed under section 794, applied to a merely interim order, and the conclusion of Hoffmann J was that it did not. Mr. Mabb relied upon the following general description of the purpose of what was then section 212, at page 261:
"A company is therefore able, by notices under s212, to track down all persons who, within a very extended definition, have interests in its shares. The reason why the definition is so extensive is to counter the limitless ingenuity of persons who prefer to conceal their interests behind trusts and corporate entities. But as Nourse LJ said in Re Geers Gross plc  BCLC 140 at 143,  1 All ER 224 at 227:
'… the clear purpose of [Pt VI of the 1985 Act] is to give a public company, and ultimately the public at large, a prima facie unqualified right to know who are the real owners of its voting shares.'"
Mr. Mabb submitted that this passage supported an interpretation of section 793 which confined the scope of legitimate questions strictly to those which would serve to identify persons interested (as defined) in the company's shares.
- More to the point there is a useful passage in which Hoffmann J resolved a dispute between counsel about whether what is described (now) in section 793(4) as "such particulars in respect of that other interest as may be required by a notice". He said:
"These last words are, on the face of them, very general. Prima facie they allow the company to ask for whatever particulars it thinks fit, provided that they are 'with respect to that other interest'. There are two safeguards against abuse by the company. First, the company's only remedy for failure to comply is an application for restrictions under (now Part 22) and that remedy is within the discretion of the court. Second, it is a defence to any criminal proceedings that the requirement was frivolous or vexatious."
In relation to what is now section 793(5), he continued:
"… counsel accepted that the word 'include' in (now section 793(5)) could not be construed as introducing an exhaustive list of matters of which particulars could be asked… I do not think that (section 793(5)) is intended to do more than illustrate the kind of matters of which particulars can be required. It does not in my view limit the ordinary meaning of 'such particulars… as may be required by the notice' in (section 793(4)).
In my view the purpose of (section 793) would be defeated if the company could not ask for particulars of the nature of the interest of any person known to the respondent as having an interest in the shares. Part (22) deliberately defines 'interest' very broadly indeed. It casts a net so wide and finely meshed that in a case like this in which a complicated structure of trusts and companies has been created, a request for the identity of all persons interested will trawl in a large number of parties from JHI and BG to Master Hinchcliffe and the NSPCC. A list of names would not enable the company to discover 'the real owner of shares' unless it could ask who were the sharks and who were the minnows: see Re Geers Gross PLC  BCLC 140  1All ER 224."
- Mr. Mabb was right to say that Hoffmann J was, in the passages quoted above, reacting against a significantly narrower interpretation of section 793's predecessor than the one for which he contends on this appeal. Nonetheless, Hoffmann J's approach appears clearly to favour a liberal rather than restricted interpretation of the ambit of the information which may legitimately be requested.
- The Geers Gross case contains nothing of assistance for present purposes beyond the citation from Nourse LJ's judgment relied upon by Hoffman J. I shall return to it when addressing the proper purpose issue.
- Returning directly to the detail of section 793, Mr. Mabb's main submission was that, taken as a whole, it empowered a company to demand information only about interests in its shares (as defined). Questions about agreements or arrangements between shareholders which would not, if they existed, give rise to such interests in shares were illegitimate. Thus, sub-section (2) required the addressee only to state whether or not he had, or previously had, such an interest. Sub-section (3) was limited to "particulars of his present or past interest in the company's shares". Sub-section (4) extended sub-section (3) to particulars of the interests of any other person in the same shares. Sub-section (5) went no further. Sub-section (5)(a) merely required persons interested in shares to be identified. Sub-section (5)(b) was strictly limited to agreements or arrangements between persons "interested in the same shares", which he submitted excluded agreements or arrangements between persons interested in different blocks of the company's shares. Furthermore, he submitted that sub-section (5)(b)(ii) was concerned only with such agreements or arrangements relating to the exercise of rights as would give rise to interests in shares within the extended definition of that concept in Part 22.
- Using the second wave section 793 notice addressed to Eclairs, Mr. Mabb submitted that paragraphs 1(d)(ii) and (iii) offended against that limited scope for compelling the production of information, mainly because it sought to require Eclairs to identify any agreement or arrangement relating to the exercise of rights conferred by the holding of any shares in JKX, rather than merely shares in which Eclairs itself was interested. Thus it would for example require disclosure of an arrangement between Mr. Kolomoisky and Mr. Zhukov relating to the voting of two separate blocks of shares (the Eclairs' block and the Glengary block) where neither Mr. Kolomoisky nor Mr. Zhukov had any interest in the other block, and where the existence of such an arrangement would not of itself give rise to interests (as defined) of either of them in the other block.
- For good measure, although this sub-paragraph was not in the centre of Mr. Mabb's target area, he criticised paragraph 1(d)(i) because, although apparently modelled on section 793(5)(b)(i), so as to compel the production of concert party arrangements within section 824, an affirmative answer would not of itself disclose any relevant interest in shares unless, pursuant to section 824(2)(b) an interest in JKX's shares had in fact been acquired by any of the parties pursuant to that agreement or arrangement. Furthermore, he said, paragraph 1(d)(i) also ignored the additional requirement under section 824(6)(a) that confines concert party agreements to true contracts or arrangements involving mutuality.
- Finally, Mr. Mabb submitted that the concluding part of paragraph 1(d) requiring "full particulars of such agreements or arrangements" went much further than was justified by the specific and precisely defined authority to seek information conferred by section 793.
- These submissions were advanced with admirable detail and determination, both at trial and on appeal. The judge was not persuaded by them, and nor am I. The judge's analysis was based upon what he regarded as two important principles. First, the breadth of the information gathering exercise which Parliament had enabled the company to conduct was demonstrated by the size of the net cast by the definition of "interest in shares" in Part 22, and would not be served by a narrow interpretation of the boundaries of section 793. In that respect he followed the lead set by Hoffmann J in the TR Technology case. Secondly, he bore in mind that the whole point of section 793 was to enable the company to obtain information which it did not already have. To confine section 793 within rigid boundaries would unduly hamper the company in the performance of a task necessarily carried out when working, to some extent, in the dark.
- The judge did not attempt an exhaustive statement of the boundaries of section 793. Rather he focussed upon the ambit of the questions in the Eclairs' notice. I shall, shortly, do the same. But I acknowledge that a key question of interpretation of section 793 which must first be answered is the ambit of sub-section (5)(b). In general terms it authorises a demand for information about section 824 concert party agreements and what I shall loosely label voting agreements or arrangements to which "persons interested in the same shares are or were parties". I accept Mr. Mabb's submission that "the same shares" means the shares in which the addressee is or was interested. But I reject Mr. Mabb's submission that the authority to demand information is limited to agreements which are only between persons interested in the same shares. In my view it extends to any relevant agreement or arrangement to which the addressee, or any other person interested in the same shares, is a party, even if the other party or parties to the agreement have no interests (as defined) in those shares. Nor are the categories of agreements or arrangements about which the company may demand information limited to those, the terms of which have the effect of rendering the other parties interested in the same shares.
- Taking a practical example, an agreement or arrangement between Mr. Kolomoisky and Mr. Zhukov that the Eclairs' and Glengary shares should all be voted together for the achievement of certain objectives would in my judgment fall squarely within section 793(5)(b)(ii), for the purposes of a disclosure notice to Eclairs. Mr. Kolomoisky would be a "person interested in the same shares" as Eclairs. He would be a party to an arrangement relating to the exercise of rights conferred by the holding of the shares in which Eclairs was interested.
- Similarly, if there was a mutuality arrangement between Mr. Kolomoisky and Mr. Zhukov to which section 824 applied, it would in my view be unrealistically narrow to exclude a question to Eclairs about such an arrangement merely because only one person interested in the Eclairs' shares was a party to that arrangement.
- The trouble with Mr. Mabb's narrower interpretation is that it proves too much. Section 793(5) is about the particulars which may be sought under both sub-sections (3) and (4). True it is that sub-section (4) contemplates the simultaneous subsistence of two or more interests in the same shares. But sub-section (3) does not. It is concerned (at least in part) with the addressee's interest in shares in which no other person or persons may be interested. Sub-section (5) must be able to work in relation to such an addressee. In that context, it would be extraordinary if sub-section (5)(b) did not authorise a demand for particulars, under sub-section (3), of arrangements or agreements (of the types described) to which the addressee was a party. In my judgment the phrase "persons interested in the same shares" in sub-section (5)(b) is merely shorthand for the purpose of capturing all agreements or arrangements of the types described to which either the addressee or any other person or persons interested in the same shares is or are (to the addressee's knowledge) party.
- But even then, sub-section (5) is, as both Hoffman J and the judge in the present case have noted, inclusive rather than comprehensive as to the particulars which may be requested. Even if Mr. Mabb's narrow construction of sub-section (5) were otherwise correct, it would constitute arid ground for the erection of a theory that section 793 was to be narrowly interpreted.
- Returning to the Eclairs' notice, I have been no more persuaded than was the judge that any parts of paragraph 1(d) exceeded the authority conferred on the company by section 793. The starting point is that, at the outset, the notice describes itself as served in accordance with section 793, and that the whole of paragraph 1 is confined to information "in relation to any of the shares in JKX… in which you have, or during the last three years had, an interest". As Vinelott J noted in Re Lornho (no.2) no recipient (especially a foreign recipient) of a section 793 notice would be likely to wish to respond to it before taking legal advice about the Part 22 regime. It is, as the judge noted, therefore legitimate to interpret the notice on the basis of an understanding common to its sender and recipient as to the statutory regime within which it was to operate.
- Paragraph 1(d)(i) is plainly intended to flush out acquisition agreements within section 824. It is not invalidated merely because it might compel disclosure by Eclairs of a section 824 agreement to which Eclairs was the only party, among those interested in its block of shares. Nor in my view would it have enabled Eclairs to decline to disclose a concert party agreement merely because, at the time of receipt of the disclosure notice, it was still purely executory.
- I consider that paragraph 1(d)(ii) fell squarely within the authority conferred by section 793(5)(b)(ii), regardless whether the parties to any voting agreement or arrangement included merely one, or more than one, of the persons interested in the Eclairs' shares.
- Paragraph 1(d)(iii) is in my view merely a sub-set of sub-paragraph (ii). In particular it matters not whether Messrs Zhukov, Ratskevych or Glengary were, by virtue of any such agreements or arrangements, to be treated as interested in the Eclairs' block of shares. It was information which the company could have sought from Eclairs, under sub-section (3), even if it was the only person interested in its shares.
- Finally, there is nothing inappropriate in the Eclairs' notice seeking "full particulars" of such agreements or arrangements as fell within paragraph 1(d), including the names of all parties thereto. Those particulars were in my judgment within the contemplation of "particulars of his own present or past interest in the company's shares".
- The result is that Eclairs' appeal fails in relation to this issue. Nonetheless, I must mention a submission by way of counter-attack from Mr. Swainston which sought entirely to finesse the complex analysis which I have addressed. He said that the relevance of issues as to the validity of parts of the second wave of section 793 notices was only concerned with the question whether the Restrictions were validly imposed. The combined effect of Article 42(1)(j) and (2)(b) was to confer such authority wherever the board knows or has reasonable cause to believe that information provided in response to a disclosure notice is false or materially incorrect. For that purpose, it matters not, he said, whether information believed to be false or materially incorrect was contained in a response to a disclosure notice which itself contained questions which might be said to trespass beyond the authority conferred by section 793. It did not even matter, he submitted, if the relevant falsity or incorrectness related to questions which themselves trespassed beyond section 793, provided that the disclosure notice was not wholly invalid. He said that the recipient of a disclosure notice had a choice in relation to questions unauthorised by section 793. It could either decline to answer, putting the company's authority to require that information in issue, or it could simply reply to those questions. If it did the latter, and its replies were reasonably believed by the Board to contain information which was false or materially incorrect then it only had itself to blame if the imposition of restrictions followed. This was not, he said, a question of estoppel, but simply the consequence of the true interpretation of Article 42.
- This was not a point with which the judge found it necessary to deal. In my view, it has much to commend it. Part 22 of the 2006 Act, and articles which supplement it, are designed to promote transparency and honesty in dealings by and between shareholders in public companies. I consider it to be a correct interpretation of Article 42 that restrictions may be used as sanctions for any falsity or material incorrectness in responses to section 793 notices, and that the validity of that sanction should not depend upon the outcome of trench warfare about the extent to which a disclosure notice precisely corresponds with the ambit of section 793, in circumstances where the addressee takes no such issue at the time of its response.
Reasonable cause to believe
- The judge decided that, within the terms of Article 42(1)(j), the Board of JKX had reasonable cause to believe that the replies provided by Mr. Kolomoisky to the requests for information in the section 793 notice served on him which corresponded with paragraphs 1(d)(ii) and (iii) of the notice served on Eclairs were false or materially incorrect. Mr. Kolomoisky said that there were no arrangements or agreements to which he was a party relating to the exercise of any rights conferred by the holding of shares within JKX and, in particular, none with Mr. Zhukov, Mr. Ratskevych or Glengary. The judge concluded that the Board had reasonable cause to believe that this was untrue. The directors believed that there were arrangements both within the Eclairs' camp and between the Eclairs and Glengary camps which related to the shares, how they would be voted, and to the apprehended raid. Specifically, they believed that there were such arrangements between Mr. Kolomoisky and Mr. Bogolyubov within the Eclairs camp, and between Mr. Kolomoisky and Mr. Zhukov, as between the Eclairs' and Glengary camps.
- After a meticulous examination of the facts, the judge concluded that the Board had reasonable grounds for those beliefs, both in terms of the procedure which they had adopted in forming them and in relation to the substance of the matters about which they had become aware by the time they decided to impose the Restrictions, including the inferences which they were reasonably entitled to draw from those matters. The judge reached similar conclusions in relation to the disclosure from the Glengary camp, but they have not been subjected to an appeal.
- Eclairs' appeal did not challenge the judge's finding that the Board actually believed the matters which I have summarised. It was confined to a challenge to the judge's conclusion that the Board had reasonable grounds for those beliefs. The main grounds for this part of the appeal were, in summary:
1.) that the judge applied an insufficiently stringent standard to the question of reasonable grounds for belief, treating it as a standard closer to grounds for suspicion than to belief, and
2.) that the judge wrongly inferred that, in forming those beliefs, the Board relied upon privileged parts of a briefing note circulated on 29th May 2013, when those parts had neither been disclosed to Eclairs nor, therefore, made available for perusal by the judge himself.
Apart from that, Eclairs points to a number of aspects in which it is said that the judge failed to give sufficient weight to certain factors, and gave too much weight to others, specific to the particular beliefs entertained by the Board about arrangements between the Eclairs and Glengary camps, and within the Eclairs' camp.
- It is convenient to take the latter points about 'weight' first. The question whether directors had reasonable grounds for specific beliefs is one of those multi-factorial mixed questions of fact and law about which this court is inevitably less well qualified to reach a view than the trial judge, particularly a judge who, as in the present case, has heard the oral evidence and cross-examination of most of the directors concerned. In my view, none of those 'weight' factors, singly or in the aggregate, came anywhere near justifying a conclusion that the judge came to the wrong answer on this issue. I shall not overburden this already long judgment by dealing with them one by one. Leaving aside the question whether he set an appropriately high standard, and the point about privileged material in the Board's briefing paper, none of them identified specific points where the judge had erred in law, and they did not even begin to amount to a case of irrationality; i.e. that no judge could reasonably have reached the conclusion which this judge did reach. To be fair, Mr. Mabb sensibly left those detailed points to be assimilated mainly from his lengthy skeleton argument, and concentrated in his oral submissions upon the two specific points to which I have referred.
- There is in my view no substance in the first of them. The judge clearly distinguished between reasonable grounds for suspicion and reasonable grounds for belief, at paragraph 137 of his judgment, and nothing in his meticulous treatment of this issue suggests to me that he did anything other than abide by that clear distinction in his analysis.
- Mr. Mabb submitted that, bearing in mind that Article 42(1)(j) speaks of "knows or has reasonable cause to believe", reasonable cause for belief set a standard only slightly less than knowledge, and one which required the directors to apply a standard substantially higher than a balance of probabilities. I disagree. Article 42(1)(j) is part of the machinery by which the shareholders of JKX have entrusted to their directors, rather than to the court, under section 794, the question whether restrictions should be imposed as a sanction for non-compliance with a section 793 request for information. Had the matter been left to the court, it would as in any other civil proceedings have approached questions of this kind by reference to the balance of probabilities. I can see no reason why the Board should not have been entitled to do exactly the same when considering whether they had reasonable cause to believe that information provided pursuant to a section 793 request was false or materially incorrect.
- Mr. Mabb submitted that, in setting too low a standard for reasonable cause to believe, the judge took insufficiently into account the effect of consequential restrictions upon the shareholders' rights. Again, that submission seems to me to run directly counter to the judge's analysis, at paragraph 137 where, in distinguishing between belief and suspicion, he said that:
"The seriousness of the consequences on proprietary rights of exercising the power requires that the firmer state of mind be the relevant one."
- Eclairs' second point, relating to the privileged material, seems to me to stem from a misreading of paragraph 141(iv) of the judgment, which was as follows:
"The debate at the board meeting was described by Mr. Moore as being at a "fairly high level" and there was no focus on whether the sort of arrangement they believed to have existed was one the existence of which was denied. I find that Mr. Moore did indeed refer to the high level nature of the discussion in his cross-examination, but he had previously characterised the meeting as being one in which the board were very focused on whether to issue the restriction notices and all the directors had an opportunity to ask all the questions they wanted. I find that there is no clear record of a discussion relating to the believed arrangement and whether it was actually denied, but I also bear in mind there was a lot of privileged information before the meeting and a number of recorded privileged interventions in the solicitors' records (they are redacted). This factor, so far as accurate, is not a strong pointer against the reasonable forming of a reasonable belief because the directors had a lot of material before them and did not necessarily have to have it all spelt out."
- Mr. Mabb submitted that this showed the judge drawing the inappropriate inference that the contents of the privileged materials themselves contributed towards the belief-forming process undertaken by the directors, in the sense of supplying vital material to make good the otherwise "fairly high level" at which the issue was addressed by the Board. I do not read this passage in the judgment in that way. The point being made was about process rather than substance, as appears from the headings before paragraphs 141 and 162, and the criticism of the Board with which the judge was dealing was that there was no clear record of the directors' deliberation about the beliefs which they came to hold (thereby justifying the Restrictions). All that the judge was saying was that the absence of a detailed minute was hardly surprising, bearing in mind the amount of privileged material placed before the directors. He formed no inference, adverse to Eclairs, about the content of that material, and based his conclusions as to the substance of the matter (in paragraphs 162 to 167) upon an analysis of the facts which the non-privileged material, and the directors' own evidence, enabled him to conclude had been available to the directors to take into account.
- It follows that, in my judgment, this second part of Eclairs' appeal also fails.
- JKX briefly pursued, under a Respondent's Notice, a submission that the judge should also have found that the directors had reasonable cause to believe that there had been a section 824 acquisition agreement, a submission made at trial which the judge rejected, at paragraphs 176 to 177. Mr. Swainston submitted that it probably occurred when Ralkon's shares were acquired by Eclairs. This was a point pursued by JKX in case it needed a plank in a shipwreck, had Eclairs' appeal in relation to the validity of paragraphs 1(d)(ii) and (iii) been successful. Since they have not, I need deal with this point only to the extent of saying that I was not persuaded, by Mr. Swainston's short submission about it, that the judge's negative conclusion was unsound.
- The claimants succeeded in this case because the judge concluded that the directors had, in deciding to impose the Restrictions, been motivated by an improper purpose, namely to improve the prospects of carrying the resolutions at the forthcoming AGM, rather than to compel the production of the information requested in the second wave of section 793 notices, but not provided. He found that the purpose of maximising the prospects of passing the resolutions at the AGM was a separate and dominant purpose, not linked either to the extraction of the information (which he found that they nonetheless wished to obtain) or to the protection of the company pending the provision of it: see paragraph 189 of his judgment, quoted at paragraph 29 above.
- By contrast, the judge concluded that the purpose for which Article 42 conferred a power on the Board of JKX to impose restrictions was, like the court's power to do so under section 794, to compel the production of information from those who had, despite request, failed to provide it. He acknowledged, by reference to section 800(3)(a) (which prohibits the court from removing restrictions imposed under section 794 unless, inter alia, no unfair advantage has accrued to any person as a result of the earlier failure to make that disclosure) that the statutory regime could be said to contemplate the additional purpose of depriving defaulters from any unfair advantage, but he doubted whether the different provisions of Article 42(4) (which provide for an automatic lifting of restrictions upon receipt of the requested information) transposed that additional purpose into the bespoke regime created by Article 42. The result was that the imposition of the Restrictions was invalidated because it had been tainted by that improper purpose.
- It was no part of the judge's conclusions that the directors had acted otherwise than in good faith, and for the promotion of what they regarded as the best interests of JKX. But in his view that overriding motivation was insufficient to preserve the Restrictions from invalidity.
- JKX does not by its appeal challenge the judge's factual findings as to the directors' predominant purpose. Rather, Mr. Swainston submits that the judge's legal analysis of the purposes for which the power to impose restrictions is conferred was wrong. In summary he submits that:
a) no such purposive restriction upon the availability of the powers, either in Part 22 of the 2006 Act or in Article 42, can or should be identified as a matter of construction;
b) the fiduciary exercise of those powers by the directors was sufficiently guaranteed by section 172 of the 2006 Act, which requires directors to act in good faith so as to promote the success of the company for the benefit of its members as a whole;
c) in any event, restrictions under Part 22 served the additional purpose of protecting the company from the activities of the defaulters, and Article 42 should not be more narrowly construed;
d) since in any event the directors wished to obtain the information withheld, the imposition of the Restrictions was justified regardless of their predominant purpose.
These submissions raise large and potentially far-reaching issues about the construction of statutory and other provisions conferring fiduciary powers on directors, and about the circumstances in which an apparently regular exercise of such a power may be impugned on the basis of an allegation of improper purpose. They are thrown into sharp focus by the statutory requirement, applicable to all directors, in section 171(b) of the 2006 Act, that:
"A director of a company must-
(b) only exercise powers for the purposes for which they are conferred."
There is nothing new about this requirement, save for its first appearance enshrined in statute. Fiduciary powers have always been subject to the requirement that they be exercised for the purposes for which they are conferred, as is evident from numerous decisions prior to 2006, which apply to company directors a principle which originated in the doctrine of fraud on a power: see Lewin on Trusts (18th ed.) at paragraph 29-272.
- I have concluded that the judge was right to find that the Restrictions were vitiated because of the improper predominant purpose for which JKX's directors imposed them. My reasons accord, largely but not precisely, with those given by the judge. In view of the general importance of the issue, and because both my Lords have reached the contrary view, I shall set them out in my own words, and at some length.
- The first question is, as Mr. Swainston recognised, whether the power to impose restrictions in Article 42 was constrained by any purposive restriction other than that it be exercised bona fide for the benefit of JKX (as it was). But as Mr. Paul Sinclair rightly observed in his brief but telling submissions for Glengary, that question needs to be approached in two stages. The first stage is to ascertain from the authorities what is the correct general approach to the identification of the purposes for which directors' powers are conferred. The second, armed with that understanding, is to identify the particular purposes for the conferral of the power in question.
- Mr. Swainston submitted that, since the Articles of Association of a company constitute something akin to a commercial contract between its shareholders, the identification of a purposive restriction upon the exercise of a power conferred on directors, where it is not set out in express terms, should be subjected to the same discipline, including the necessity test, which is applied to the identification of contractual implied terms. He said that, bearing in mind the overriding requirement that directors exercise their powers bona fide for the benefit of the company, it will be a rare case in which the application of that discipline will identify any more stringent term than that, by way of implication.
- I emphatically disagree with that approach. It is true that, for over a century, corporate Articles of Association have been likened to a contract between the shareholders: see Allen v Gold Reefs of West Africa Limited  1 Ch 656, at 671. Furthermore, the court will be slow to recognise purposive restrictions on shareholders' powers, because they are not fiduciary, even though some restrictions (for example in relation to powers of majorities to bind minorities) may nonetheless be implied by law, rather than by satisfying a commercial necessity test. Allen v Gold Reefs is a case in point. But it is clear that the approach to the identification of implied terms in commercial contracts has never been applied to the identification of purposive restrictions upon directors' fiduciary powers.
- The leading authority on this subject is the judgment of the Privy Council in Howard Smith Limited v Ampol Petroleum  AC 821. The Supreme Court of New South Wales had struck down an allotment and issue of shares by directors on the ground that, although motivated by their perception that the best interests of the company would thereby be served, the directors had been motivated by a desire to dilute the shareholding of persons opposed to a possible takeover bid, rather than a desire to augment the company's capital, even though it needed more capital. Giving the judgment of the Judicial Committee (which dismissed the appeal), Lord Wilberforce said this, at page 835:
"To define in advance the exact limit beyond which directors must not pass is, in their Lordships' view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase – such as "bona fide in the interests of the company as a whole," or "for some corporate purpose." Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity, cases where the directors are acting sectionally, or partially: i.e. improperly favouring one section of the shareholders against another.
In their Lordships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is to be found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.
"The application of the general equitable principle to the acts of directors managing the affairs of a company cannot be as nice as it is in the case of a trustee exercising a special power of appointment. (Mills v Mills 60 CLR 150, 185-186 per Dixon J.)
The mainstream of authority, in their Lordships' opinion, supports this approach."
- Earlier, Lord Wilberforce had rejected as extreme the parties' arguments on the one side that, for validity, all that was required is a bona fide exercise of the power in the interests of the company, and on the other side, that a single purpose must be identified, outwith which all exercises of the power must be invalid.
- There is no hint in Lord Wilberforce's analysis of the application of the common law tests for the implication of terms. Furthermore, the fiduciary obligation on directors to exercise all powers only for the purposes for which they are conferred was a restriction previously imposed by law, and now expressly enshrined in statute. It is not a question of implied terms at all. The underlying assumption, both of the common law and now of Parliament, is that all fiduciary powers are conferred on directors for a purpose or purposes, regardless whether that purpose is expressly spelt out in the 2006 Act, or in a particular company's Articles, or has to be identified by the process described by Lord Wilberforce.
- In relation to purely managerial powers, concerned with the planning and conduct of the company's business, the court will be slow to identify bespoke restrictions, and will afford the greatest respect to the directors' skill and judgment, as the passage from the Howard Smith case quoted above makes clear. But where the powers are capable of affecting the company's constitution at shareholder level, as is the case in relation to powers to allot or forfeit shares, and powers to deprive shareholders of voting rights, more circumspection is necessary, as is in particular demonstrated by the outcome of the Howard Smith case. Although the issue and allotment of shares for the purpose of diluting the holdings of those opposed to a takeover bid was adjudged by the directors to serve the company's best interests, it was nonetheless invalidly exercised because dilution of that kind was an unconstitutional interference with shareholders' rights outwith the capital-raising purpose for which the power had been conferred.
- The need for the court to look carefully at the purpose for which a fiduciary power is exercised, where its effect may impinge upon the constitutional balance of power between groups of shareholders, is well illustrated by Hogg v Cramphorn Limited  Ch 254. The directors, acting in good faith in pursuance of what they conceived to be the best interests of the company, sought to fend off an unwelcome takeover bid by setting up an employees' trust for the acquisition of shares in the company, and then issuing shares to the trustees, in the expectation that they would vote those shares against the bid. Buckley J held that the power to issue shares was a fiduciary power, that it had been exercised for an improper motive, so that the issue was liable to set aside. At page 268 he said:
"Unless a majority in a company is acting oppressively towards the minority, this court should not and will not itself interfere with the exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the views held or policies favoured by the majority and the minority. Nor will this court permit directors to exercise powers, which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights; and in a case of this kind also, in my judgment, the court should not investigate the rival merits of the views or policies of the parties. … It is not, in my judgment, open to the directors in such a case to say, "we genuinely believe that what we seek to prevent the majority from doing will harm the company and therefore our act in arming ourselves or our party with sufficient shares to outvote the majority is a conscientious exercise of our powers under the Articles, which should not be interfered with.
Such a belief, even if well-founded, would be irrelevant. A majority of shareholders in general meeting is entitled to pursue what course it chooses within the company's powers, however wrong-headed it may appear to others, provided the majority do not unfairly oppress the other members of the company."
- In my judgment, Buckley J's observations are equally applicable to an interference by directors with the power of a 25% minority to block special resolutions, however apparently beneficial to the company the passing of those resolutions may appear to the directors to be. The entrenched rights of a 25% (or greater) minority are as much an aspect of the constitution of the company as are the rights of the majority, and the exercise of powers, such as a power to disenfranchise, which may have the effect of trespassing upon those entrenched rights, calls for the same scrutiny of the purposes for which it is exercised as did the power to issue new shares in Hogg v Cramphorn and Howard Smith v Ampol.
- Turning to the power to seek restrictions under Part 22, and to impose them under Article 42, there is significant authority, although not binding on this court, to the effect that the statutory power to seek restrictions exists for the purpose of compelling the provision of the relevant information from persons unwilling to provide it. In Re FH Lloyd Holdings PLC  BCLC 293 the company sought an order under section 77 of the Companies Act 1981 (a distant predecessor of section 794 of the 2006 Act) imposing restrictions on shares held on behalf of a Luxembourg company. The issue for decision was whether the section had any application to persons outside the jurisdiction. In concluding that it did, Nourse J said, at page 300h:
"… the clear purpose of Part IV of the 1981 Act (the predecessor of Part 22 of the 2006 Act) is to give a public company, and ultimately the public at large, a prima facie unqualified right to know who are the real owners of its voting shares."
- In Re Geers Gross PLC  1 WLR 1649, the company had obtained a restrictions order under Part XV of the Companies Act 1985 (another predecessor of Part 22). The question was whether the court should approve a proposed sale of the restricted shares under what is now section 800(3)(b), where the shareholder continued to decline to provide the whole of the requested information. Nourse LJ, with whom the other members of the Court of Appeal agreed, repeated with approval his earlier dictum in the FH Lloyd Holdings case.
- In Re Ricardo Group PLC  BCLC 566, the company had obtained an ex-parte restrictions order under Part XV of the 1985 Act. The respondent applied for and obtained a discharge of the order under the liberty to apply, having provided the requested information, notwithstanding the company's wish to hold on to the order pending further enquiries as to the completeness and accuracy of the information provided. At page 572, Millet J said:
"These orders… are not granted in order to preserve the status quo pending the trial. Far from preserving the status quo, they interfere with it. They are granted as a sanction to compel the provision of information to which the company is entitled. It follows, in my judgment, that once the information is supplied, any further justification for the continuance of the sanction disappears."
Later, at page 577, he continued:
"… These restriction orders are not to be used as weapons to gain a temporary advantage over an opponent in a contested takeover bid. Their only legitimate purpose is to coerce a recalcitrant respondent into providing the requisite information."
- None of those cases was, in strict terms, about the validity of the exercise of a power to seek or impose restrictions upon the basis of an alleged improper purpose, although Millet J addresses that question in terms in the second of the passages quoted above. Furthermore, they are all cases purely about the predecessors of the statutory regime now in Part 22, rather than the Board's own power to impose restrictions without going to court, such as is found in Article 42. Nonetheless, it is not surprising that the judge regarded them as clear and compelling guidance, in reaching his conclusion. At paragraph 206 of his judgment, he said:
"I do not think that Millet J's dicta are obiter, but even if they were I would, subject to one qualification, I agree with them and follow them. The vice that is aimed at is the non-disclosure of information. If proper information is disclosed in the first place then there is no basis for imposing restrictions no matter how desirable that might be thought to be from the point of the view of the company and the other shareholders, and no matter how apparently aggressive the predator has been in the period leading up to the notices. The purpose of the notices is not to counter the predatory activities as such; it is to acquire information. It follows that the non-provision of information is not to be taken as a justification for opening up a new front against the predator with the benefit of a new weapon. It is, subject to one point, to provide a sanction or an incentive to remedy the default, and the only default which is relevant for these purposes is the failure to provide information. I think that Millet J is clearly right about that."
- I agree with that passage, provided that full account is taken of the one qualification or point to which the judge referred. It arises from section 800(3)(a) which prohibits the court from removing restrictions unless satisfied not only that the relevant facts have been disclosed to the company, but also that "no unfair advantage has accrued to any person as a result of the earlier failure to make that disclosure". The judge said, and I agree, that this reference to unfair advantage was strictly limited to advantages flowing from the non-disclosure itself, and could not be prayed in aid as justifying the maintenance of restrictions as useful obstacles in the way of an undesirable predator.
- Nonetheless, while I regard Millet J's dictum as a trenchant and correct statement of the general purpose of the power to seek restrictions, and therefore the correct starting point in the application of Lord Wilberforce's recommended analysis in Howard Smith v Ampol, I would qualify Millet J's statement that this is the only purpose of restrictions to a greater extent than did the judge. In my view, an associated purpose of the power to seek restrictions is not merely to deprive persons who are tight-fisted with relevant information from obtaining relevant advantages, but also to protect the company and its shareholders generally from the consequences of being kept in the dark about the extent of undisclosed interests in the company's shares, and about acquisition or voting agreements or arrangements between such persons.
- Mr. Mabb submitted (and the judge broadly accepted) that no similar additional purpose could be identified within Article 42, because its bespoke regime for the imposition and removal of restrictions lacked any equivalent to section 800(3)(a). Article 42(4) provides:
"The Board may determine that one or more of the restrictions imposed on restricted shares shall cease to apply at any time. If the Company receives in accordance with the terms of the relevant disclosure notice the information required therein in respect of the restricted shares all restrictions imposed on the restricted shares shall cease to apply seven days after the receipt of the information. In addition, in the event that the Company receives an executed instrument of transfer in respect of all or any restricted shares, which would otherwise be given effect, pursuant to a sale
(a) on a recognised investment exchange, or
(b) on any stock exchange outside the United Kingdom on which the Company's shares are normally dealt, or
(c) on the acceptance of a takeover offer…
to a party not connected with the member holding such restricted shares… then all the restrictions imposed on such restricted shares shall cease to apply with effect from the date on which any such transfer as aforesaid is received by the Company for registration…"
- I have not been persuaded that the purposes of restrictions imposed under Article 42 should be more narrowly confined than those which I have identified as arising under Part 22. While I acknowledge the difference in language, I have two reasons for concluding that restrictions under Article 42 exist for substantially the same purposes as under Part 22. The first arises from the close interconnection between the two regimes. If, as I think, a secondary purpose of restrictions under Part 22 is to protect the company from being kept in the dark pending the provision of the specified information, it seems to me most unlikely that those framing Article 42 devised it for purposes which excluded the provision of that protection. Secondly, Article 42(4) contemplates that, even before the provision of the relevant information, the restrictions may properly be removed once the relevant shares have been transferred by the defaulter to an unconnected third party. It is in my view a fair inference that in such circumstances the need for continued protection is to be treated as having evaporated. Mr. Mabb submitted that this part of Article 42(4) was inserted merely because the Stock Exchange Listing Rules required it, for the purposes of maintaining a properly liquid market in a listed company's shares. That may be so, but the fact that its inclusion is compulsory does not in my view deprive it of relevance in ascertaining the purposes of the power to impose restrictions.
- Although I have, as explained, identified a slightly wider protective purpose behind the power to impose restrictions than that described by the judge, I agree with him nonetheless that the protection thereby intended to be afforded to the company and its shareholders, pending the provision of full information is only protection against disadvantages constituted by being kept in the dark, rather than protection from predators generally. Thus for example, restrictions might properly be imposed for the purpose of preventing defaulters from voting, where the purpose was limited to ensuring that other shareholders were not disabled from deciding how best to exercise their voting rights due to being wrongly kept in the dark. But if the purpose of the restrictions was to disable the defaulters from exercising rights as a more-than-25% minority to block special resolutions designed to confer additional powers on the Board beyond those already set out in the Articles of Association, and where the voting rights of all the other shareholders would be insufficient to pass those resolutions, regardless of whether they were being kept in some respects in the dark, then that would not fall within the modestly extended protective purposes which I have identified.
- I have thus far dealt with the first three of JKX's submissions on this issue. I reject the first, namely that there is no purposive restriction on the exercise of the relevant power, and the second, namely that the obligation to act bona fide in the interests of the company under section 172 is a sufficient guarantee of the proper fiduciary exercise of the power. I have partially accepted the third, in the sense that I have identified a limited protective purpose behind the power to seek or impose restrictions both under Part 22 and Article 42, beyond that identified by the judge. The remaining questions are first, whether the actual purposes of the directors, as identified by the judge, fell within the limited protective purposes which I have identified and secondly, if the predominant purpose of the directors fell outside it, whether their subsidiary purpose or wish to obtain the requested information saves the exercise of the power to impose the Restrictions from invalidity. I would answer no to both questions.
- As for the first, the judge was careful in paragraph 189 of his judgment (quoted in full above) to distinguish what he found to be the directors' predominant purpose from any more limited desire to protect the company and its shareholders from the consequences of being kept in the dark. He said:
"While they may (and in all probability actually did) appreciate that the restrictions would have to be lifted if the information was provided, they did not regard the ability to impose restrictions as being one designed to protect the company pending the provision of information; they regarded it as one which they could use, and actually did use, to get an advantage (the opportunity to pass the resolutions) for its own sake, not linked to the extraction of information."
- That finding of fact is not itself challenged on this appeal and is, in my view, fatal to any attempt to squeeze the directors' predominant purpose within the slightly larger ambit of permissible purposes which I have identified, by comparison with the purposes identified by the judge.
- The second and final issue is a pure question of law. It is not dissimilar from an issue raised at a late stage of the trial, namely whether, if the directors had not had their predominant intention, they would nonetheless have imposed the Restrictions for a proper purpose, so that the existence of their improper predominant purpose made no difference. The question was raised by the judge during closing submissions, and an affirmative answer proposed by Mr. Swainston for JKX.
- In the form which the point then took, it was partly factual and partly legal, since it required (or at least permitted) an examination of the directors' thinking about what they might have done had they not acted predominantly for the improper purpose identified by the judge. In the end, the judge decided on grounds of procedural fairness that it would be wrong for him to deal with the point, because it had neither been pleaded nor proved in evidence, nor tested by cross-examination. He did so with obvious reluctance (see paragraph 232 of the judgment) because he thought it probable, after full forensic examination, that he would have concluded that the directors would indeed have imposed the Restrictions in those circumstances. Nonetheless he set out provisional brief conclusions, based on the evidence which he had heard, in case the matter went further. They include his finding, at paragraph 236(i), that the directors had a genuine desire to obtain the information which had been withheld.
- There has been no appeal against the judge's decision that this point could not fairly be pursued by JKX, and it has not been resurrected on appeal in the form described by the judge. The issue now pursued is a slightly different one, namely, given an improper predominant purpose, is the exercise of the power nonetheless validated by the existence, side-by-side with it, of a subordinate but proper purpose, or desire, to obtain the relevant information?
- In my judgment, where a fiduciary power is exercised predominantly for an improper purpose, it is not, without more, saved from invalidity by the existence, at the same time, of a subordinate proper purpose. I say 'without more' deliberately because, as the judge noted in his summary of the possible legal consequences of the point which he did not allow to be taken, where it could be shown that, had the fiduciary or other decision maker not been actuated by an improper purpose or irrelevant consideration, the court may occasionally uphold the exercise of the power or impugned decision if it is obvious that, in those circumstances, it would have been exercised or decided in the same way in any event: see paragraphs 240-243 of the judgment. But the factual predicate for that analysis is missing. The directors were primarily actuated by an improper purpose, and there is no evidence properly available to show that, but for that, they would have still made the same decision.
- The requirement that fiduciary powers are exercised only for proper purposes is one of the equitable tools by which the courts enforce proper conduct by trustees and other persons in a fiduciary position. In that respect the requirement is similar to that which the courts impose on decision-makers, where proof that irrelevant matters were taken into account will generally lead to the quashing of the decision, even if it was also based upon an appraisal of relevant matters. Section 171 of the 2006 Act neatly expresses the rigour of the principle by providing that a director must "only" exercise powers for the purposes for which they are conferred. It is for that same reason that, in general, the exercise of a fiduciary power for reasons which are even in part based on the trustee's self-interest will be voidable, even if the trustee was actuated by other legitimate considerations. It is only if the benefit to the trustee from the exercise of the power is merely incidental, and forms no part of the trustee's purposes, that the exercise of it will be upheld: see generally Lewin (op. cit.) at paragraph 29-259.
- Mr. Swainston submitted that it would be wrong for the court to visit upon busy commercial directors the full rigour and potential intricacy of the analysis of their purposes for making important business decisions, by a mindless application of rules designed for the enforcement of proper conduct by trustees. If by that colourful submission he meant that the rule that fiduciary powers should only be exercised for proper purposes should not be firmly applied to directors, I disagree. In Howard Smith v Ampol, Lord Wilberforce recognised in the passage cited above that the general equitable principle is applied to directors with less nicety than when applied to the exercise of a power of appointment by trustees. But it is applied nonetheless, and he said that the court had to examine "the substantial purpose for which the power was exercised", and then search for a "fairly broad line", between what is and is not a proper exercise of the power. In my view the requirement to examine the substantial purpose for the exercise of the power leaves no room for the validation of its exercise where a predominant improper purpose is accompanied by a subordinate proper one.
- I would be surprised if directors of a public company, properly advised, would find it difficult to identify a fairly broad line of distinction between disenfranchising a group of shareholders for the purpose of obtaining a short-term window of opportunity to pass special resolutions which the group could otherwise easily have blocked (and had blocked for the previous three years), and doing so for the purpose of enforcing the provision of information, and protecting the company from disadvantages arising purely from being kept in the dark in the meantime.
- Furthermore, I consider it important that the court should uphold the proper purpose principle in relation to the exercise of fiduciary powers by directors, all the more so where the power is capable of affecting, or interfering with, the constitutional balance between shareholders and directors, and between particular groups of shareholders. The temptation upon directors, anxious to protect their company from what they regard as the adverse consequences of a course of action proposed by shareholders, to interfere in that way, whether by the issue of shares to their supporters, or by disenfranchisement of their opponents' shares, may be very hard to resist, unless the consequences of improprieties of that kind are clearly laid down and adhered to by the court. Those were precisely the temptations to which the directors succumbed in Howard Smith v Ampol and in Hogg v Cramphorn, and in both cases they were motivated by their bona fide perception of the company's best interests.
- The judge found that, in the present case, the directors of JKX succumbed to exactly the same temptation. It would do no service to the maintenance of constitutional corporate governance for this court to water down the healthy principle that directors' fiduciary powers must only be exercised for proper purposes. To do so on the ground that the disenfranchised shareholders were controlled by raiders from whom the directors were understandably, and commendably, concerned to protect the company would in my view (although my Lords disagree) be to make bad law out of a hard case.
- I have since preparing this judgment in draft anxiously considered the reasons for my Lords' contrary view on this issue, set out in the judgment of Sir Robin Jacob which I have read in draft. In bare outline they conclude that the proper purpose doctrine, and the authorities which explain and apply it, have no significant application to the directors' power to disenfranchise shareholders, either under Article 42 or under Part 22 of the 2006 Act, because (1) the defaulting shareholders have a choice to avoid that consequence by full disclosure, (2) to conclude otherwise would emasculate a salutary sanction for shareholder misconduct, and (3) the statutory power is not expressly so circumscribed, either in the Articles or in statute. I have not been able to persuade myself that, separately or together, those reasons justify the conclusion at which my Lords arrive. I shall very briefly explain why.
- Taking those reasons in reverse order, none of the fiduciary powers with which authorities like Howard Smith v Ampol and Hogg v Cramphorn were concerned had express purposive restrictions attached to them. It was sufficient to justify a careful purposive analysis that they were fiduciary powers and that their exercise could impact upon the constitutional rights and powers of the shareholders.
- I do not with respect agree that the recognition of a limited proper purpose for the exercise of the power to disenfranchise shareholders for non-disclosure would be to emasculate it. Provided that the sanction is genuinely imposed for the purpose of compelling the production of the requested information, and for protecting the company from being kept in the dark in the meantime, it may be exercised with speed, determination and vigour. Neither Part 22 nor Article 42 makes special provision where the failure to make full disclosure is dishonest or even deliberate. Information provided may be false or materially incorrect due to carelessness as much as to a desire to deceive, yet the same power to disenfranchise exists in both situations.
- I agree that the ability of shareholders to avoid disenfranchisement by making full and accurate disclosure is a significant factual basis for distinguishing this case from both Howard Smith v Ampol and Hogg v Cramphorn, and that it may be said to mitigate the consequences of an approach that treats the proper purpose doctrine as inapplicable. But in my view the proper purpose doctrine derives from the fact that the power is fiduciary, and that its exercise can have a draconian effect upon shareholders' rights, and upon the constitutional balance between the powers of the shareholders and the powers of the Board. The fact that in many cases the defaulting shareholders may be said to have only themselves to blame does not seem to me to be a principled reason for treating the exercise of a fiduciary power as free from the proper purpose doctrine. It would be extraordinary for example if directors could take deliberate advantage of a careless lapse by a (say) 51% shareholder to make complete disclosure, to disenfranchise him and, before he had time to address a deficiency in disclosure, to push through a pre-planned re-arrangement of the company's affairs with the unopposed assistance of the 49% in a manner which the disenfranchised majority could not thereafter undo. Suppose that, in the present case, the defaulting shareholders' disclosure failure had been careless rather than deliberate. If the power to disenfranchise was validly exercised, those shareholders will permanently have been disabled from preventing important changes to JKX's constitution requiring a 75% majority which, but for disenfranchisement, they had a right to prevent, regardless whether the proposed changes were beneficial to the company.
- For those reasons I would have dismissed the appeal against the judge's finding that the Restrictions were vitiated by an improper purpose.
- It follows from this perhaps over-long analysis that I would have dismissed all the appeals, and have left the judge's decision wholly undisturbed. But since my Lords have reached the opposite conclusion in relation to the proper purpose issue, the appeals by JKX must be allowed. We are all agreed that the cross appeals should be dismissed.
Sir Robin Jacob and Lord Justice Longmore :
- This is the joint judgment of myself and Longmore LJ to which we have each contributed.
- We agree with, and have nothing to add to, the judgments of Briggs LJ and Mann J on all points save for that labelled "improper purpose".
- The "improper purpose point" is this: if directors of a public company are entitled under the Articles of the company to require a person interested in the company's shares to state the nature of his interest and whether he is a party to an agreement or arrangement relating to the exercise of any rights conferred by the holding of the shares and they are further entitled, in the event that they know or have reasonable cause to believe that the statements given in response are incorrect, to determine that the shareholder is not entitled to attend or vote at any general meeting of the company, is it material to the validity of such a determination that the purpose of the directors in making that restriction is to prevent the member voting at the meeting rather than, for example, to protect the interests of the company or to elicit information which is in fact truthful?
- We begin by observing that we think a "yes" answer would be surprising. The Eclairs and Glengary camps will successfully have evaded their duties to give proper answers to the disclosure notices, escaping with answers which the Board had reasonable grounds to believe were false or materially incorrect. Stripping away the detail, the questions were to find out what the mutual plans of the two camps were – the very sort of thing that the Board of any well-run public company ought to be able to find out, which shareholders would want to know, and which the policy behind Art 42 of the Company's Articles and Part 22 of the 2006 Act – transparency – is aimed at.
- It is of course true that the Board's primary motive in sending the disclosure notices (a motive which was not the subject of specific challenge though as Briggs LJ noted in argument it might have been) was, almost certainly, to be able to impose restriction orders later. For it would be unrealistic to think that the Board's motives were any different at the earlier time of the notices as opposed to the time of the orders themselves – or that the Board actually expected full and complete answers from those they strongly suspected were planning a raid.
- But what the Board could not control was what the recipients would actually answer. The choice of providing full and correct answers to a disclosure notice lies with the recipient not the sender.
- This makes all the difference. In all the cases to which we were referred such as Howard Smith v Ampol and Hogg v Cramphorn about the improper uses of the powers of a board of directors, the victims had no choice. The purported powers exercised by the boards concerned were on their face unilateral powers. By contrast the "victim" of a restriction notice can readily prevent it by providing full and correct answers before it is imposed. And even where a restriction notice is imposed the "victim" can undo its effect by telling the truth, as indeed the restriction notices in this case positively invited the "victims" to do. So a party who chooses not to answer the questions properly is a victim of his own choice, not a victim of any improper use of a power of the board of directors. We see no reason why such a party should thereafter be able to complain. Why should the law protect him when all he had to do was to tell the truth?
- None of the cases relied upon by Mr Mabb (particularly Howard Smith and Hogg) involved deceitful conduct by the "victim" and in all those cases the parties knew what the others were up to. We understand, of course, that directors should not be permitted to use their powers to stage a constitutional coup or to subvert the company's constitution. In the present case, however, the directors' power to impose restrictions on voting if a shareholder provides information which they have reasonable cause to believe is false is itself part of the current constitutional structure of the company. To hold that the power is limited at the choice of the "victim" would be to subvert that very constitution.
- So we think the misuse of power doctrine has no significant place in the operation of Art 42 or Part 22 of the 2006 Act. It might conceivably apply to cases where a board had not given the party a proper opportunity to answer (e.g. not enough time as in Re Lonrho Plc (No. 2) or perhaps set questions which could not really be answered). Even then however the better solution would be to hold that the purported notices were simply invalid as not being notices within the meaning of the 2006 Act or Article concerned. Be that as it may, where the questions were fairly asked and the victim could have answered them, it is the victim's own choice which results in disenfranchisement.
- We think the whole point of the ability of the directors to restrict the voting rights of a shareholder is to prevent him being able to vote at a general meeting. This ability is not just a sanction applicable if information is not provided but a sanction applicable if the Board of directors "knows or has reasonable cause to believe that the information provided is false or materially incorrect". Indeed Article 42(1)(j) says in terms that information which the Board knows or has reasonable cause to believe is false or materially incorrect is to be treated as not having been received by the Company. So in a very real sense the sanction is intended to be a sanction for the failure to provide the requested information. Thus in a case where there is a blanket refusal to provide information any restriction will remain in place see Gower Principles of Modern Company Law (9th ed. 2012) page 1072 note 183. In the light of the wording of the Article, the position must be the same, if Article 42(1)(j) is applicable.
- We do not think Re Ricardo is contrary to this view. There the relevant information had been provided by the time Millett J was asked to maintain the voting restriction on the shares concerned. Not surprisingly he refused to do so. It was in that context that he said that the only legitimate purpose of a restriction order was to coerce a recalcitrant respondent into providing the requisite information. He did not have to consider what the position would be if the information provided was information which the directors knew or had reasonable cause to believe was false or materially incorrect. It cannot, in our judgment, be the case that, if false or incomplete information is provided, the restriction cannot be imposed or maintained.
- Consideration of the 2006 Act, upon which Art 42 is clearly based, leads to the same conclusion. The 2006 Act does not specify that the sanction of restrictions on voting can only be imposed for any particular purpose. We find it difficult to believe that Parliament intended a detailed inquiry into the minds of the directors of a company to be undertaken before the sanction can be imposed. Section 800(3) of the 2006 Act make clear that, once imposed, the sanction cannot be released except in the circumstances there specified. Absence of dominant purpose of obtaining the information is not there specified. If all (or a majority of directors) have to give evidence of their dominant purpose in imposing the relevant sanction and be prepared to submit to cross-examination, it is difficult to see how section 793 of the 2006 Act can function in what may often be a rapidly changing scene. It is much more likely that Parliament intended that the relevant sanction be imposed (and remain imposed) while no or incorrect information is given.
- This construction moreover gives substance to the 2006 Act or an article such as Art 42. For in reality it is precisely the circumstances of this sort of case where the section (or an article such as Art 42) is most likely to be invoked. A board of directors will not normally send out a disclosure notice unless it has cause to think that the recipients are up to something subversive but secret. And the most probable timing for such a notice will be when some controversial resolutions are pending or likely to be so shortly. In that most likely of scenarios it is also very likely that the board would not only like the recipients to be disenfranchised but have that as its predominant motive. The result is that if the predominant motive test applies the provisions would be unlikely to have any or much application: they would be emasculated.
- We think that any other construction of the section (or in this case JKX's Articles) would only be an encouragement to deceitful conduct and not something which English company law should countenance.
- We would therefore allow JKX's appeals and dismiss all cross-appeals.