Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71

Facts

• JKX Oil & Gas plc received requisition notices from Eclairs Group Ltd and Glengary Overseas Ltd, minority shareholders holding over 30% of JKX shares, requesting a general meeting to remove certain directors and appoint replacements.
• The JKX board suspected these shareholders aimed to gain control of the company without paying a premium.
• JKX directors issued restriction notices under Article 42 of the company's Articles of Association, preventing Eclairs and Glengary from voting at the meeting after the shareholders did not respond to requests for information under section 793 of the Companies Act 2006.
• The restriction notices were based on concerns about the shareholders’ intentions and their failure to supply requested details.
• The shareholders challenged the directors’ use of restriction notices, leading to litigation on whether the directors’ actions were for a proper purpose.

Issues

1. Whether the JKX directors’ issuance of restriction notices under Article 42 complied with the proper purpose rule.
2. Whether directors may use their powers primarily to affect the outcome of shareholder votes, rather than for the purposes those powers were originally granted.
3. What tests are appropriate for determining directors’ purposes and motives under the proper purpose rule.
4. How director discretion should be balanced against shareholder rights in the context of corporate governance.

Decision

• The Supreme Court held that the directors had acted for an improper purpose by issuing restriction notices with the primary aim of preventing certain shareholders from voting.
• The Court affirmed a two-step approach: first, identify the intended purpose of the relevant power; second, determine the directors’ primary motive for exercising it.
• The rationale actually motivating the directors, rather than their formal justification, is determinative.
• Directors may not use powers conferred for information-gathering purposes to block shareholder voting rights because they disagree with the shareholders’ objectives.
• The restriction notices were invalid as they were aimed at influencing the outcome of the vote.

Legal Principles

• Directors must exercise powers only for the specific purposes for which those powers were conferred (the proper purpose rule).
• The proper purpose test involves (1) identifying the intended purpose of the relevant power, and (2) assessing the directors’ main reason for its use.
• The substance of directors’ motives is more important than the form or stated justification.
• Directors’ powers must not be used to disrupt shareholder rights or to prevent shareholder resolutions they disapprove of.
• There must be a careful balance between director authority and the fundamental rights of shareholders, particularly regarding voting and board changes.

Conclusion

The Supreme Court decision in Eclairs Group Ltd v JKX Oil & Gas plc clarified the scope and application of the proper purpose rule in UK company law, ruling that directors cannot use their powers to control shareholder votes unless acting within their proper intended purposes, thereby reinforcing shareholder rights and setting clear standards for board conduct in corporate governance.