Introduction
The Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 case altered how directors' duties and powers are understood, focusing on the proper purpose rule. This rule requires directors to use powers only for the reasons they were granted. The Supreme Court clarified how this rule applies when directors act to affect shareholder resolutions. The judgment sets out key tests for assessing directors' motives and offers practical guidance on balancing board authority with shareholder rights. This decision continues to influence corporate governance in the UK.
The Facts of the Case
JKX Oil & Gas plc received requisition notices from Eclairs Group Ltd and Glengary Overseas Ltd, minority shareholders holding over 30% of JKX shares. These notices asked for a general meeting to remove certain directors and appoint replacements. The JKX directors, thinking the shareholders sought control without paying a premium, issued restriction notices under Article 42 of JKX's Articles of Association. These notices blocked Eclairs and Glengary from voting at the meeting, citing concerns about the shareholders’ goals after unanswered requests for details under section 793 of the Companies Act 2006.
The Proper Purpose Rule: Interpretation and Application
The Supreme Court reviewed whether the directors’ actions complied with the proper purpose rule. The Court affirmed directors must use powers only for their original purposes. Lord Sumption outlined a two-step test: (1) identify the power’s intended purpose, and (2) determine the directors’ primary reason for using it. If the primary reason falls outside the power’s intended scope, the action is invalid.
Director Motives: A Matter of Substance, Not Form
The Court stressed that the actual reason behind directors’ actions holds more weight than their stated justifications. It concluded the JKX directors’ main goal in issuing restriction notices was to stop shareholders from voting, not to gather details. Using Article 42 to sway the vote’s outcome was deemed improper.
Shareholder Rights and Director Discretion: Balancing Interests
The judgment highlights the need to balance director authority with shareholder rights. While directors manage daily operations, they cannot use their powers to block shareholder resolutions they oppose. The ruling affirms shareholders’ rights to vote on key matters, such as changes to the board.
Implications for Corporate Governance
Eclairs v JKX clarified the boundaries of director power, emphasizing the need to follow proper purposes. It warns against using powers to interfere with shareholder votes. Boards must now act cautiously when decisions affect voting rights. Companies should draft articles of association to specify director powers clearly.
Conclusion
The Eclairs v JKX decision advanced company law by explaining the proper purpose rule. The Supreme Court ruled directors cannot use powers intended for other purposes to control shareholder votes. This strengthens shareholder rights while respecting directors’ role in management. The judgment remains a key reference for corporate governance, supporting transparency and accountability. It provides a straightforward method for assessing director actions, ensuring powers are used as intended. The principles from this case will continue to shape UK company law and governance practices.
