Restrictions on Beneficial Shareholders: an improper purpose?

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The corporate and commercial Bahamas law firm ParrisWhittaker regularly advises companies and shareholders on their rights and obligations in law and under Articles of Association. Following a recent case, the Court of Appeal in London, considered whether directors’ powers to impose restrictions on the beneficial shareholders were used for an improper purpose. What is the law? The legal system in The Bahamas is based on English common law, supplemented by local laws including the International Business Companies Act 2000. UK court rulings are important in terms of how the law is to be interpreted and we watch particularly closely how the Appeal Court interprets the law. At issue in this case was whether the directors’ powers to impose restrictions on the beneficial shareholders under statute and under the articles of association were used for an improper purpose.

The corporate and commercial Bahamas law firm ParrisWhittaker regularly advises companies and shareholders on their rights and obligations in law and under Articles of Association. 

Following a recent case, the Court of Appeal in London¹, considered whether directors’ powers to impose restrictions on the beneficial shareholders were used for an improper purpose. 

What is the law?

The legal system in The Bahamas is based on English common law, supplemented by local laws including the International Business Companies Act 2000. UK court rulings are important in terms of how the law is to be interpreted and we watch particularly closely how the Appeal Court interprets the law.

At issue in this case was whether the directors’ powers to impose restrictions on the beneficial shareholders under statute and under the articles of association were used for an improper purpose.

What was the case about?

The board of a UK public company, JKX Oil & Gas PLC, feared the company was being ‘raided’ by two connected shareholders who wanted to replace senior management and frustrate a fundraising by the company with the goal of acquiring the company at less than its fair value. 

The board therefore served a number of notices under the UK’s Companies Act 2006 and the Articles of Association requesting disclosure of information about the interests in the Shareholders’ shares.  The board was not satisfied with the responses which it believed were materially inaccurate, and therefore imposed restrictions preventing the voting and transfer of the Shareholders’ shares – effectively disenfranchising the Shareholders at the forthcoming AGM.

The Shareholders successfully applied to the High Court for interim relief before the AGM.  The court held that the board exercised its power primarily to stop the Shareholders from exercising their voting rights and this was an improper purpose.

The Court of Appeal disagreed: the High Court judge was wrong in holding that the restrictions were defective for improper purpose. It found that the Shareholders were the victims of their own failure to respond properly to the notices.

What does ruling mean?

The meaning and scope of the ‘proper purpose’ has been clarified in relation to assessing the validity of such notices requesting information about the interests in the shareholders’ shares.  The ruling effectively widens the scope, so that where a board has reason to doubt the veracity or accuracy of a response to the notice, this may be sufficient reason for the company to then disenfranchise the shareholder/s receiving the notice. 

An appeal to the UK’s Supreme Court looks likely and we will be watching to see the outcome of any appeal and what it means for companies and beneficial shareholders.

How can we help!

If your company has concerns about any beneficial shareholders, for instance if their intentions are questionable, contact the expert company lawyers at ParrisWhittaker for urgent assistance before taking further action.  We have years of commercial litigation experience in the corporate context and we can give you strategic advice and representation to protect your company’s interests.

Contact us now. 

^{1Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2014] EWCA Civ 640}