Supreme Court: Corporate Raids and the Proper Purpose Rule

Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71 (2 December 2015)

In a judgment which may at first blush appear to be unremarkable, Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge held that the proper purpose rule applied to the exercise of the power conferred on the board – allowing it to issue a “restriction notice” whenever a statutory disclosure notice had been issued and had not been complied with – under article 42 of JKX’s articles of association and that the company’s directors acted for an improper purpose. Notably, section 793 of the Companies Act 2006 provides a public company the power to issue a statutory disclosure notice to any person whom it knows or reasonably believes to be interested in its shares. According to the Supreme Court, in circumstances where a company’s board of directors was entitled under the company’s articles of association to issue a disclosure notice against a shareholder and where the board was further entitled – in the event that they knew or had reasonable cause to believe that the statements given in response were incorrect – to restrict the shareholder’s right to attend or vote at any general meeting of the company, any such restriction would be invalid if the board’s purpose in making the restriction had been to prevent the shareholder voting at the meeting.

Lord Sumption gave the main judgment and Lord Hodge agreed with him. Lord Mance and Lord Neuberger agreed that the appeals should be allowed, but they preferred to not to express a view on aspects of the reasoning. Moreover, Lord Clarke agreed, but expressed a preference to defer a final conclusion on those aspects until they arise for decision and have been fully argued. Prior to this decision, the case had been reported in the Court of Appeal as [2014] Bus LR 835 and in the High Court as [2014] Bus LR 18. JKX Oil & Gas Plc, an English company listed on the London Stock Exchange, was the parent company of a group involved the development and exploitation of oil and gas reserves, primarily in Russia and the Ukraine. From that perspective, Lord Sumption used the opportunity to apply his unrivalled expertise on both company law and Russia to the present case. The exercise of a discretionary power by directors tends to be challenged on the ground that it does not promote the success of the company, a subjective question as regards the company’s business interests.

Directors’ remuneration: proposed amendment regulations

Lucian Bebchuck and Jesse Fried’s seminal study Pay without Performance: The Unfulfilled Promise of Executive Compensation and similar critiques have killed stone-cold the argument that arm’s-length contracting works: the argument has not been resurrected and it is widely accepted that in the corporate sector pay remains decoupled from performance. For Bebchuck and Fried – both professors of corporate law at Harvard University – management can easily manipulate directors and, rather than creating value for the company, everyone is more interested in personal gain at the cost of the company.

From this perspective “market forces are neither sufficiently finely tuned nor sufficiently powerful to compel” the conventional view of corporate governance which assumes that executives will be rewarded for performance and not failure. It is therefore not surprising that in order to win voters’ support, governments everywhere in Europe are making promises to reform the dynamics of the pay and power equation.

The Secretary of State for Business Innovation and Skills (Mr Vince Cable, “the business secretary”) is keen to be seen as a promoter change in the business world and is hence proposing reform which strengthens shareholder democracy and promote the public interest.

Incorporation in Pakistan: Part 1

This is an international corporate law site edited by an advocate of the High Court of Sindh, Pakistan. Therefore, as someone involved in producing this site, I am taking the opportunity to set things in motion by posting on Pakistani company law which is governed by the Companies Ordinance 1984 (the “Ordinance”). Compliance with the Ordinance is regulated by the Security and Exchange Commission of Pakistan (“SECP” or the “Commission”) which was established under the Securities and Exchange Commission Act 1997. 

SECP became operational in 1999 and it replaced the older Company Law Division. SECP’s central office is located in the federal capital Islamabad and the Commission also operates company registration offices (“CROs”) in other cities such as Karachi, Lahore, Quetta, Peshawar, Multan, Faisalabad and Sukkur. The SECP is divided into seven divisions and for business and financial law purposes the relevant sections are the (i) company law division; (ii) securities market division; (iii) specialised companies division; and (iv) insurance division.