Case Preview: Glengary Overseas Ltd v JKX Oil & Gas Plc
10 Wednesday Jun 2015
This case concerns the operation of Part 22 of the Companies Act 2006 and the provision under section 793 that gives public companies the power to serve a notice to obtain information from a person interested in shares in a company.
JKX Oil & Gas plc is an English public company involved in the development and exploitation of oil and gas reserves in Ukraine and Russia. Eclairs Group Limited and Glengary Overseas Ltd, together, hold 39% of the JKX’s issued share capital.
Around March 2013, the board of JKX became aware of suspicious behaviour by Glengary and Eclairs. For example, in March 2013, JKX were notified that one of its shareholders, Ralkon Commercial Ltd, had transferred its shareholding to another entity. It was subsequently found out that the shares had been transferred to Eclairs. In the same month, Eclairs sent a letter to JKX demanding an extraordinary general meeting be held. Eclairs proposed resolutions seeking the removal of Dr Paul Davies as CEO and Mr Peter Dixon as Commercial Director and the appointment of three alternate directors, one of whom was Mr Ratskkevych who, unbeknownst to JKX, was one of the beneficial owners of Glengary.
These events, amongst others, led to suspicions that Eclairs and Glengary had an arrangement whereby they would combine their minority shareholdings to ensure they had voting control. This control could then be used to acquire the company without paying a premium for the remaining shares. In other words, they were planning a corporate ‘raid’ on JKX.
In response, JKX issued disclosure notices in March 2013 said to be made under section 793 CA requesting the disclosure of information in relation to the number of shares held, the beneficial interests held and the relationship and any arrangement between the two shareholders. Eclairs and Glengary responded to the notices denying that there were any arrangements between them. The responses also revealed that Mr Ratskevych, a director of Eclairs, also held 5% of the shares in Glengarry. At a board meeting on 30 May 2013, JKX issued restriction notices under Article 42(2) of the company’s articles of association preventing Glengary and Eclairs from exercising their right to vote at the upcoming AGM and from transferring their shareholdings.
Eclairs and Glengary challenged the restrictions in the High Court before Mann J who ruled that the disclosure notices were valid and that the directors of JKX had reasonable cause to believe that the answers provided by the shareholders were materially incorrect. Crucially however, Mann J ruled that the restrictions were invalid because the dominant purpose for the restrictions was to ensure the passing of the ordinary and special resolutions at the forthcoming AGM and not to obtain information about beneficial ownership of the restricted shares. The High Court accordingly set aside the board resolutions and restriction notices.
Court of Appeal
Overturning the High Court’s decision by a 2-1 majority, the Court of Appeal (per Longmore LJ and Sir Robin Jacob) held that the restrictions issued by JKX were valid and had not been imposed for an ‘improper purpose’. They gave three reasons for their conclusion:
- No misuse of power
Eclairs and Glengary sought to rely on the case of Howard Smith Ltd v Ampol Petroleum Ltd  AC 821 where it was held that the board had used their power for an improper purpose. Longmore LJ and Sir Robin Jacob distinguished the restrictions issued in the present case as these were conditional on the conduct of the respondent rather than there being a unilateral power to issue restrictions. Glengary and Eclairs had failed to provide valid information to JKX and thus there had been no misuse of power in preventing the two shareholders from attending and voting on resolutions at the AGM or transferring their shareholdings.
- Sanction should be for the failure to provide valid information
Longmore LJ and Sir Robin Jacob argued that the whole point of restricting shares is to sanction those who fail to provide the information requested. In re Ricardo Group plc  BCLC 566, Millett J said ‘the only legitimate purpose of a restriction order is to coerce a recalcitrant respondent into providing the requisite information’. Consequently, where shareholders have failed to provide information when requested to do so, there would be no reason to lift any restrictions attached to their shares.
- No dominant motive test
Longmore LLJ and Sir Robin Jacob dismissed the dominant purpose test. They argued that a disclosure notice is likely to be sent out when controversial resolutions are about to be voted on. Accordingly, the dominant purpose is most likely to be to disenfranchise the shareholders who have failed to respond to a disclosure notice. Therefore, if restrictions could only be imposed where the dominant purpose is to obtain information, section 793 and Article 42 would be rendered useless.
Consequently, the twelve resolutions voted on at the AGM including the re-election of the CEO and the allotment of approximately £5.7m of share capital were deemed passed.
The appeal was heard by Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge on 18 May 2015. The only issue to come before the Supreme Court was whether the purpose for imposing the restrictions was improper. The judgment will provide clarification on how the doctrine of proper purpose should operate.