Section 793 notices: a reminder for boards

22nd January 2016

Section 793 of the Companies Act 2006 provides that a company may issue a notice to any person whom it knows, or has reasonable cause to believe, to be interested in its shares or to have been so interested at any time in the preceding three years.

The notice may require the recipient:

• to confirm or state whether or not he does or did have an interest in the company’s shares
• if he holds or has held an interest in the company’s shares, to provide certain specified information as set out in sections 793(3) to 793(6).

In Eclairs Group Ltd v JKX Oil & Gas plc [1], JKX (the Company) served a section 793 notice on Eclairs, whom it suspected of attempting to destabilise the company with a view to acquiring it at less than market value.

The Company’s articles of association, as is commonly the case with quoted companies, provided that the board could impose restrictions on rights attached to shares if it had “reasonable cause to believe” that a particular state of affairs existed, having considered the responses to the section 793 notice. The board considered Eclairs’ response to the section 793 notice to be materially inaccurate and accordingly served it with a restriction notice pursuant to the articles. The effect of this was to prevent Eclairs voting at the forthcoming annual general meeting.

The issue before the Supreme Court was whether the imposition of the restrictions on the rights attaching to the shares was improper and should be set aside.

The Supreme Court held that the “proper purpose rule” is not something derived from a company’s articles of association – which are a contract between the members – but is a legal principle imposing limits on the power of someone in a fiduciary position, like directors. There does not have to be any stipulation in the articles that the directors will only exercise their power for a proper purpose for the rule to apply.

The Court went on to say that the power to impose restrictions is wholly ancillary to the power to call for information under section 793.Its purpose is to provide a sanction or incentive to remedy a failure to comply with a disclosure notice. Its purpose does not extend to influencing the outcome of resolutions at a general meeting.

The Supreme Court referred to previous cases in which a board of directors had wrongly exercised its powers in order to retain control of the company. This was another such case. It was understandable that a board would wish to have potential predators disenfranchised but that was not a proper exercise of a board’s powers. It was immaterial that the restrictions could have been lifted by the potential predator supplying the information requested as the imposition of the restrictions was still an abuse.

WM comment

The decision is a reminder of the need for boards to ensure that they exercise their powers for a proper purpose, something which may be assisted with properly drafted minutes.

Cases on section 793 are infrequent and the decision will disappoint quoted companies that may need to rely on it and the accompanying power to serve a restriction notice that is likely to be in their articles. Section 793 notices are often issued where there is a suspicion of predatory behaviour by a shareholder and the line between wishing to elicit satisfactory responses to a section 793 notice and to prevent a raid may be a very thin one indeed.

_____________________

[1] [2015] UKSC 71