Eclairs Group Ltd v JKX Oil case brief

PROPER PURPOSE RULE (ECLAIRS AND HOWARD)

Eclairs Group Ltd v JKX Oil case brief summary

The directors of JKX Oil & Gas plc suspected that two shareholders were planning to destabilize the company and carry out a corporate raid. The JKX board issued disclosure notices to the shareholders requesting information about the beneficial owners of the shares that they held.

Article 42 of JKX's articles of association gave the directors the power to impose restrictions on the exercise of rights attaching to shares where there was reasonable cause to believe that the information provided was false or materially incorrect. Unsatisfied with the responses to the disclosure notices the directors resolved to issue restriction notices on Eclairs and Glengary that would suspend their voting rights.

SC held that directors' predominant purpose was the improper one of preventing the resolutions from being blocked at the AGM rather than the proper purpose of making Eclairs and Glengary produce the information requested in the disclosure notices.

Proper Purpose rule

An equitable principle. A director must only exercise powers for the purposes for which they were conferred.  Emphasized that the rule is concerned with an abuse of power rather than an excess of power; that is, acts that are within the scope of power, but which are done for an improper reason.

For ex Dale and Carrington v Prathapam - An exercise of power by the directors in the matter of allotment of shares, if made mala fide and in their own interest and not in the interest of the company, will be invalid even though the allotment may result incidentally in some benefit to the company.

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