A fight between directors and shareholders over control of JKX Oil & Gas Plc has made it to court. The Claimants were significant beneficial shareholders in JKX. The Directors of JKX believed that the company was being subjected to a corporate raid by the Ukrainian businessmen controlling the Claimants who, they believed were trying to obtain a controlling interest (at less than the market rate) by destabilising the current management and frustrating the company’s attempts to raise capital.
The directors sought (in the interests of the company) to pass special resolutions at the AGM to allow them to raise much needed additional capital. However, they expected the claimants to vote against the resolutions as part of their scheme to acquire the company. In order to prevent such adverse votes they came up with a plan to exclude the claimants from voting. This involved serving Companies Act s.793 notices on the Claimants in order to force them to disclose the nature of their interest in JKX and the nature of any agreements between them and other shareholders in the company. When the responses came in, the directors deemed them to be materially inaccurate and in accordance with JKX’s articles imposed restrictions on the voting rights of the shareholders, preventing the Claimants from voting against the vital capital raising resolutions at the AGM.
A good plan in theory, but the Claimants were not going to be easily beaten. They issued proceedings challenging the directors’ use of the restrictions and applied for and obtained an interim injunction preventing the company from passing the capital raising resolutions until the case was heard. The Claimants claimed, amongst other things, that the restrictions on their voting rights had been exercised for an improper purpose. They claimed that the purpose behind the power to restrict voting rights was to incentivise the recipients of s793 notices to provide accurate information. However, the true purpose behind the directors imposing the restrictions was to thwart the efforts of the raiders and pass the resolutions at the AGM in order to obtain capital for the company.
The Court agreed with the Claimants. Whilst the Court clearly had a great deal of sympathy for the directors, who were acting in the best interests of the company, the directors had used their powers under the articles improperly. Consequently, the Court ordered that the restrictions on the Claimants voting rights be set aside, freeing them to opposed the resolutions.
This case demonstrates the difficulties faced by directors in ensuring they stay on the right side of the law when fighting raids. Shareholders have legal rights and can exercise them in their own interests even if that is not what the directors would consider the interests of the company as a whole to be (although there are some ways in which directors can seek the Court’s assistance to protect the company’s wider interests from raiders or rebellious shareholders). If shareholders abuse their rights to act in their own interests to the detriment of other shareholders then those other shareholders may have a legal claim. However, unilateral ‘clever’ manoeuvres by the directors to achieve a similar aim, may well backfire.
The author, Paul Haggett, advises directors, companies and shareholders (individuals and corporate) on shareholding issues including minority actions and voting disputes.