Obligations of company directors

Jim Slater was a renowned corporate raider and ‘asset stripper’ of the 1960’s and 70’s, whose practices contributed to the tightening up of company law; he died in November 2015, just a few weeks before the Supreme Court’s decision was announced in the linked cases of Eclairs Group and Glengary Overseas v. JKX Oil & Gas plc and doubtless he would have smiled at some of the judgements as the case progressed through the various courts.

Eclairs Group and Glengary Overseas v JKX Oil & Gas [2015] UKSC 71 concerned the board of JKX calling for two shareholders in the publicly quoted company to disclose the beneficial owners behind their shareholdings, as it was entitled to do under section 793 of the Companies Act 2006.

It was apparent to the directors that, in the run-up to an annual general meeting (AGM), both Eclairs and Glengary were likely to vote against the re-election of certain directors and against special resolutions permitting the company to raise capital by share issues.

Since between them they held more than 25 per cent of the shares, they could effectively block a special resolution. The directors recognised that if they could contend that the shareholders had either failed to provide the information in a timely fashion or the responses were not truthful, they could utilise powers under the articles of association to prohibit these two shareholders from voting at the AGM - a classic defence against a takeover bid (as our old friend Jim Slater found more than once).

The board did not believe the response by Eclair and Glengary and consequently suspended their rights.

Advising directors

This creates issues both for directors and those advising them, and a need to be extraordinarily careful when recording any board discussions surrounding decisions of this nature. So, how should practitioners advise directors who suspect the registered shareowners are not the beneficial owners or that one or more are likely to act in concert?

It is certainly prudent for directors to seek legal advice if there is any question of why they are serving notices under section 793. They have a fiduciary obligation to the company as a whole and need to act even-handedly and objectively in exercising their powers.

Directors need to keep a watchful eye on the share register, calling for information as and when they first become aware of any suspicions about the underlying ownership or potential for concert party activity, rather than waiting until just before a general meeting to debate a prospective takeover.

Certainly they should be wary about convening a general meeting if a request for information remains outstanding, especially where the 'suspect shareholdings' might be critical in a vote or if there is any suggestion that they may be taking the side of one group of shareholders against another.

As shares may be changing hand fast and furiously once the company is identified as a target, it would be more than unfortunate if directors felt that their hands were tied from seeking such critical information about the underlying ownership of the shares in the company.

The key issue is that the power must be used only for a proper purpose and no other (i.e. in this case to ascertain honest replies to the notices seeking information and no more).

The practitioner needs to provide clear legal advice about 'proper purpose' to ensure that all the directors understand that their respective views have to be clearly expressed and recorded, demonstrating that their reasons are adequately stated and that none of them could be challenged in any way for being inappropriate.

As for Jim Slater, his financial empire collapsed but he turned to a successful second career in writing children's books and as a financial columnist for the Daily Telegraph. Had he been called as an expert witness on boardroom matters, his anecdotes would have doubtless livened up the court of first instance in this case.

Jonathan T R Silverman is senior partner of Silverman Sherliker @thelegalview www.silvermansherliker.co.uk