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Company Democracy Trumps Directors’ Concerns

In a ruling which makes clear that the courts will only countenance restraints on company democracy in very restricted circumstances, the High Court has ruled that a company’s board of directors acted unlawfully when it attempted to stop certain beneficial shareholders from voting at an annual general meeting (AGM).

The directors believed that the public company was being ‘raided’ by two beneficial shareholders and feared that an attempt was being made to destabilise the company by replacing senior management and obstructing necessary fund raising processes. The directors were concerned that the beneficial shareholders’ ultimate objective was to acquire control of the company at less than its proper value.

The board, or the company’s principal executive directors, served a notice under section 793 of the Companies Act 2006 seeking disclosure of interests in shares. The board formed the view that the responses to that notice were materially inaccurate and served further notices under its articles of association which purported to prevent the beneficial shareholders from transferring their shares or voting at a forthcoming AGM.

The Court found that the section 793 notice was valid and that the board had reasonable cause to believe that it had been given inaccurate information. However, in upholding the beneficial shareholders’ case, the Court went on to rule that the restrictions on their right to transfer shares or vote at the AGM had been imposed for an improper purpose.

The Court emphasised that the only legitimate purpose for which such restrictions could be imposed was in respect of the acquisition of information and that they could not legitimately be used as an additional weapon to manipulate voting in a takeover battle. It was apparent that the majority of the board had not imposed the restrictions merely in order to compel production of the missing information and had had ‘a very firm eye’ on the forthcoming AGM.

The Court found that, in imposing the restrictions, the majority of the board was substantially motivated by the impermissible purpose of tackling the perceived raid by altering voting control within the company, thus ensuring that certain resolutions would be passed at the AGM which lay only six days in the future.