Company Democracy and Disenfranchisement of Shareholders

In a decision which will send shock waves through company boardrooms and which has important implications for corporate democracy, the Court of Appeal has ruled that a public company’s directors acted lawfully when they barred two beneficial shareholders from voting at an annual general meeting (AGM).

The directors believed that the company was being ‘raided’ by the shareholders, who together owned 39 per cent of its shares, and feared that an attempt was being made to destabilise the company by replacing senior management and obstructing necessary fund raising. They were concerned that the shareholders’ ultimate objective was to acquire control of the company at less than its proper value.

The directors had served notices under Section 793 of the Companies Act 2006 seeking disclosure of interests in shares. They formed the view that the responses to those notices were materially inaccurate and served further notices under its articles of association which purported to prevent the shareholders from transferring their shares or voting at a forthcoming AGM.

A judge subsequently found that the directors had acted in good faith and had had reasonable cause to believe that the board had been given inaccurate information. However, in upholding a challenge brought by the shareholders, the judge went on to rule that the restrictions had been imposed for the ‘improper predominant purpose’ of restraining the shareholders from voting on certain contentious resolutions which they had previously blocked and which were due to go before the AGM.

In upholding the company’s challenge to that decision, by a majority, the Court of Appeal found that there been no improper purpose on the part of the directors, who had been concerned to elicit truthful information from the shareholders and to protect the interests of the company. The whole point of the power conferred on directors by Section 793 to disenfranchise miscreant shareholders was to prevent them being able to cast their votes at AGMs.

The directors had been entitled to take action on receiving what they believed to be inaccurate information and the Court found that any other interpretation of Section 793, or the company’s articles, ‘would only be an encouragement to deceitful conduct and not something which English company law should countenance’. In recognition of the widespread importance of the issues raised, and the inability of the Court to reach a unanimous decision, the shareholders were granted permission to appeal further to the Supreme Court on the improper purpose issue.