"Corporate Raid" : Supreme Court Explains The Legal Aspects

 "Corporate Raid" : Supreme Court Explains The Legal Aspects

The issue of corporate raid was raised before Hon'ble Supreme Court.

In Eclairs Group Ltd v JKX Oil and Gas Plc [2015] GCtR 4212 (UKSCt), there were issues about an alleged corporate raid.

The term corporate raid was then linked with exploitation of minority shareholders in a company. Calling the term "pejorative" but "convenient", the decision explains how and what are the effects of corporate raid.

Tools to Resist

One of the tools available to a public company seeking to resist the covert acquisition of control by raiders is a statutory disclosure notice calling for information about persons interested in its shares. There are statutory provisions empowering the court to restrict the exercise of rights attaching to shares if those interested in them fail to comply with a disclosure notice. But it is common for the articles of a public company to empower the board to impose such restrictions. The questions at issue on this appeal affect companies which have adopted powers of this kind in their articles. They are, in bald summary, what are the proper purposes for which the board may restrict the exercise of rights attaching to shares, and in what circumstances can the restrictions be challenged on the ground that they were imposed for a collateral purpose?

Requirement of Notice

The power to issue a statutory disclosure notice originates in section 27 of the Companies Act 1976. That provision was subsequently replaced by section 74 of the Companies Act 1981, and then by section 212 of the Act of 1985. It is now contained in section 793 of the Companies Act 2006. Section 793 empowers a public company to issue a disclosure notice to any person whom it knows or reasonably believes to be interested in its shares. The notice may require that person to disclose (among other things) whether or not it is interested in shares, the nature of that interest if there is one, and whether any persons interested are party to any agreement for the acquisition of interests in shares or the exercise of any rights conferred by the holding of shares. Sections 820-825 of the 2006 Act contain very broadly framed provisions for determining when a person is to be regarded as interested in shares for these purposes. It extends to any legal or equitable interest, or any right to exercise or control the exercise of any right attaching to shares, or any such right or interest vested in a company under a person’s control or in specified categories of close relative, or any control or influence arising from an agreement for the acquisition of shares.

Proper Purpose Rule

Part 10, Chapter 2 of the Companies Act 2006 codified for the first time the general duties of directors. The proper purpose rule is stated in section 171(b) of the 2006 Act, which provides that a director of a company must “only exercise powers for the purposes for which they are conferred”. The rule thus stated substantially corresponds to the equitable rule which had for many years been applied to the exercise of discretionary powers by trustees.

Fiduciary

A company director differs from an express trustee in having no title to the company’s assets. But he is unquestionably a fiduciary and has always been treated as a trustee for the company of his powers. Their exercise is limited to the purpose for which they were conferred. One of the commonest applications of the principle in company law is to prevent the use of the directors’ powers for the purpose of influencing the outcome of a general meeting. This is not only an abuse of a power for a collateral purpose. It also offends the constitutional distribution of powers between the different organs of the company, because it involves the use of the board’s powers to control or influence a decision which the company’s constitution assigns to the general body of shareholders. 

Powers of Directors

It was enunciated that the rule that the fiduciary powers of directors may be exercised only for the purposes for which they were conferred is one of the main means by which equity enforces the proper conduct of directors. It is also fundamental to the constitutional distinction between the respective domains of the board and the shareholders. These considerations are particularly important when the company is in play between competing groups seeking to control or influence its affairs. 

Written by 

Vishal

Delhi

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