The Supreme Court reverted to the High Court’s position in determining that the proper purpose rule did apply to the imposition of restrictions on the voting rights of Eclairs and Glengary. The Supreme Court also found that those restrictions were imposed for an improper purpose.
In particular, the Supreme Court found that the relevant article of JKX’s articles of association had three related purposes:
- to induce a shareholder to comply with a disclosure notice
- to protect the company and its shareholders against having to make decisions about their respective interests in ignorance of relevant information
- as a punitive sanction for a failure to comply with a disclosure notice.
These purposes do not extend to directors seeking to influence the outcome of the AGM, which it was accepted was a purpose underlying the board’s decision to impose restrictions on the shares of Eclairs and Glengary. The restrictions had therefore been imposed for an improper purpose and were invalid.
In reaching this conclusion, Lord Sumption highlighted the fundamental importance of the proper purpose rule in stating:
‘The rule that the duciary 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.’
Lords Sumption and Hodge applied a ‘but-for’ causative test in determining whether the actions of a board will be invalid due to a breach of the proper purpose rule. That is to say, where there are a mixture of proper and improper purposes underlying the board’s decision, the decision will breach the rule if it would not have been taken but for the existence of the improper purpose(s). Lords Mance, Clarke and Neuberger reserved their position on what the proper causative test should be, given the absence of detailed submissions on this point during the hearings.