Eclairs Group Ltd and another v JKX Oil & Gas Plc

Heard on 18 and 19 May 2015

This appeal is about an alleged "corporate raid". According to the judgment of Mann J, at para 224, this expression is a "loose, convenient and pejorative shorthand" which can be applied to a variety of situations, but in this case means an attempt to exploit a minority shareholding in a company to obtain effective management or voting control without paying what other shareholders would regard as a proper price. I shall use the expression in that sense in spite of its pejorative overtones, but only because it is convenient.

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?

JKX Oil & Gas Plc is an English company listed on the London Stock Exchange. It is the parent company of a group whose business consists in the development and exploitation of oil and gas reserves, primarily in Russia and the Ukraine. For reasons which are disputed, and for present purposes irrelevant, the company has not prospered of late. Its difficulties have been reflected in its share price which has fallen to historically low levels. In 2013, the directors of JKX perceived that it had become the target of a raid by two companies, Eclairs and Glengary, both incorporated in the British Virgin Islands. Eclairs is a company controlled by trusts associated with Mr Igor Kolomoisky and Mr Gennadiy Bogolyubov. Mr Kolomoisky is a prominent Ukrainian businessman and politician and Mr Bogolyubov is his business associate. Eclairs beneficially owns some 47m shares amounting to 27.55% of the issued share capital of JKX. Glengary is a company controlled by Mr Alexander Zhukov in which his right-hand man Mr Ratskevych also has a small holding. The company beneficially owns 19m shares amounting to 11.45% of the issued share capital of JKX. The judge found that Mr Kolomoisky and Mr Bogolyubov had a reputation as corporate raiders. Rather less is known about Mr Zhukov, but the directors of JKX believed him to have had business dealings with Mr Kolomisky in the past.

Between 2010 and 2012, JKX was trying to raise capital. It encountered some difficulty in raising it from banks and other financial institutions, partly because of the risks associated with investment in the Ukraine, and partly because Mr Kolomoisky's substantial stake in the company proved to be a deterrent. A number of proposals were made for raising capital by the issue and allotment of new shares, but these failed because Mr Kolomoisky opposed them. They would have required shareholders' special resolutions, and Eclairs' holding constituted a blocking minority. On 7 March 2013, Eclairs wrote to JKX calling upon it to convene an extraordinary general meeting to consider ordinary resolutions for the removal of the Chief Executive Dr Davies and the Commercial Director Mr Dixon from the board, and the appointment of three new directors. Enquiries suggested that this move had been concerted between Mr Kolomoisky and Mr Zhukov, and that the proposed new directors were associates of theirs. Newspapers in the Ukraine reported that Mr Kolomoisky was trying to take control of JKX's principal Ukrainian subsidiary.

The company received Eclairs' request on 15 March 2013. Its response was to issue five disclosure notices between 20 and 26 March. On the Eclairs side, they were addressed to Eclairs and Mr Bogolyubov, and on the Glengary side to Glengarry, Mr Zhukov and Mr Ratskevych. On 13 May 2013, further disclosure notices were issued to the same addressees as the March notices plus, on the Eclairs side, Mr Kolomoisky. The notices requested information about the number of shares held, their beneficial ownership and any agreements or arrangements between the various persons interested in them. The responses, which were received promptly, admitted the existence of interests in JKX shares, but denied that the addressees were party to any agreement or arrangement among themselves.

On 23 April 2013, the company convened an AGM for 5 June 2013. The business included the re-election of Dr Davies, the approval of the directors' remuneration report and three resolutions empowering the board to allot shares for cash, to disapply statutory pre-emption rights upon the allotment of shares, and to make market purchases of the company's shares. On 23 May 2013, Eclairs published an advertisement in the Financial Times and an open letter to shareholders. In these documents, shareholders were invited to oppose the above five proposed resolutions. Since the resolutions to authorise market purchases and to disapply pre-emption rights required a special resolution, this meant that as matters stood they were certain to fail. The other resolutions required only an ordinary resolution but would be difficult to get through in the face of opposition from two blocks together controlling 39% of the company.

The responses to the second batch of disclosure notices were received on 27 and 28 May 2013. On 30 May, a board meeting was held. One director (Mr Miller) was absent, but had given instructions to the chairman as to how he wished to vote, and two others (Dr Davies and Mr Dixon) recused themselves and took no part in the proceedings. The remaining directors considered that the responses to the notices were inadequate because they believed that there were agreements or arrangements between the addressees which they had not disclosed. They resolved to issue restriction notices under powers conferred on the board by the company's articles on the 47m shares in which Eclairs was interested and the 19m shares in which Glengary was interested. The effect of the restriction notices was to suspend the right to vote at general meetings attaching to these shares and to restrict the right of transfer.

On 4 June 2013, the day before the AGM, Eclairs and Glengary began separate proceedings in the Chancery Division challenging the restriction notices. A number of grounds were advanced, most of which were rejected by Mann J and have now fallen away. The one ground which subsists and is now before this court is that the board acted for a collateral, and therefore improper, purpose. It was contended that the only proper purpose for which the power could be exercised was to extract the information, and that the real purpose of the board had been to ensure that the resolutions at the forthcoming AGM would be passed. In the event, the company gave undertakings to David Richards J on the day that the proceedings were commenced, the effect of which was to allow the votes attaching to the 47m and 19m shares to be cast on the resolutions without prejudice to their validity.

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.

Under the statute, the failure of a person interested in shares to comply with a disclosure notice may result in the restriction of the rights conferred by those shares.Section 794(1) provides:

"794 Notice requiring information: order imposing restrictions on shares

Where -

(a) a notice under section 793 (notice requiring information about interests in company's shares) is served by a company on a person who is or was interested in shares in the company, and

(b) that person fails to give the company the information...