Corporate Law Update: 10 - 16 April 2021

16 April 2021

In this week’s update: the High Court prevents a company from using its own resources to fund a dispute between its shareholders and a request for access to a company’s register of members was both invalid and made for an improper purpose.

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Company money could not be used to fund inter-shareholder dispute

The High Court held that the finances of a company could not be used to fund what was effectively litigation by one shareholder against another.

What happened?

Koza Ltd v Koza Altin Işletmeleri AS [2021] EWHC 786 (Ch) concerned Koza Limited (Koza UK), a company incorporated in England. Koza UK’s share capital consisted of 60 million ordinary shares held by Koza Altin, a listed Turkish company, and two “A” shares held by a Mr Ipek and his brother.

In due course, a dispute arose between Koza Altin and Mr Ipek. This culminated in Koza Altin serving a notice under section 303 of the Companies Act 2006 requiring Koza UK to convene a general meeting for the purpose of removing Koza UK’s board and appointing new directors. By this time, Koza UK’s sole director was Mr Ipek, who declined to convene the meeting.

Koza Altin proceeded to attempt to convene the meeting itself under section 305 of the Companies Act 2006. Mr Ipek brought proceedings in the English court in both his name and in the name of Koza UK to seek an injunction to prevent Koza Altin from holding the general meeting.

The proceedings would give rise to various debated issues, including whether the persons purporting to act on behalf of Koza Altin were in fact authorised to do so, and whether provisions of Koza UK’s articles that required the consent of Koza UK’s “A” shareholders to any appointment or removal of it directors were valid and enforceable under English law.

The central question in this particular set of proceedings was whether Mr Ipek was entitled to direct Koza UK to use its own resources to finance the proceedings without making any contribution of his own. Koza Altin argued that the object of the proceedings was the control of Koza UK and that, as such, the matter was a dispute between Koza UK’s shareholders, rather than one involving Koza UK itself. It said that Koza UK’s own funds should not be expended on a shareholder dispute, and that for Mr Ipek to cause Koza UK to fund the proceedings amounted to a misuse of those funds.

What did the court say?

The court agreed with Koza Altin.

The judge reviewed various recent cases on the point and said the key question was whether a claim is brought in good faith in the independent interests of a company, or rather is advanced as a response to or as part and parcel of a shareholders' dispute.

If a company is a “genuine protagonist” in proceedings against one of its shareholders, it will be right and proper for the company’s funds to be used to finance the claim. However, if the company is merely the “object” of what is, in reality, a dispute between its shareholders, it will be a misfeasance and breach of duty by the directors to cause the company to use its resources to pursue the proceedings.

In this case, the court said there was no doubt that the real and substantive contest was between Mr Ipek and Koza Altin over control of Koza UK. In particular, the proceedings were a dispute between the "A" shareholders, who relied on their veto rights in Koza UK’s articles for control over Koza UK, and the ordinary shareholders, who relied on their challenge to those veto rights to retain control.

What does this mean for me?

This is not a new point of law but it a useful and clear reminder of an important point: a controlling shareholder cannot simply treat a company as its own and use that company’s resources to fund its own litigation. The court will be inclined to grant an injunction in those circumstances to prevent this.

Likewise, a director of a company should be very careful when deciding whether to commit company resources to ongoing litigation. If the litigation does not serve the company, causing the company to pay for it is likely to amount to misfeasance and breach of duty. Before taking a decision to fund litigation, a company’s directors should ensure they understand what interest the company has in the proceedings and how a successful outcome would benefit the company.

Request to view company’s register of members was invalid and improper

The High Court has held that a request for access to view a company’s register of members was invalid because it did not contain all the required information. In addition, the court found that the company was entitled not to comply with the request because one of the three purposes of which it was made was not a “proper purpose”.

What happened?

Sir Henry Royce Memorial Foundation v Hardy [2021] EWHC 714 (Ch) concerned a registered charity which had been incorporated as a company limited by guarantee.

One of the company’s members made a request to inspect the company’s register of members and take a copy of it. Under section 116 of the Companies Act 2006, any member of a company is entitled to inspect and take a copy of its register of members at no charge.

A request under section 116 must contain prescribed details. This includes the name and address of the person making the request, the purpose for which the information is to be used, whether the information will be disclosed to any other person else and, if it will, their name and address and the purpose for which they are to use the information disclosed to them.

Under section 117 of the Companies Act, a company must comply with the request. However, if the company believes the request is not being made for a “proper purpose”, it can apply to court for permission not to comply with it.

Statute does not set out when a purpose is “proper”. Instead, this is left to the courts to decide objectively case by case. The Chartered Governance Institute has published guidance on when a request may not be “proper”, to which the courts have given a good deal of weight. What we do know is that, if someone makes a request for multiple purposes, the court will order a company not to comply if at least one of those purposes is not proper (Burry v Knight [2014] EWCA Civ 604).

In this case, the member provided his name and address. He also stated that the purpose for which he wanted to access the company’s register of members was to call a general meeting of the company for three specific purposes:

  • To examine why no annual general meeting (AGM) had been convened in the previous year.
  • To table and interrogate the company’s audited accounts for its previous financial year.
  • To remove five directors from office on the grounds of gross negligence arising from misconduct as directors of a different company, which had caused “irreparable harm” to the company.

However, he did not state in his request whether the information would be disclosed to anyone else.

Initially, the company agreed to the request. However, subsequently the company’s lawyers emailed the member stating that:

  • the request was invalid, because the member had failed to state whether the information would be disclosed to anyone else, and so the company would not be complying with the request; and
  • the company would ask the court to confirm that the request was not for a proper purpose.

The member replied by email fifteen minutes later stating that he had inadvertently omitted the relevant required details and confirming that he would not be making the information available to anyone else. He argued that his request and his subsequent email should be read together and that, by supplying the missing details, he cured the omission in his original request.

The High Court had to consider three things:

  • Was the original request invalid due to the missing details?
  • If it was invalid, was it rectified when the member subsequently provided the missing details?
  • Had the request been made for a proper purpose?

What did the court say?

The court said the request was invalid. The judge referred to the previous case of Fox-Davies v Burberry plc [2017] EWCA Civ 1129, in which the person making the request had stated that they intended to disclose the given to them information but had failed to specify to whom it would be given. Here the omission was different – the request had not stated any intention at all – but there had nonetheless been a failure to include the required details, rendering the request invalid.

In reaching its decision, the court considered what the words “whether the information will be disclosed to any other person” meant. He said they require merely a statement of what the person making the requests intends at the time of the request. They did not amount to a promise as to how the information would ultimately be used.

The request did not subsequently become valid when the member supplied the missing details. It was not possible to “validate” the original request retrospectively.

It had been open to the member to start the process over, as there is no limit on the number of requests a person may make to access a company’s register of members. However, it was clear from the wording of his email that the member had not made a fresh request for access to the register. Rather, he was merely intending to supply the details missing from the original, invalid request.

Finally on this point, the judge said that the member’s original application and his subsequent email could not together amount to a single “request”. The wording of section 116 suggested that a request was a “single event”. It might be possible for it to “extend over two or more pieces of paper”, but it was not possible to “aggregate separate matters into one” in the way the member was proposing.

The request was therefore invalid. In any case, the judge also held that the request had not been not for a proper purpose. Requisitioning a meeting to explain the absence of the previous year’s AGM and to discuss the company’s accounts were both proper purposes.

But, in this case, it was not a proper purpose to seek to remove directors purely due to alleged misfeasance while acting as directors of a different company. In theory, it could be proper to seek to remove a director who has allegedly committed serious misconduct in another capacity. However, for the request to be proper, the directors’ actions in that capacity would need to affect the company in some way and be based on more than mere allegations.

What does this mean for me?

The power to obtain a company’s register of members is a powerful one which, used in the right circumstances, can be a useful or vital tool. It is often critical in deciding how to approach and structure a public takeover, in communicating views to other shareholders and in getting items onto the agenda of a general meeting.

However, this decision shows how important it is to ensure any request is crafted carefully so as to comply fully with the technical provision of the Companies Act 2006 and avoid any legal challenge. The court has a wide discretion to order a company not to comply with a request. Judges have previously rejected requests designed to revive stale allegations against directors and to track down shareholders to assist them in recovering their shares on payment of a fee, but, beyond these decisions, this still remains relatively unexplored territory.

A person should consider the following before making a request for access to a company’s register of members.

  • Does the request contain all the required details? The details listed in section 116 are mandatory. Failure to include any of them will automatically render the request invalid and the process will need to be re-started from scratch.
  • What is the purpose of the request? If it is vexatious, based on spurious grounds or does not benefit the company or its membership in some way, a court will look at it with more scepticism.
  • If the person making the request is a member of the company, does the request relate to the member’s interest and rights as a member? If so, it is more likely to be for a proper purpose.
  • Consult the Chartered Governance Institute’s guidance. The courts have previously found that guidance highly instructive. If the guidance suggests that the purpose in question is “improper”, the courts are likely to reach the same conclusion.

Get in touch