Corporate Law Update

This week we look at a couple of cases on what constitutes a proper purpose when requesting to inspect a company’s register of members, and whether a dissolved shareholder’s consent is required to invoke the Duomatic principle.

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Court finds company remained a shareholder after being dissolved, denies Duomatic remedy

In Randhawa and another v Turpin and another [2017] EWCA Civ 1201, the Court of Appeal held that a corporate shareholder continued to be a member of a company, even though the shareholder had been formally dissolved. This meant it was not possible for the company’s other shareholder to have altered the company’s constitution informally under the “Duomatic” principle.

The decision is an appeal from the original decision of the High Court, which we reported on in our update for the week ending 20 October 2016.

What happened?

The case concerned a company called BW Estates Limited (“BWE”). BWE’s main shareholder was David Williams, who held 75% of BWE’s shares on bare trust for his father, Robert. The other shareholder was an Isle of Man company called Belvedere Limited (“Belvedere”). Belvedere had been dissolved in October 1996. However, the shares it had held remained registered in its name.

In 2009, Robert was disqualified from acting as a director, leaving David as BWE’s only director. BWE’s constitution stated that, while BWE had only one director, his powers were limited to convening a meeting to appoint another director. Otherwise, the quorum for a board meeting was two directors.

In September 2013, David, acting alone, resolved to place BWE into administration. Robert attended the meeting with David in which the decision was made and acquiesced in the decision.

In 2015, two creditors applied for a declaration that the administrators’ appointment was invalid, since the board meeting at which David resolved to make the appointment was inquorate.

Among other things, Robert and David argued in response that the appointment was valid because, under the Duomatic principle, they had both acted as though the articles had been amended to allow David to exercise all the powers of a director.

The Duomatic principle states that, if all the shareholders of a company who can vote at general meetings agree to a matter that could be approved at a general meeting, that matter is binding as if a resolution had been passed in general meeting to that effect.

Duomatic can operate to amend a company’s articles of association. This can happen even if the shareholders do not formally agree an amendment, but simply as act though the amendment had been made (as shown in the recent Sherlock Holmes case).

What was the original decision?

The original High Court decision addressed various points. However, on the question of Duomatic, the judge said the principle did apply, and that BWE’s articles had been amended, for two reasons:

  • Dissolved shareholder. Duomatic requires assent from all shareholders entitled to vote, but, where one shareholder no longer exists and its shares do not pass automatically to someone else, those shares cannot be counted and must be ignored. David’s assent, as the only other shareholder, was therefore enough to invoke the Duomatic principle.
  • Beneficial owner. Belvedere had been holding its shares on trust for Robert. Robert, as the beneficial owner of those shares, had assented to David taking decisions as a sole director. Together with David’s assent, this was sufficient to invoke the Duomatic principle.

What was decided this time?

The creditors appealed, and the Court of Appeal overturned the High Court’s decision.

On the first point, it said it was not possible to ignore the shares registered in Belvedere’s name. Various cases had shown that the word “member” must be interpreted in the context of the relevant statute. The Companies Act is clear that a company’s members are the persons listed in its register of members. This means that, perhaps counter-intuitively, a person continues to be a member of a company after they die, until the register of members is updated.

The position was no different for a dissolved corporate shareholder. Even though Belvedere no longer existed, the shares in question were still registered in its name, and so it was a member of BWE and entitled to vote at general meetings. Duomatic could not apply, as Belvedere had not given its assent.

The judge did not decide the second point, because the parties seem to have agreed that Belvedere’s shares should have passed to the Crown when it was dissolved (a concept known as bona vacantia).

Practical implications

In some ways, the judgment provides an awkward outcome. Where a shareholder dies or is dissolved, it will be necessary to follow a process to update the register of members to reflect the new member. Until this is done, the deceased or dissolved member remains a shareholder of record of the company.

During this intervening period, a company may face several practical difficulties. It will not be possible for the other members to take constitutional decisions informally under the Duomatic principle, even though the shareholder in question cannot actually vote anymore.

For private companies, it may also affect the ability to pass written resolutions. For example, if a deceased or dissolved shareholder held more than 25% of the company’s shares, it may no longer be possible to pass special resolutions as written resolutions or to pass decisions of a sole member.

In reality, it might be possible to circumvent this problem by calling general meetings and counting the votes cast at that meeting. However, this can be cumbersome and will be possible only if there are enough shareholders remaining to form a quorum at the meeting.

As a practical point, therefore, if a company becomes aware that one of its shareholders has died or been dissolved, it should enquire into the state of affairs so that the register can be updated as quickly as possible. For a deceased member, this may mean following up with the personal representatives. For a dissolved member, however, it may involve restoring the entity so it can transfer its shares.

Whilst understandable, it is disappointing that the court did not provide a view on whether the assent of beneficial owners can be used to invoke the Duomatic principle. We noted in our previous update on this that it greyed the limits of the principle and could cause difficulties for companies.

Companies are not required to take notice of trusts over their shares and should treat their registered members as the persons entitled to vote and receive dividends. If beneficial owners alone were able to invoke the Duomatic principle, companies could undergo constitutional changes without being aware.

Further guidance on “proper purpose” test for register of members

In Fox-Davies v Burberry PLC [2017] EWCA Civ 1129, the Court of Appeal had to decide whether a request to inspect a company’s register of members had been validly given, and (if so) whether it had been made for a “proper purpose”.

Under the Companies Act 2006, any person (whether or not a member of the company) may request to inspect a company’s register of members. The request must contain certain prescribed information, including the purpose for which the information is to be used. The company then has five working days to comply with the request or apply to court if it feels the request was not made for a “proper purpose”. If the purpose is not proper, the court must direct the company not to comply with the request.

In this case, the court found that the request was invalid, because it did not contain some of the prescribed information. However, the parties asked the court to treat the request as valid and to consider whether the “proper purpose” test had been satisfied.

In doing so, the court expressed some general propositions about the “proper purpose” test:

  • The test is objective and does not depend on the company’s own, subjectively-held view.
  • A purpose is not improper merely because it is not in the shareholders’ interests.
  • There is no clear distinction between requests by members and requests by non-members. (The Court of Appeal disagreed with the High Court’s view, which is that there is a difference.)
  • The courts may look at the means of achieving an objective as well as the objective itself. Here, the person making the request intended to contact registered shareholders with information relating to an “asset” they held, but not to reveal any further information until a fee was paid.
  • The court will find the purpose based on the facts, not solely the purpose stated in the request.
  • While some purposes are generally proper and some improper, it will often depend on the facts.
  • The court can and will legitimately have regard to ICSA’s guidance on the proper purpose test. That guidance specifically states that requests from tracing agencies for the purpose of contacting and extracting commission or fees from the beneficiaries could be an improper purpose if the company is not satisfied that it is in the interests of its shareholders.

All three judges delivered their own judgment and, to some degree, disagreed with each other over which precise factors a court is entitled to take into account. Whilst this therefore leaves an element of residual uncertainty, the case provides useful guidance for companies that frequently receive, or may receive, requests to inspect their register of members.

It is also important to note that, although a similar procedure applies for a request to inspect a company’s PSC register, the purpose of this register is arguably different, and what constitutes a “proper purpose” for inspecting a register of members may not always constitute a “proper purpose” for inspecting a PSC register (and vice versa). Whilst informative, therefore, companies should not rely too heavily on the principles above when considering whether to refer a PSC register request to court.