High Court judgment in “corporate raiding” case

06/09/13

On 30 August 2013, Mr Justice Mann handed down judgment in Eclairs Group Limited and Glengary Overseas Limited v JKX Oil & Gas plc [2013] EWHC 2631 (Ch).

The Board of JKX perceived that the company was being "raided" by Eclairs and Glengary, which are investment vehicles beneficially owned by the oligarchs Mr Igor Kolomoisky, Mr Gennadiy Bogolyubov, and Mr Alexander Zhukov. In particular, the board of JKX feared that Eclairs and Glengary were seeking to destabilise the company by replacing senior management and obstructing necessary fund raising processes with the ultimate aim of acquiring the company at less than its proper value. The board therefore served a number of notices under section 793 of the Companies Act 2006 and the company's Articles of Association seeking disclosure of information about the interests in Eclairs' and Glengary's shares. When the responses came in the Board considered them to be materially inaccurate and accordingly it imposed restrictions which prevented the voting and transfer of the Eclairs and Glengary shares. This occurred 6 days before the annual general meeting of JKX on 5 June 2013, at which (as the Board knew) Eclairs and Glengary were intending to oppose certain proposed ordinary and special resolutions. The effect of the restrictions would have been to prevent Eclairs and Glengary from voting at the AGM and thus giving effect to their opposition.

Following an urgent application for interim relief made by Eclairs and Glengary in advance of the AGM, an expedited trial took place concerning the validity of the Board's decision to impose the restrictions. Mr Justice Mann found that the Board had reasonable cause to believe that the information provided by Eclairs and Glengary in response to the section 793 notices was false or materially inaccurate and that the Board had acted in good faith in imposing restrictions. However, Mr Justice Mann held that the Board had exercised its power primarily to restrict Eclairs and Glengary from exercising their voting rights as opposed to extracting information from the respondents to the section 793 notices. He held that the only permissible purpose was to extract information, although resisting destabilisation might have been a permissible consideration provided that it was secondary to a primary purpose of extracting information. Having reached the conclusion that the responses were false or materially inaccurate, the Board acted wrongly because it imposed restrictions for the primary purpose of obstructing the raid and protecting the company and its shareholders as a whole. It was immaterial that where the Court imposed restrictions, it could only remove them if satisfied that no unfair advantage had accrued from any relevant non-disclosure. That did not entail that a purpose of imposing restrictions in the first place could be to prevent or neutralise an unfair advantage, or any broader purpose of protecting the Company.