Directors' Duties: The Proper Purpose Test

The Supreme Court has held that the proper purpose test applies to a decision by the directors of a public company to issue, under the terms of the company's articles, restriction notices which disenfranchise shareholders from voting. It is not enough that the directors have acted in what they believed to be in the best interests of the company.

Background

Part 22 of the Companies Act 2006 gives a public company the right to investigate who has an interest in its shares by sending out section 793 notices. Where a person fails to comply with a notice within a reasonable time, the company may apply to court for an order imposing restrictions on the shares. In practice, many public companies include provisions in their articles allowing the company itself to impose restrictions if a person fails to respond to a section 793 notice.