The meaning of 'significant influence or control'

In December 2015, the Supreme Court considered the application of the proper purpose rule in section 171 of the Companies Act 2006 (CA 2006) in the case of Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71. Section 171 of the CA 2006 states that directors have a duty to exercise their powers for the purpose for which they are granted. Any exercise of a power for an unrelated purpose could be fraudulent and a misuse of the power. The case centred on a board’s decision to issue restriction notices under the company’s articles of association.

The articles allowed the board to impose voting restrictions on shareholders where a statutory disclosure notice had not been complied with. ?The articles permitted the board to treat a response to a disclosure notice as non-compliant where it knew or had reasonable cause to believe that the information provided was false or materially incorrect. 

On 7 March 2013, E Ltd, a minority shareholder, called an extraordinary general meeting to consider ordinary resolutions for the appointment of three new directors who, on investigation, were likely to be associates of E Ltd and G Ltd (another minority shareholder).

The company issued disclosure notices to both minority shareholders under section 793 of the CA 2006 and requested information about the number of shares held, their beneficial ownership, and any arrangements between the people interested in them. The replies disclosed the existence of interests in the shares but denied that there ?were any arrangements between them.

On 23 May, E Ltd publicly invited shareholders to oppose the proposed resolutions for the re-election of certain directors at the company’s upcoming annual general meeting (AGM) on 5 June.

On 30 May, the company’s board held a meeting and concluded that as the information was incomplete, the disclosure notices had not been complied with. The board decided to implement its powers under the articles and enforce restriction notices on the minority shareholders to suspend their right to vote at general meetings.

E Ltd and G Ltd duly challenged the restriction notices on the basis that the real purpose of the board had been to ensure that the resolutions at the upcoming AGM would be passed, as opposed to acquiring the missing information. 

Proper purpose

The High Court was of the view that the board, in issuing the restriction notices, was influencing the outcome of the resolutions before the AGM took place. The directors ‘took the opportunity of using the power to alter the potential votes at the forthcoming AGM in order to maximise the chances of the resolutions being passed in a manner which they thought was in the best interests of the company’. Since this was not the proper purpose of the article, the restriction notices were set aside. The company appealed.

The Court of Appeal reversed the High Court decision and allowed the appeal by a majority as the restrictions arose purely from the shareholder’s failure to comply with the disclosure notice, and a restriction on voting rights was reasonably permitted by the articles. ?E Ltd and G Ltd appealed. 

The Supreme Court unanimously allowed the appeals, holding that the directors of the company acted for an improper purpose. It was held that the board’s primary purpose in delivering the restriction notices had been to prevent those shareholders from voting at the meeting and therefore such restrictions were invalid. The purpose of the articles was to prevent the non-compliance of information requisitioned by a disclosure notice. Although it may be a consequence of such a restriction notice, influencing the outcome of resolutions at a general meeting was not the proper purpose of the articles.

PSC register

As previously reported, the Small Business, Enterprise and Employment Act 2015 received royal assent on 26 March 2015. The Act amends several areas of the CA 2006, including a new requirement of all companies to keep available for inspection a register of people with significant control in the company (PSC register). 

On 21 December 2015, the Department for Business, Innovation and Skills published draft statutory guidance for consultation on the meaning of, and how to determine, who is a person of significant influence or control under the specified conditions (contained in the new schedule 1A to the CA 2006). 

With this provision due to come into force on 6 April 2016, corporate lawyers should advise their company clients to take action, if they haven’t done so already, to identify such individuals within their organisations.

‘Significant influence or control’

The draft guidance states that significant influence and control are alternatives. If a person has control of a company, they have the power to direct its policies and activities. A significant influence enables the person to ensure that the company adopts the policies or activities which are desired by them. 

While the draft guidance does not provide an extensive definition or any definitive test as to what would constitute significant control, it does state that a person may exercise significant influence or control over a company as a result of a variety of differing circumstances. These can include the provisions of a company’s constitution, the rights attached to the shares or securities held by that person, or the provisions of a shareholders’ agreement or similar document.

The guidance also provides a number of examples. An individual would need to be included on the PSC register:

• If they have direct or indirect ownership of more than 25 per cent of a company’s shares;

• If they have direct or indirect control of more than 25 per cent of a company’s voting rights;

• If they have a direct or indirect right to appoint or remove a majority of the board of company directors; 

• If they have rights to exercise significant influence or control over a company; and

• If they have rights to exercise significant influence or control over activities of a trust or firm which itself meets one or more of the first four conditions (in respect of a company).

The following are examples of what would constitute actually exercising ‘significant influence or control’:

A person involved in the day-to-day management and direction of the company, for example, a person who is not a director but is regularly consulted on board decisions or whose views influence decisions made by the board; or

A person whose recommendations are often followed by shareholders who hold the majority of the voting rights in the company when they are deciding how to vote – for example, where a company founder no longer has a significant shareholding in the company they founded but makes recommendations to the other shareholders on how to vote, and their recommendations are generally followed. 

Safe harbours

The draft guidance also sets out specific safe harbours that will not in the normal course constitute significant influence or control for the purposes of the Act. The examples include:

An individual providing advice in a professional capacity, for example, a lawyer, an accountant, a management consultant (including a company mentor), or a financial adviser;

A third party acting under the terms of a commercial or financial agreement, for example, a supplier, a customer, or a lender;

An employee acting in the course of their employment, including an employee or director of a third party; and

A director of a company, including a managing director, a sole director, and a non-executive or executive director who holds a casting vote. 

The draft guidance notes that the safe harbour may not apply if the relationship or role differs substantially from how the role or relationship is generally understood, or if it forms one of several circumstances in which that person has to exercise significant influence or control.

In order to comply with the new measure, it is recommended that companies review all individuals who have a position of responsibility in relation to managing the company for the purpose of being included in the PSC register. Such individuals should be identified according to whether the effect of their relationship places them in a position where they actually exercise significant influence or control for the purpose of the new Act. 

Companies should also be advised that as relationships and roles often change over time, individuals may need to be included in the PSC register at a later date, and therefore this is something that they should regularly review. 

The actual form and necessary content for the PSC register is to be finalised in the coming months, following closure of the consultation period.

Debbie King is a partner at Farleys @FarleysLaw www.farleys.com