Proper purpose test for access to register of members
Good Company July 2014 edition
- Transparency and trust: seeing the way to reform
- Service of English legal proceedings on overseas directors
- Personal guarantees by directors
- Raising money under false pretences
- Holding company liability for health and safety
- Proper purpose test for access to register of members
- When not to be a de facto director
The Court of Appeal has considered, for the first time, when the court should prevent access to a company's register of members on the grounds that the request for access is made for an improper purpose.
The Companies Act 2006 introduced restrictions on the right of shareholders and members of the public to inspect and take copies of a company's register of members. If someone wants access to the register, they must make a request to the company giving:
- their name and address (or, in the case of a company, the name and address of an individual responsible for making the request on its behalf);
- the purpose for which the information will be used; and
- whether the information will be passed on to any other person and, if so, their name and address and the purpose for which they will use it.
The company must, within five days, either comply with the request or make an application to court and failure to do so is a criminal offence. The court will make an order relieving the company of the obligation to comply if it is satisfied that the request is not made for a proper purpose. The Act does not define what is a "proper purpose" and the words are therefore to be given their ordinary, natural meaning.
In a recent case before the Court of Appeal, a shareholder sought to overturn a court order denying him access to the register of a family company.
Dr Knight had some complaints about the past conduct of the company's business by its directors which he had been pursuing, on and off, for some years. He asked for access to the register of members, stating that his purpose was to communicate his concerns to the other shareholders. He also wanted to raise issues with the other shareholders about provisions in the company's articles of association about share valuation on transfer.
The company applied to court, which found that communication of his concerns about the directors' conduct was not a proper purpose for access to the register, as his allegations were stale and based on very thin evidence and he was seeking to use the registers to further a family vendetta. However, it would be a proper purpose for him to access the register in order to communicate with other shareholders about the share valuation provisions. The court therefore made an order that the company need not give Dr Knight access to the register, provided that it undertook to circulate a letter from him to the other shareholders in relation to the share valuation provisions.
Dr Knight appealed to the Court of Appeal. That Court upheld the earlier decision, agreeing that shareholders would not benefit from allowing Dr Knight to write to them about his old concerns about the directors' conduct.
The Court of Appeal also confirmed that, where a request is made for a number of purposes and one purpose is proper but another is not, access to the register should be denied. It approved the approach of requiring the company to give an undertaking to pass on communications about the proper purpose in these circumstances. Another solution to the problem would be for the court to grant access to the register on receipt of an undertaking not to use it for any purpose which was improper. Which approach to take is a matter for the court's discretion.
In considering the meaning of "proper purpose", the Court of Appeal made some comments of general application.
The court will not be restricted to the purpose stated in the request for access in determining what the purpose of the request actually is. A company may therefore apply to court if it considers that a request has been made for an improper purpose which does not appear on the face of the request.
Where it is a member of the company, rather than a member of the public, who is requesting access to the register, a proper purpose ought generally to relate to the member's interest in that capacity or the exercise of shareholder rights (or to both of those things).
If a member is seeking access in order to communicate with other members, a strong case is required before access will be prevented as the court will be reluctant to weaken corporate governance.
The Court of Appeal confirmed that the courts might have regard to guidance published by the Institute of Chartered Secretaries and Administrators (ICSA), although it is not binding or exhaustive. The guidance is available on its website to ICSA members and can be purchased by non-members.
The Court of Appeal decision gives companies, and those seeking access to their registers, some welcome guidance on the proper purpose test and how to deal with multiple purposes, some of which are improper. However, there will need to be more cases before it becomes clear when companies must grant access and when it is appropriate to apply to court.
Danielle Harris is a senior associate and professional support lawyer in the corporate group of Fieldfisher in London.