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"Blocking" a company's shares: How to respond to a Notice under s 793 Companies Act 2006

14/07/2014

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United Kingdom

S 793 Companies Act 2006 ("the Act") gives a public company the right to require anyone who is, or might be, "interested" in its shares to answer written questions about the nature of that interest.

S 793 Companies Act 2006 ("the Act") gives a public company the right to require anyone who is, or might be, "interested" in its shares to answer written questions about the nature of that interest. It is usually used by companies who wish to track unusual movements in their register, typically in the context of a possible stake building exercise or takeover, but also to explain unexpected share movement or simply as part of a routine "house keeping" exercise. The Act contains extensive definitions of what amounts to an "interest", including wives, trusts, offshore vehicles and the like in order, said a previous Judge "… to counter the limitless ingenuity of persons who prefer to conceal their interests behind trusts and corporate entities". The Act also contains extensive provisions about agreements or arrangements between different people relating to stake building so that a company is not ambushed by several, apparently unconnected, shareholders building up a secret stake "in concert" with each other, typically through nominees. A failure to respond to a s793 request enables the company to "block" the shares in question, preventing the shareholder from voting or transferring its shares, until the answers are provided.

The biggest case going through the courts at the moment relates to JKX Oil & Gas plc, in which wealthy Ukrainian businessmen Igor Kolomoisky and Gennady Bogolyubov, and Russian businessman Alexander Zhokov, have built up a stake. JKX sent out various s 793 requests, and when it felt proper answers had not been provided, six days before JKX's AGM "blocked" the shares preventing them from being voted against various resolutions which JKX wished to pass. A speedy trial was ordered, and as a result the Judge lifted the "block". The reason for this was because, when imposing the "block", the Board of JKX did so not simply to persuade the shareholders to produce the information requested (the sole proper purpose) but primarily to deliberately prevent the shares being voted against the AGM resolutions (an improper purpose).

The Court of Appeal has now said (13 May 2014) that, in fact, a Board deliberately setting out to "block" shares is not improper. This is because it is not material that the purpose of the Board is to prevent the member voting at the meeting rather than, for example, to protect the interests of the company or to elicit information which is in fact truthful. The Court stated that the questions asked by JKX in its s 793 Notice were to find out what the plans of the shareholders were: "the very sort of thing that the Board of any well-run public company ought to be able to find out, and which shareholders would want to know". Even though the Board's primary motive in sending the Notices in the first place was, almost certainly, to be able to impose restrictions, what the Board could not control was what the shareholders would actually say in answer: the choice of providing full and correct answers to a disclosure notice lay with the recipient, not the sender.

As such, the "victim" of a restriction notice can readily prevent  a "block" on shares by providing full and correct answers. And even where a "block" is imposed, the "victim" can remove it by telling the truth. So someone who chooses not to answer the questions properly is a victim of his own choice, not a victim of any improper use of a power by the Board, and there is no reason why he should thereafter be able to complain. Why, asked the Court, should the law protect him when all he had to do was to tell the truth ? The Court went as far as saying that, in fact, the whole point of the ability of the Board to restrict the voting rights of a shareholder is to prevent him being able to vote at a general meeting.

From a practical point of view, a Board will not normally send out anything other than a "normal" s 793 Notice unless it thinks the recipients are up to something subversive, but secret. The most probable timing for such a Notice will be when some controversial resolutions are pending. In that likely scenario, it is also very likely that the Board would not only like the recipients to be disenfranchised, but will have that as its predominant motive.

Simon Moore regularly advises companies in sending out, and shareholders responding to, s 793 Notices

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