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Proper Purpose

01 November 2018 by Peter Swabey

Proper Purpose

ICSA has published an updated edition of our guidance note on access to the register of members

ICSA’s guidance on the proper purpose test was originally published back in 2007 when the Companies Act 2006 changes were implemented.

Prior to the introduction of the Companies Act 2006 (the ‘Act’) the register of members was a public register and, under section 356 of the Companies Act 1985, open to inspection and copying by any member and any other person. In recognition of the need to protect shareholders the Act made access to a company’s register of members (whether an inspection or a request for a copy) subject to a new test, which those wishing to obtain a copy of the register of shareholders had to meet – rather than simply paying for the data, they now had to demonstrate that they had a reason for doing so.

These provisions are to be found in sections 116–119 of Part 8 of the Act. The legal background is covered in more detail in the guidance note but, in brief, section 116(2) of the Act provides that ‘Any person may require a copy of a company’s register of members, or of any part of it, on payment of such fee as may be prescribed’. Section 116(4)(c) provides that the request must state ‘the purpose for which the information is to be used’ and section 117(1) that on receipt of a request under s116, a company ‘must within five working days either (a) comply with the request, or (b) apply to the court. Section 117(3) adds that where ‘the court is satisfied that the inspection or copy is not sought for a proper purpose…it shall direct the company not to comply with the request…’

Key issues

So there are three key issues at stake here. Firstly, the company only has five working days to decide what to do; secondly, the onus is on the company to provide the requested copy (or inspection) unless it decides that the request is deficient or is not for a proper purpose; and thirdly it has to decide what is, or is not, a proper purpose. The first of these is operational, the second a matter of fact, but the third is entirely subjective and the Act provides no help as to what constitutes a proper purpose or not, with the matter being left up to the courts to decide.

ICSA’s guidance was intended to offer the views of a variety of experienced practitioners on what might, or might not, constitute a proper purpose for access to the register of members.

“Firstly, the company only has five working days to decide what to do”

So what has changed? Well, the law, both in terms of statute law, as the Small Business, Enterprise and Employment Act 2015 made amendments to the Act which affects the information available about shareholders, and in terms of case law as there have been two cases in the last few years which have looked at the issue of proper purpose – Burry & Knight Limited & another v Martin John Murless Knight [2014] EWCA Civ 604 (‘Burry & Knight’) and Richard Charles Fox-Davies v Burberry Plc [2017] EWCA Civ 1129 (‘Burberry’). The earlier edition of this guidance note was referred to as a reference point in Burry & Knight although it is important to recognise that what constitutes a proper purpose in any particular case is dependent on the facts and circumstances of that case.

Burry & Knight was a case involving two longstanding companies whose directors and shareholders came, predominantly, from two families. There was a dispute, which had gone on for a number of years, as a result of which Dr Knight, the appellant, sought to raise a number of concerns with shareholders and others, and it was in this very particular context that the request was found to contain an improper purpose. The strong feelings expressed and the companies’ efforts over time to investigate the allegations were material in both the High Court and the Court of Appeal coming to the conclusion they did.

What do these cases teach us?

The Burberry case involved a request from a commercial tracing agent who requested a copy of the register of members from the company. Burberry had already appointed a search company to trace and contact lost members to reunite them with their shares on terms it considered more advantageous to shareholders by allowing the member to claim their shareholding directly from the company without payment of a fee and applied to the court for a no-access order.

The court discussed whether or not Mr Fox-Davies’ purpose was a ‘proper purpose.’ At first instance, the court found the purpose to be against the interests of shareholders and therefore improper. The appeal to the Court of Appeal was dismissed on the basis that the request was invalid because it did not contain all the information about the third parties to whom the information would be disclosed that is required under section 116(4)(d). The Court of Appeal nevertheless went on to consider whether the purpose was proper and decided that it was not. The commentary from each of the three Court of Appeal judges on the nature of the proper purpose test was different, so the points that were made should be treated with caution. The case emphasises the case by case nature of the application of the proper purpose test.

The request must include all the information required under the Act, not just some of it.

“The request must include all the information required under the Act”

The Burberry appeal was rejected because the original request did not provide the names and addresses of the persons to whom the information would be disclosed, as required under section 116(4)(d). This non-compliance was held to have invalidated the request and so the company did not need to apply to court for an order that it does not need to provide the register, because the obligation to allow inspection or provide a copy of the register has not been triggered and so the question of a proper purpose does not arise.

Case circumstances

In Burry & Knight the court made some helpful comments regarding identifying the purpose. It recognised that the purpose of the request will normally be found in the request itself but Parliament has not stated that the court is restricted to considering the purpose as stated in that document. In this case the true purpose was ascertained by consideration of all the circumstances of the case.

If there is more than one purpose, not all may be proper or improper. In Burry & Knight two of the purposes for which a copy of the register of members was sought were considered improper, but one was a proper purpose. The court held at first instance, and the Court of Appeal agreed, that the proper purpose was not necessarily tainted by being coupled with an improper purpose but held that ‘in such cases the court would have to make a no-access provision if any of the purposes was improper’. Burry & Knight also clarified that a purpose may be improper not only because of the end it seeks to achieve, but also because of the way in which it seeks to achieve that end.

Communication with members may, or may not, be a proper purpose. The judgement in Burry & Knight commented that a proposed communication with other members must, for it to be a proper purpose, be relevant in some way to the members’ interests as members. In this case the communication was considered not to be a proper purpose because it could not confer anything of value on fellow shareholders as its real purpose was to harass them.

There is a clear presumption in favour of providing access and the onus is on the company to prove that the purpose is improper.

In Burry & Knight, the point was made that the court should exercise its discretion to issue a no-access order ‘sparingly and with circumspection’ where requests are made by shareholders to communicate with other shareholders. It is not enough for the company to demonstrate that the purpose is capable of being, or may possibly be, an improper one if the court is not satisfied that it is in fact improper.

At first sight, this may seem a niche area of company secretarial practice, but it is one of those that will be very important in the event that a company receives a request for a copy of the register of members, not least because of the strict process set out in the legislation and the tight deadlines with which the company must comply. It is also worth noting that, as in the case of Burry & Knight, these requirements apply to all companies, not just
listed ones.

Every company has a duty to ensure that personal data which it controls, is not disclosed unlawfully or unfairly. There is a safe harbour for information provided to comply with the law, but it follows that a company will be obliged to make sure the purpose underlying a proposed disclosure is a proper one to avoid the risk of a claim by a shareholder that his or her data protection rights have been infringed.

ICSA is grateful to Carol Shutkever, Herbert Smith Freehills LLP; Fiona Chute, Brodies Solicitors LLP and members of the ICSA Registrars Group for their assistance in revising this guidance note.

Peter Swabey FCIS is policy and research director at ICSA: The Governance Institute

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