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Register of Members: Court of Appeal guidance on "Proper Purpose"

View profile for Tanya Shillingford
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In Burry & Knight Limited & Another v Knight [2014] EWCA Civ 604 the Court of Appeal considered, for the first time, the prevention of access to a company’s register of members under section 117 of the Companies Act 2006.

Background

Prior to the Companies Act 2006 (“CA 2006”), it was easy to identify the members of a company. Any person could pay a fee to obtain a copy of the register of members, and a list of members would in any event be included on the company’s annual returns filed at Companies House. This level of transparency, however, was open to abuse. For instance, there were incidents where animal rights activists used the register of members to harass and intimidate members of companies they were seeking to close down.

Aiming to safeguard against the potential for abuse, the CA 2006 has modified the right to inspect a copy of the register of members of a company. It is still possible for any person to request access to the register (upon payment of the proper fee, of course) but sections 116 and 117 CA 2006 introduce a test to determine whether the request to inspect the register is made for a ‘proper purpose’.

The ‘Proper Purpose’ Test

Anyone wishing to access the register of members must submit a request to the company stating, amongst other details, the purpose of the request. The purpose must be ‘proper’ within the meaning of section 116 CA 2006. If the request is not ‘proper’, the company may refuse to provide access to the register and apply to the court for a ‘no access order’ under section 117 CA 2006.

Crucially, a company must either provide access to the register or apply to the court for a ‘no access order’ within 5 working days of receiving the request. If the company fails to take any action, a criminal offence is committed by the company and by every officer in default. It is therefore essential to determine quickly whether the purpose is ‘proper’, and whether there is any basis to apply for a no access order.

What constitutes a ‘proper purpose’?

Until recently, the main source of guidance on what constitutes ‘proper purpose’ was that of the Institute of Chartered Secretaries & Administrators (ICSA). The guidance sets out examples of proper and improper purposes and whilst useful, the guidance is non-exhaustive and non-binding. The judgment of the Court of Appeal in Burry v Knight therefore provides some welcome further guidance as to the approach to be adopted when requesting, or receiving a request, to access the register of members.

Facts

The Appellant was a minority shareholder and former director of two private family-owned companies. He had concerns dating back many years, particularly in relation to the benefits and remuneration for directors. In 2012 he made a section 116 request to inspect the register of shareholders and cited the following reasons for his request:

  1. To study the current shareholders of both companies;
  2. To write to the shareholders detailing his concerns about past conduct of the directors; and
  3. To raise concerns over the proposed method of share valuation of the companies, as set out in the  companies’ articles, and to advise shareholders to join a group to obtain      expert advice on this matter.

The Registrar of the Companies Court found at first instance that only the third request, relating to share valuation, was ‘proper’. The allegations about the companies’ management lacked substance, had “gone stale”, and there had been long delays in pursuing the allegations. The Appellant’s conduct over the years suggested that his real purpose was to conduct a vendetta against family members with whom he was on bad terms.

The Registrar made a “no access order” pursuant to section 117(3) CA 2006, but also made a Pelling Order, directing that the companies need not comply with the Appellant’s request for access, on the condition that they forward a letter from the Appellant to the shareholders regarding the provisions of the articles as to share valuation.

Court of Appeal

The Court of Appeal upheld the Registrar’s decision and provided guidance in relation to requests for access. The court held that the words “proper purpose” in section 117(3) CA 2006 should be given their “ordinary, natural meaning”. Where a request is made for multiple purposes, and some are proper and some are not, the company does not have to provide access to the register – the request will fail the section 117 test if any of the purposes are improper. Section 117(3) applies to both requests from shareholders and from members of the public. However, the company has the burden of proof in demonstrating (on balance of probabilities) that the request is for an improper purpose, and where a request is made by a shareholder to communicate with fellow shareholders, the court should exercise its discretion sparingly, as it requires a strong case to prevent access.

Comment

It is important for companies to be aware of the very short time-frame in which to respond to a section 116 request. Five working days is not long to consider the purpose of the request, and whether it is ‘proper’. Failure to provide access to the register, or make the application to court, is an offence and can attract a fine of up to £1,000. It is therefore advisable for companies to develop internal guidelines and procedures to determine whether a section 116 request is ‘proper’ as quickly as possible.

For any person considering making a request to access a register of members, the reasons given should be carefully stated. It would appear that a request made for a proper purpose may be denied if accompanied by a secondary purpose that is improper.

This article was written by Tanya Shillingford, Partner, with assistance from Trainee Solicitor Elizabeth McClenan.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.