Directing the Directors: Injunction granted preventing the holding of an EGM
The High Court, in a decision handed down on 28 September last, granted an injunction to the petitioner, Petroceltic International Plc (the Company) preventing the holding of an Extraordinary General Meeting (EGM) that had been called by the defendant, Worldview Capital Management SA (Worldview), a 29.44% shareholder in the Company.
The substantive issue which arose here was the validity of resolutions proposed by Worldview, and if the directors could justifiably refuse to put them to the members of the Company. Further, the legality of advisory resolutions which constitute "an expression of opinion" was a key consideration in this case.
The Court found that the relationship between the Company and Worldview had deteriorated over the previous 15 months. The Company made allegations of defamatory remarks by Worldview regarding the Company's management and business strategies, and also alleged that numerous EGMs were requested by Worldview with the aim of obstructing the business of the Company.
The Company had also recently announced a proposed bond issue to raise up to US$175 million to refinance existing bank debt and provide funds for various corporate purposes.
Worldview then proposed that, at the Company's EGM to be held on 7 September, 2015, a number of resolutions would be put to the shareholders. However, the Company claimed the resolutions sought by Worldview would limit the exercise of the powers of the Board that had been delegated to them by the Company, and were therefore not capable of being legally implemented if passed. The Board wrote to Worldview's solicitors informing them that the proposed resolutions did not comply with the legal requirements set out in the Company's articles of association, and therefore would not be put to the shareholders for consideration at the 7 September EGM.
Worldview then sent to the Company's shareholders a circular and notice of EGM, to be held on 5 October 2015, at which it was proposed that the same resolutions which Worldview had requested be considered by the shareholders at its 7 September EGM, would be put to the shareholders.
Broadly, the two proposed resolutions were as follows:-
- That the members did not approve of the proposed issuance of certain bonds by the Company to raise funds (as contemplated by the Company's press announcement).
- That the members did not approve of the incurring of any new borrowing or issuing any debt securities by the Company under certain circumstances, for example, where an annual interest rate was above a specified rate of interest.
The Company's solicitors then wrote to Worldview's solicitors requesting Worldview to withdraw the EGM and to notify the Company's shareholders accordingly. This was rejected by Worldview, and in response the Company brought an application for an injunction preventing the holding of the EGM.
It was argued by Counsel for the Company that the proposed resolutions would obstruct the proper management of the Company, and impede the ability of the Company to raise funds in the manner proposed. It was further submitted that the proposed EGM of 5 October was unlawful, because Worldview had no legal authority to convene such an EGM under the Companies Act 2014 unless the directors of the Company failed to convene a meeting which had been duly requisitioned in accordance with that Act.
In deciding whether to grant the injunction, Abbott J. relied on the well-established criteria set out in the decision in Campus Oil1 whereby the applicant must establish: (1) a serious issue, or in the case of mandatory injunction, a strong case to be tried; (2) that damages are an inadequate remedy; and (3) that the balance of convenience favours the granting of the injunction.
Abbott J. concluded that the Company had a strong case and, as authority, relied upon Ryanair Ltd. v. Aer Lingus Group Plc2 in which McGovern J. refused Ryanair's application to compel Aer Lingus to take the necessary steps to table a resolution in relation to the Aer Lingus pension scheme. McGovern J. decided the proposed resolution in that case was unsatisfactory, in the first place because it appeared to be merely aspirational and second, on a more fundamental objection that the Board had been given power to determine what pension benefits a company will provide. Since this power was given to the directors under the articles of association, McGovern J. held that the members, in a general meeting, cannot, by ordinary resolution, seek to over-ride or fetter that exclusive power.
Abbott J. further relied on the evidence on behalf of the Company provided by way of affidavit by a senior independent director, in deciding the issue of whether the Company would suffer loss and damage in the event of the resolutions being passed. The Judge was satisfied that damages would not provide adequate compensation to the company for such loss and damage. Abbott J. further relied on this evidence to conclude that the balance of convenience favoured the granting of the injunction.
The decision is interesting because it indicates judicial support for the view that the passing of a resolution for "an expression of opinion" by members of a company might act, depending on the circumstances and the strength of support from the shareholders, as a market impediment to (for example) the raising of finance by that company, and that this might indirectly fetter the decision-making abilities of directors acting within an area of discretion given to them under the company's articles of association.
The case is also noteworthy in that it would also appear to lend further judicial support to the view that, in such circumstances, a company might be justified in refusing to put any such resolution to the shareholders of the company for consideration at a duly convened EGM of the company.
This prompts the question of whether the directors might be justified in refusing to convene the EGM for this purpose, notwithstanding the making of a valid request to do so by the shareholders seeking to pass such a resolution. The difficulty here is that the provisions of the Companies Act 2014, relating to the convening of EGMs by requisition of the members, do not state that the directors are entitled to refuse to duly convene and hold an EGM, once properly requisitioned by the members in accordance with the Companies Act, even if it is for the purpose of putting resolutions to the members which the directors bona fide believe are wholly inappropriate and which they would be entitled, on the basis of the decisions in Ryanair v. Aer Lingus and Petroceltic v. Worldview, to refuse to put to the members for their consideration. However, there is persuasive English authority for the view that if the entire of the objects of the meeting as set out in the requisition are incapable of being legally carried into effect, the directors will be entitled to refuse to convene the EGM3. Accordingly, depending on exactly what is proposed by the requisitionists, the directors may be justified in not convening the EGM (or in seeking a declaration of the Court that they are not required to do so) or, alternatively, they could proceed to duly convene the EGM but, based on the foregoing authorities, may be justified in not putting the impugned resolutions to the shareholders.
For more information please contact Jack O'Farrell,
Date published: 20 October 2015