The Court of Appeal has recently rejected a request by a tracing agent to inspect a public company's register of members. It found that the request had been made for an "improper purpose".
Why is this case important?
This is one of only two reported cases on whether a request to inspect a company's register of members was made for an "improper purpose".
Although the three judges all agreed on the outcome, unfortunately each adopted slightly different reasoning. So companies and their advisers still don't have a definitive answer on how to evaluate a request which they suspect has been made for an improper purpose.
Background
All companies must keep a register of members. This contains the names and addresses of all members and, for companies limited by shares, details of the shares held by each member.
The company must make this register available for inspection – but anyone who wants to view the register must first make a formal written request to the company.
The request has to contain certain information as set out in the Companies Act 2006. For example, it must state the purpose for which the information from the register will be used, and also include details of any third parties to whom the requester intends to disclose the information on the register.
The company must, within five days of receiving a request, either:
- comply with it; or
- apply to court for an order directing it not to comply on the grounds that the request has been made for an improper purpose.
Unfortunately, the Companies Act does not define "proper purpose". This can cause a bit of a headache for companies and their advisers where a request is received and the company is unsure about whether the purpose is proper or not. It's particularly pressing because refusal of a valid request is a criminal offence.
Industry body ICSA has published guidance containing suggested examples of proper and improper purposes. "Proper purpose" examples include analysis of the register for statistical purposes, or shareholders wanting to contact other shareholders about matters relating to the company.
Examples given by ICSA of an improper purpose include obtaining personal information for the purposes of identity fraud, or for intimidating or harassing company members.
The facts
A request to inspect the register of members was made by someone whose business was to trace lost members in public quoted companies. He would engage third parties to carry out the tracing activities.
Once a lost shareholder was traced, the tracer would notify the shareholder that he had information that would lead to them recovering an asset to which they were entitled, but gave no further information about that asset. The shareholder had to agree to pay a fee to the agent before any further information would be disclosed.
The tracing agent did not include in his request the names and address of the individuals with whom he would share the information.
The company in question already engaged its own tracing agent whose terms were more favourable to shareholders.
Courts' decisions
The High Court held that the request was invalid and made for an improper purpose. Click here to read our previous blog about that decision.
The tracing agent appealed. The Court of Appeal dismissed his appeal.
Validity of request
The Court of Appeal determined that the request was invalid because it did not include the details of the third parties with whom the tracing agent would share the information.
Proper purpose
That finding on validity would have been enough to dispose of the appeal.
However, the court went on to consider whether the request had been made for a proper purpose. All judges decided – for slightly differing reasons – that the request had been made for an improper purpose.
Factors relevant to proper purpose test
Who has to prove what?
If a disputed request to inspect comes to court, it's up to the company to show that the purpose is improper (not for the person requesting to show that his purpose was proper).
Objective or subjective test?
The court will look objectively at whether the request was made for an improper purpose. The court's decision does not depend on the company's subjective view.
Whether the end justifies the means
The court doesn't just consider the purpose of inspection in isolation. It can also look at the means by which that person will achieve his objective. In this case, the purpose could have been a "proper" one of reconnecting lost shareholders with the company – but it was open to the court to conclude that the purpose was improper if the agent's terms were commercially oppressive.
Same test applies whether request made by member of the company or a non-member
The High Court had suggested that requests could be treated differently depending on whether they came from a member or a non-member. The Court of Appeal said there was no such distinction when applying the proper purpose test.
Interests of shareholders not a factor
Whether a purpose is proper does not depend on whether it is in the interests of shareholders. The ICSA guidance gives examples of requests being made for the purposes of credit or identity checks, statistical research, or enforcing judgments. These have nothing to do with shareholder interests.
Commercial self-interest of the requester
The court did not completely agree on how this should be taken into account. The majority view was that commercial self-interest on the part of the requester would not, of itself, make a purpose improper.
Company having its own tracing agent
There was disagreement about the relevancy of the company having its own tracing agent and the commercial terms of its operation.
Commercial terms of requester tracing agent
Critically in this case, the tracing agent did not reveal the commercial terms on which he was willing to connect lost shareholders with the company. Without that information, the court was unable to assess whether his purpose was proper.
What can companies learn from this case?
If a company receives a request to inspect its register of members, it must first check that the request contains all the information required by the Companies Act.
If it does not, then the request is invalid and need not be complied with.
If all the required information is in the request, but the company is unsure as to whether the purpose is "proper", it only has 5 days to decide whether to comply or to go to court for a determination. Going to court is expensive and there are reputational issues to consider should the court uphold the request to inspect.
It is a pity that the judges in this case didn't agree on all the factors that should be taken into account. However, the case has clarified several points so there is more guidance than we had before.
If in doubt, companies should consult their legal adviser.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
