Company law contains a number of measures aimed at protecting the personal details of the individuals involved in a company (such as its directors and shareholders). One of the places where those details appear is in a company’s register of shareholders.
Register of shareholders
Every company has to keep an up-to-date register of its shareholders and make that register available for inspection on request to its shareholders (without charge) and to any other person (on payment of a fee).
The register must contain the names and addresses of the shareholders as well as details of the shares held by each of them.
An inspection request
Anyone wanting to inspect the register must make a request to the company stating (amongst other things) the purpose for which the information requested is to be used.
A company then has just five business days to either comply with the inspection request or else apply to court for confirmation that the request can be refused on the basis that it has not been made for a ‘proper purpose’.
If the court agrees that the inspection request has not been made for a proper purpose it will direct the company not to comply with that request. It may also order that the company’s costs of making the application are paid by the person who made the improper request. But if the court decides that actually the request was made for a proper purpose then the company will be required to comply with the request immediately and, since it is a criminal offence not to comply with a valid inspection request, the company and all its officers in default may be liable to a fine.
What is a ‘proper purpose’?
One of the problems for companies faced with an inspection request is that there is no legal guidance on what is or isn’t a proper purpose in this context. There is a very short deadline within which the company must carry out its own investigation of the person making the inspection request and their motivation for doing so before the company is pushed into making a court application with little idea of how the court will view the purposes stated in the application.
Helpfully, six years after the relevant provisions were introduced, a case on this point has finally come before the courts meaning the judiciary has had to consider for the first time what a proper purpose might be. The court held that the words should be given their ordinary and natural meaning and that, where a request is made by a shareholder, the proper purpose should generally relate to the shareholder’s interest as a shareholder and/or to the exercise of shareholder rights.
In this case, the court felt that the shareholder’s allegations lacked substance and were essentially window-dressing with the real intention of ‘making mischief’ – clearly not a proper purpose. However, the court did find that one of the purposes (communicating with the shareholders regarding concerns over the method of share valuation in the articles) was a proper purpose. Faced with the situation in which some of the stated purposes were improper and one was proper, the court prevented disclosure of the register of shareholders to the shareholder but ordered the company to write to its shareholders setting out the shareholder’s concerns. The court was not prepared to allow the member to communicate directly with the other members as it believed he would not do so in ‘appropriate or measured’ terms. This refusal to allow the disgruntled shareholder to communicate directly with shareholders will no doubt be welcomed by many boards.
As well as the guidance offered by this ruling, the Institute of Chartered Secretaries and Administrators (ICSA) has previously issued its own guidance note which provides examples of ‘proper’ and ‘improper’ purposes. That guidance was referred to in the case mentioned above, with the court noting that, whilst it was non-binding and non-exhaustive, it may still prove useful.