The Proper Purpose Rule and the Exercise of Directors’ Power in the Context of a Takeover Battle

Abstract

This article examines the Proper Purpose Rule and the Exercise of Directors’ Power in the recent JKX case as decided by the UK Supreme court. The decision of the JKX case now represents the leading Common law authority on the interpretation and application of the Proper Purpose Rule (the Rule or the PPR) in the Context of a Takeover Battle. As codified in section 171(b) of the UK Companies Act 2006, the Rule requires directors to exercise their powers only for the purposes for which the powers are conferred, either by statutory documents or by corporate constitutional documents. The decision makes clear that the PPR is pervasive and should be considered whenever a board is exercising the powers conferred upon it. The decision is also significant in re-affirming the conventional approach of an English takeover regime towards restricted power of a target board of directors when a company becomes the subject of a corporate raid, or a hostile takeover; an approach adopted also by many European Union (EU) countries following the transposition of the Takeover Directive 2004/25/EC.

Keywords: Proper Purpose Rule, Market for Corporate Control, Hostile Takeovers, Shareholders’ Rights,Fiduciary Duties, Takeover Directive

JEL Classification: K22, K41, G23, G28, G31, G34, G38, M12