The Supreme Court reaffirmed the "proper purpose" rule holding that

directors who had imposed restrictions on shares pursuant to a

legitimate power to do so had nonetheless imposed them for an
improper purpose.

In this case, the board was concerned that certain minority shareholders
(Eclairs and Glengary) were planning a corporate raid on the company
so issued disclosure notices seeking information from the shareholders
regarding the number of shares held, the beneficial interests and any
agreements between them. Eclairs subsequently publicly urged
shareholders to oppose upcoming AGM company resolutions, which
included resolutions to re-elect certain directors.

Believing the responses to be inadequate, the board decided to exercise

its powers under article 42 of the Articles of Association to issue
restriction notices to Eclairs and Glengary for failing to comply with the Commented [LIP(J1]: Article 42 of JKX's
disclosure notice, which suspended their voting and transfer rights. articles of association had three proper
purposes:
This was challenged by Eclairs and Glengary on the grounds of section To induce the shareholders to provide
171(1)(b) Companies Act 2006 - a director must only exercise powers the information.
for the purposes for which they were conferred. To protect JKX from having to make a
decision without the information.
Mann J held, at first instance, that the proper purpose rule applied and To punish a shareholder that failed or
the restrictions should be set aside as the board had exercised their refused to provide the information
power for the purpose of influencing the resolutions at the AGM. The
Court of Appeal rejected this, holding that the rule did not apply as the
shareholders could have remedied their situation by providing fuller
answers.
The Supreme Court, reversing the Court of Appeal decision, held that
the directors acted with an improper purpose and the rule thus applied;
whilst they had acted within their power, the purpose of the power in
Article 42 was largely to provide a sanction/incentive to remedy a failure
to comply adequately with a disclosure notice; its purpose was not for
influencing resolutions at an AGM.