JKX, the London-listed oil company has seen its entire board being replaced following years of questionable corporate governance and poor performance.

Proxima Capital, JKX’s third largest shareholder managed to secure over two thirds of the votes cast at a special meeting of JKX shareholders held on Thursday with their proposals to replace most of the board, including the chairman and chief executive. Even before the meeting, change seemed inevitable with two directors resigning on the morning of the vote, with the chairman, Nigel Moore sighting personal reasons for their sudden departure. The two directors that Proxima was not seeking to remove resigned immediately after the meeting leaving JKX with a five-member board.

The battle for control of JKX, had seen the previous board adopt practices which, to borrow a phrase from Ken Olisa, "more Soviet than City.

In an attempt to keep control of the company, the JKX board was permitted to restrict the voting rights and subsequently bar members from attending meetings using powers under the Companies Act 2006 (CA). Section 793 of the Companies Act 2006 grants the directors the right to acquire information from any person whom the company knows or has reasonable cause to believe has an interest in the shares and such Notices can require those to disclose whether they have entered into an agreement as defined under Section 834 CA 2006.

Despite Eclairs and Glengary, the largest and fourth largest shareholders respectively, having complied with the submitted section 793 Notices, the board relied on their CA powers to once again restrict their voting rights, due to having “reasonable cause to believe”, that the information provided by Eclairs and Glengary disclosures being "false or materially incorrect". Eclairs and Glengary had tried unsuccessfully to remove the JKX board back in 2014.

The board’s decision to adopt Article 42 may have been the tipping point for most disgruntled shareholders.  The ink had not long dried on the Judgement handed down by Lord Neuberger in the UK Supreme Court on 2 December 2015 concluding that the board’s previous use of Article 42 was an abuse of power, when the board considered it wise to adopt the provision once again. Flying in the face of Lord Neuberger’s judgement, the board omitted to rectify their position and bring a truce to the situation; rather they were perceived to sustain an attack on their shareholders.

Despite protestations of the board and accusations of back-door takeovers, including circulars with references to favourable proxy advisor recommendations in support of management, Thursday’s outcome concludes an unprecedented case study of shareholder rights abuse and a stubborn unwillingness to engage with shareholders. The case was summed up by Lord Neuberger as follows:

“Directors owe a duty of loyalty to the company, but shareholders owe no loyalty either to the company or its board. Within broad limits, derived for the most part from Part 30 of the Companies Act 2006 (Protection of Members against Unfair Prejudice) and the City Code on Takeovers and Mergers, they (the shareholders) are entitled to exercise their rights in their own interest as they see it and to challenge the existing management for good reasons or bad.”

Further Reading

Executive summary of the Supreme Court Judgement [link]

Discussion of the duty of directors to exercise their powers for a “proper purpose” [link]