Inspecting company registers and the 'proper purpose' test

Every company is required to keep certain registers and records. In many cases, those registers and records must be open to public inspection.

But special rules apply both to a company's register of members and its PSC ('persons of significant control') register. Those registers only have to be made available for inspection where a request has been made for a 'proper purpose'. But what is a 'proper purpose'? And what should a company do if it receives a request?

Company records

The general records which a company must keep include registers of matters such as the company's directors, secretaries, PSCs and members, as well as various documents such as copies of directors' service agreements,  share buyback contracts and instruments creating charges.

Whilst some specific records must be kept confidential – such as the register of directors' residential addresses - the majority of them must be open to public inspection. 

So what should a company do when it receives a request to inspect its register of members or PSCs?

Receiving an inspection request

Any person who wants to inspect a company's register of members or PSCs must state in the request their name and address, whether the information will be disclosed to any other person and, crucially, the purpose for which the information is to be used.

When a company receives an inspection request it has only five working days within which it must either comply with the request, by allowing the person to inspect the register of members, or make an application to court for an order that the company need not comply with the request on the grounds that the request has not been made for a 'proper purpose'.

Failing to comply with a valid inspection request is a criminal offence by both the company and every officer in default. Whilst companies may be keen to protect information in the register, they will need to consider carefully whether to permit inspection as an unsuccessful court application would come with adverse costs implications.

Guidance on 'proper purpose'

In a recent case  the High Court provided a useful summary of the law relating to requests to inspect the register of members as follows:

• the criminal penalties associated with non-compliance emphasise the importance attached to the right of access to the register;
• the phrase 'proper purpose' should be given its ordinary and natural meaning;
• the court should first identify the purpose of a request, which is not restricted to the purpose set out in that request and should be determined by the court on the balance of probabilities on the basis of the evidence before it;
• having identified the purpose, the court should then consider whether it is proper, using an objective test on the basis of the evidence before the court;
• the court may refer to the guidance note issued by The Chartered Governance Institute, ICSA;
• the test for whether a purpose is proper does not depend on whether it is in the interests of shareholders as the person making the request, who may or may not be a shareholder, may have interests of their own in making the request;
• the onus is on the company to show, on the balance of probabilities, that the request is improper; and
• if the court is in any doubt it should refuse the company's application and allow access.

In that case the court held that seeking a general meeting of the members and, in order to do that, contacting those members with a view to proposing resolutions to remove and replace the directors and a managing agent, was an entirely proper purpose. The court said there was a strong presumption in favour of shareholder democracy and a policy of upholding principles of corporate transparency and good corporate governance. If a member could not communicate with fellow members it put the board in a very strong position and weakened the company's corporate governance, with the members unable to monitor the board's activities. 

The period in which a company must make a decision about an inspection request is very short – just five working days - so this latest guidance from the courts on interpreting the 'proper purpose' test is welcome.