Court Gives Limited Interpretation To Express 'good Faith' Clause

• Published date: 10 March 2023
• Subject Matter: Corporate/Commercial Law, Directors and Officers, Shareholders
• Law Firm: Norton Rose Fulbright
• Author: Claire Irwin and Gill Davy

In Compound Photonics Group Ltd, Re [2022] EWCA Civ 1371 the Court of Appeal gave a limited interpretation to an express 'good' faith' clause in a shareholders' agreement. The clause did not prevent the majority shareholders of a company from removing a director. The Court of Appeal unanimously agreed that the High Court had interpreted the good faith clause too broadly.

Background

This was an appeal against a High Court decision in a trial of an unfair prejudice petition under section 994 of the Companies Act 2006.

The appellants were the investors in a company, who held 93% of the shares (the Investors). The founders of the company, Mr Faulkner and Mr Sachs, held the minority shares and remained involved as directors (the Respondents).

Over time, the business failed to be as lucrative as had been hoped, and the Investors began losing faith in the Respondents' directorship. Due to pressure from the Investors, Mr Sachs ultimately resigned from the board. The Investors later used their powers under the Companies Act 2006 to call a general meeting, at which they removed Mr Faulkner as a director.

The Respondents argued that they had been unfairly prejudiced by the conduct of the Investors when they were respectively forced to resign and removed from office as directors. The conduct breached the good faith clause contained in the shareholders' agreement pursuant to which the shareholders undertook to each other and to the company that they would at all times act "in good faith" in relation to the matters contained in the agreement. The Respondents asserted that this provision required the Investors to adhere to the inherent "bargain" set out in the shareholders' agreement - namely, that the two directors should be entrenched as directors and that the Investors, as majority shareholders, should not control the board in determining the commercial future of the company. The Investors argued to the contrary that they had complied with the good faith clause by acting honestly and in a commercially justifiable manner.

In interpreting the good faith clause, the first-instance Judge followed Unwin v Bond [2020] EWHC 1768 (Comm) and held that a good faith obligation included a number of minimum standards, including procedural fairness and held in favour of the Respondents. The Investors appealed.

Court of Appeal's decision

The Court of Appeal allowed the appeal. The Court of Appeal disagreed with the approach at first instance, ruling that the Investors did not...