Court Gives Limited Interpretation To Express 'good Faith' Clause

• Published date: 10 March 2023
• 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...