Court Of Appeal Guidance On Good Faith Obligations In Shareholders' Agreements

• Published date: 25 November 2022
• Law Firm: Cooley LLP
• Author: Ms Alex Radcliffe and Andrew Love

Introduction

In its judgment in Re Compound Photonic Group Ltd¹, the Court of Appeal has given helpful guidance on the scope of good faith obligations in a shareholders' agreement.

The case concerned the removal of two directors by the majority shareholders, which triggered the minority shareholders to present an unfair prejudice petition. The judge at first instance found that the directors were entrenched in office and that the majority shareholders were not entitled to vote to remove them, despite the fact there was no terms in the shareholders' agreement to that effect.

Allowing the appeal of the majority shareholders, the Court of Appeal has confirmed that the meaning of a good faith obligation must be objectively determined by the express and implied terms of the contract containing that obligation. The lack of any term prohibiting the majority shareholders from removing the directors was fatal to the petition.

The background

The facts of the case are complex and set out in over 300 paragraphs in the first instance decision. The following is, by necessity, a highly condensed summary of the most salient points.

Compound Photonics Group Limited (the 'Company') was a vehicle for the intended commercialisation of academic research by the CEO, Dr Sachs, into gallium arsenide and liquid crystal technology. The intention was to utilise that technology for the manufacture of very small ('pico') projectors.

The Company received substantial investment from three companies, which together held 93% of the shareholding (the 'Investors'). The remaining 7% of the shareholding was held by Dr Sachs, Mr Faulkner (the Company's chairman), and 68 other shareholders (the 'Minorities').

The...