Last autumn, the Court of Appeal held that actions taken by majority shareholders of a company, asking directors to resign, were not unfairly prejudicial to the minority shareholders. In doing so, the court made some interesting observations about good faith. This month the UK Supreme Court refused permission to appeal.

Minority shareholders claimed that they had been unfairly prejudiced by the majority shareholders who were said to have forced two directors to resign. The judge at first instance agreed. The essence of his reasoning was the meaning he gave to a clause in the shareholders’ agreement under which the shareholders expressly agreed with each other and the company to act in good faith in all dealings in relation to the matters in the shareholders’ agreement. The judge held that obligation required the majority shareholders to act “with fidelity to the bargain”, and that the bargain that they had made was “expressly designed to avoid the will of the majority prevailing in matters concerned with the commercial future of the Company”.

The successful appeal was about this interpretation being too wide. The Court of Appeal stressed that the meaning given to “good faith” must come from the context in which it is used, and previous cases may be of limited value and are to be treated with caution. Good faith doesn’t always mean the same thing. For example, the duty of good faith owed by partners in a partnership was not the same as that owed by the shareholders in this case.

In the Court of Appeal’s view, the obligation on the parties could be breached by being dishonest, acting in bad faith but also by acting in a way that would be regarded as commercially unacceptable to reasonable and honest people, albeit that they would not necessarily regard it as dishonest. The court had considerable reservations about finding a duty of fidelity to the bargain to be inherent in a good faith clause used in a shareholders’ agreement. In any event, the shareholders’ agreement did not require the two directors to have an “unalterable balance of power”, nor did it impose some procedural duty of fair and open dealing with the two directors, and neither did it require the majority shareholders to have regard to the interests of the minority shareholders in some undefined way over and above the general requirement of company law.

It’s a good discipline when expressly drafting in a reference to good faith in a contract, to consider what exactly you mean by that phrase (and, equally importantly, what you don’t mean) and, sometimes, it may be helpful, if you have something specific in mind, to draft this in.

Judgment: Re Compound Photonics (aka Mark Faulkner v Vollin Holdings)

For more about good faith please see the FMLC paper on Duties of Good Faith in Wholesale Financial Contracts