Compound Photonics Group Ltd, Re

This is an unfair prejudice petition under section 994 of the Companies Act 2006 brought by minority shareholders and two former directors (Mr Faulkner and Dr Sachs) of Compound Photonics Group Limited (CPGL). The court construed the parties' 2013 constitutional documents (the 2013 SHA and Articles) and concluded that a contractual obligation to act in good faith (clause 4.2 of the SHA), read with the allocation of board powers and special protections for the CEO and Founder Director, imposed a binding limitation on the manner in which the majority investors could exercise control.

Applying established principles about contractual good faith and directors' duties (including CA 2006 ss.171 and 172), the judge found that the majority investors and their nominee directors overrode the agreed constitutional bargain from March 2016 onwards. Key instances were the manner of Dr Sachs' effective exclusion in March 2016 and subsequent marginalisation and eventual removal of Mr Faulkner. Those actions breached the SHA (notably clauses 4.2, 5.2 and 5.3(a)) and gave rise to unfairly prejudicial treatment of the minority shareholders.

The court rejected a number of particular allegations: it did not find Mr Bolger to have been a shadow director for the relevant period; it found no evidence that the Newton Aycliffe sale to Kaiam in May 2017 was a sale at an undervalue (the expert valuation evidence favoured the respondents' expert); and it did not make findings of breach in respect of every alleged statutory duty (some allegations were not made out on the evidence). Remedies were reserved for a separate hearing.

Background and parties

- This was a first instance trial of an unfair prejudice petition under section 994 CA 2006 brought by minority shareholders, the former CEO (Dr Jonathan Sachs) and former Chairman (Mr Mark Faulkner) of CPGL. The majority investors were represented by entities associated with Vollin/Aldon and Minden, advised principally by Kew Capital and associated advisers. The petitioners alleged that (i) the majority investors and their nominee directors frustrated the constitutional bargain embodied in the 2013 shareholders' agreement and articles, (ii) the petitioners were excluded from management and essential information, (iii) the conduct of the majority and their nominees involved breaches of the SHA (notably clause 4.2) and of directors' duties under the Companies Act 2006, and (iv) a subsidiary asset (the Newton Aycliffe fab) had been sold at an undervalue.

Nature of the application

• Relief sought: a declaration and such relief as the court considers appropriate under the unfair prejudice regime (section 994). The hearing was on liability only; remedies were to be heard separately.

Issues framed by the court

• Construction and scope of the contractual good faith obligation in clause 4.2 of the 2013 SHA and its interaction with the Articles (including the special protections for the CEO and Founder Director).
• Whether the majority investors and/or their nominee directors acted in breach of the SHA or of statutory directors' duties (ss.171, 172, 173, 175 CA 2006) in excluding and removing the petitioners from management and in subsequent management of CPGL.
• Whether specific acts (service of the Selex last-time-buy notice, closing or sale strategy for Newton Aycliffe, the transaction with Kaiam, withholding of information and the removal of Mr Faulkner) were unfairly prejudicial.
• Whether a sale of Newton Aycliffe to Kaiam in May 2017 was at an undervalue.

Court's reasoning (concise)

• Construction: The court treated the SHA and Articles as the parties' contractual bargain. Clause 4.2 (an undertaking to act in good faith in matters in the SHA) was wide enough, in context, to require fidelity to the constitutional allocation of powers. The 2013 constitution was a compromise allocating management to the board with protections for the CEO and Founder Director; that bargain could not be nullified in substance by majority action without potential contractual consequences even though a majority still had the literal statutory power to remove directors under CA 2006 s.168.
• Content of good faith: The court adopted the established approach that a contractual duty of good faith requires honest conduct, faithfulness to the agreed common purpose, not using powers for an ulterior purpose, fair and open dealing and regard to the legitimate interests of other parties. Procedural fairness could be required where major strategic decisions affecting shareholders were in issue.
• Application: The Investors decided in March 2016 to remove Dr Sachs and to manage the business through investor-update processes, marginalising the petitioners and operating outside the governance machinery agreed in 2013. The court concluded the Investors breached clause 4.2 and related SHA provisions (notably clauses 5.2 and 5.3(a)) and that the nominee directors breached duties under CA 2006 ss.171 and 172 in relevant respects. The removal of Dr Sachs and the later removal of Mr Faulkner were therefore unfairly prejudicial to the petitioners.
• Newton Aycliffe: The court accepted the respondents' expert valuation over the petitioners' expert and found no sale at an undervalue. The II-VI subsequent resale at a far higher price was not a reliable indicator of market value at the May 2017 date.
• Shadow director: The court rejected the submission that Mr Bolger was a shadow director for the period in question; his actions were performed in an executive capacity and within a context where investor forums were driving strategy.

Disposition

- The petition succeeded in part (liability established on a number of core unfair prejudice complaints). Remedies and relief were reserved for a further hearing.

Application allowed in part. The court held that the majority investors and those acting through them had, from March 2016 onwards, materially overridden the constitutional bargain expressed in the 2013 shareholders' agreement and articles. In doing so they breached the contractual good faith obligation in clause 4.2 and related provisions (notably clauses 5.2 and 5.3(a)), and key nominee directors breached duties under CA 2006 ss.171 and 172 in relevant respects. The court nevertheless rejected certain pleaded allegations (notably that Newton Aycliffe was sold at an undervalue and that Mr Bolger was a shadow director). Remedies were deferred to a later hearing.