Compound Photonics Group Ltd, Re

In an unfair prejudice petition, majority shareholders may retain the statutory power to remove directors while being contractually restricted from exercising that power in breach of the parties’ constitutional bargain. An express good faith obligation may require fidelity to that bargain, fair and open dealing, regard to the other members’ legitimate interests and procedurally fair decision-making.

Where the agreed governance structure gives particular directors a central role in balancing majority and minority interests, bypassing that structure and transferring strategic control to the majority may constitute unfair prejudice. The court will assess the directors’ statutory duties separately. Commercial decisions honestly taken for the company’s benefit do not necessarily breach those duties, although directors must act in accordance with the company’s constitution and have regard to the need to act fairly between members.

The petition was brought under section 994 of the Companies Act 2006 by minority shareholders in Compound Photonics Group Limited and its subsidiary, Compound Photonics UK Limited. The petitioners alleged that the majority investors, Vollin Holdings Limited and Minden Worldwide Limited, had overridden the agreed governance arrangements, procured the removal of key directors, excluded the minorities from management and caused the disposal of the Newton Aycliffe facility.

The principal issues were the scope and content of the good faith obligation in the 2013 shareholders agreement, the effect of the statutory power to remove directors, alleged breaches of directors’ duties, the appointment of replacement directors, the change in business strategy and whether Newton Aycliffe had been sold at an undervalue.

1. Good faith and the constitutional bargain. The 2013 shareholders agreement and articles formed a carefully calibrated governance settlement. The board was to manage the business, while Dr Sachs and Mr Faulkner occupied special positions intended to preserve a balance between the majority investors and the minority shareholders. Clause 4.2 of the shareholders agreement was sufficiently broad to govern the investors’ exercise of voting rights affecting that balance. It required fidelity to the bargain and incorporated obligations of fair and open dealing, regard to the other parties’ interests and, where appropriate, an opportunity to make representations: [2021] EWHC 787 (Ch) at [382]-[400].
2. Removal of Dr Sachs and Mr Faulkner. Section 168 of the Companies Act 2006 made the removals legally effective, but did not prevent the removals from constituting breaches of the shareholders’ agreement. The investors acted in breach of good faith by deciding to exclude Dr Sachs and Mr Faulkner in order to override the agreed constitutional balance. The process for removing Dr Sachs was also procedurally unfair: he was taken by surprise, was not told clearly that short-term funding had already been approved until 31 May 2016, and was given no proper opportunity to respond. The same substantive conclusion applied to Mr Faulkner. The petitioners were therefore unfairly prejudiced: [402]-[419], [502]-[510].
3. Governance after Dr Sachs’ departure. The investors and their nominees effectively transferred strategic and management decisions from the board to investor update meetings. This breached clauses 4.2, 5.2 and 5.3(a) of the shareholders agreement and constituted continuing unfair prejudice. The withholding of information, the handling of the Selex Last Time Buy, the proposed funding and the Kaiam discussions were manifestations of that wider collapse of the agreed governance structure: [438]-[461].
4. Directors’ duties. The nominee directors breached section 171(a) by participating in arrangements that disregarded the company’s constitution, which included the shareholders agreement. They also breached section 172 in supporting Dr Sachs’ removal without proper regard to the minorities’ interest in preserving the constitutional balance. The general management decisions after March 2016 did not establish breaches of sections 171(b), 173 or 175. The directors honestly considered that cost reduction, repositioning and exploration of a Kaiam transaction promoted the company’s interests: [420]-[430], [472]-[491], [576]-[591].
5. Other issues. The change towards embedded projection, AR, VR and HUD products remained within the contractual definition of the business. Mr Bolger was not a shadow director. The appointment of further directors was another manifestation of the breakdown of the constitutional machinery. Newton Aycliffe was not shown to have been sold at an undervalue; the sale to Kaiam was commercially defensible and the later US$80 million resale reflected a subsequent market change or a special purchaser. The petitioners nevertheless succeeded on the continuing governance breaches. Remedies were left for a further hearing: [462]-[468], [492]-[501], [512]-[531], [532]-[574], [592].