Mark Faulkner & Ors v Vollin Holdings Limited & Ors

An express contractual duty of good faith takes its meaning from its contractual context. Its core requires honesty and may prohibit commercially unacceptable bad faith. Further duties, such as fidelity to the bargain, procedural fairness or regard for another party’s interests, must arise through ordinary interpretation or implication.

A professionally drafted shareholders’ agreement requires clear wording to restrict shareholders’ proprietary voting rights or alter the statutory allocation of corporate power. A shareholders’ agreement does not ordinarily form part of the company’s constitution for directors’ duties. Conduct is unfairly prejudicial only if both unfairness and prejudice are established. Disregard of membership rights may constitute non-financial prejudice, but a breach causing neither financial loss nor other material disadvantage does not necessarily do so.

Minority shareholders petitioned under section 994 of the Companies Act 2006 after the majority investors procured the resignation of one director, removed another and assumed a greater role in management. The company was not a quasi-partnership.

Adam Johnson J held in [2021] EWHC 787 (Ch) that a good-faith clause in the shareholders’ agreement protected an agreed constitutional balance under which the two directors were entrenched. He found breaches by the investors and their nominee directors and ordered the investors to purchase the minorities’ shares.

The central issues on appeal were the proper content of the express good-faith obligation, the parties’ contractual bargain, whether the shareholders’ agreement formed part of the company’s constitution for section 171(a), and whether the minorities had suffered unfair prejudice.

1. Appeal allowed and Respondents’ Notice dismissed. The investors and their nominee directors had not conducted the company’s affairs in a manner unfairly prejudicial to the minorities.

2. An express good-faith clause must be construed in its contractual context. The clause imposed a core obligation of honesty and prohibited bad faith, including conduct which reasonable and honest people would regard as commercially unacceptable. A finding of dishonesty was not indispensable. The clause did not automatically import universal minimum standards drawn from other cases. Additional requirements must arise through ordinary interpretation or implication.

3. The shareholders’ agreement did not impose procedural duties extending beyond sections 168 and 169 of the Companies Act 2006. Nor did it require the investors to consider the minorities’ interests in an undefined way. The authorities concerning partnerships, quasi-partnerships, foreign law and other commercial relationships did not justify importing those obligations into this professionally drafted agreement.

4. The contractual bargain neither entrenched the two directors nor excluded majority influence over the company’s commercial future. Section 168 gives the company in general meeting the power to remove a director. A shareholder may nevertheless contractually fetter its own vote, and that promise may ordinarily be enforced by injunction. No such express restraint appeared here. The provisions contemplating the directors’ departure and Regulation 70’s reservation of shareholder directions contradicted the asserted permanent balance of power.

5. The shareholders’ agreement was not part of the company’s constitution for section 171(a). It did not fall within sections 17 and 29, and was neither a constitutional resolution nor a decision equivalent to one under section 257. The findings of breach of directors’ duties under sections 171(a) and 172(1)(f) therefore could not stand.

6. The investors genuinely and rationally believed that the first director’s departure served the company’s interests. Their use of surprise and an ultimatum was neither dishonest nor bad faith. Similar reasoning defeated the complaints concerning the second director’s removal.

7. Unfairness and prejudice are distinct requirements under section 994. Non-financial prejudice is possible, but a disregard of membership rights does not invariably establish prejudice. The challenged management decisions were honest and commercially reasonable, the members’ financial interests were aligned, and the asset sale was not at an undervalue. No relevant prejudice was proved.

1. Court of Appeal (Civil Division): The appeal in [2022] EWCA Civ 1371 was allowed. The findings of unfair prejudice and the resulting purchase order were set aside. The Respondents’ Notice was dismissed.

2. High Court, Companies Court: In [2021] EWHC 787 (Ch), Adam Johnson J upheld the petition under section 994 of the Companies Act 2006 and ordered the investors to purchase the minorities’ shares at a value to be determined.