Mark Faulkner v Vollin Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Snowden,Lady Justice Carr,Lord Justice Newey |
| Judgment Date | 21 October 2022 |
| Neutral Citation | [2022] EWCA Civ 1371 |
| Docket Number | Case No: CA-2021-000720 |
| Court | Court of Appeal (Civil Division) |
In the Matter of Compound Photonics Group Limited
And in the Matter of Compound Photonics UK Limited
And in the Matter of the Companies Act 2006
[2022] EWCA Civ 1371
Lord Justice Newey
Lady Justice Carr
and
Lord Justice Snowden
Case No: CA-2021-000720
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
Mr. Justice Adam Johnson
Royal Courts of Justice
Strand, London, WC2A 2LL
Andreas Gledhill KC and Donald Lilly (instructed by Allen & Overy LLP) for the Appellants Vollin and Aldon
Mark Rainsford KC (instructed by Direct Access) for the Appellant Minden
Robin Hollington KC and Adrian Pay (instructed by Mishcon de Reya LLP) for the Petitioners/Respondents to the Appeal
Hearing dates: 4–6 May 2022
Approved Judgment
Remote hand-down: This judgment was handed down remotely at 10.00am on 21 October 2022 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
| Index to judgment | Paragraph number |
| A. Introduction | 1 |
| B. Factual Background | 9 |
| C. The terms of the 2013 SHA and 2013 Articles | 75 |
| D. The arguments of the parties at trial | 93 |
| E. The Judge's analysis of the law and the parties' bargain | 97 |
| F. The Judge's application of the law to the facts | 122 |
| G. The central issues on the appeal | 142 |
| H. The meaning of clause 4.2 of the 2013 SHA | 147 |
| I. The parties' bargain | 243 |
| J. Was the 2013 SHA part of the Company's constitution? | 277 |
| K. Were the Minorities unfairly prejudiced? | 287 |
| L. The Respondents' Notice | 336 |
| M. Disposition | 341 |
A. Introduction
This is an appeal against the decision of Mr. Justice Adam Johnson (“the Judge”) given in a detailed judgment after a four week trial of an unfair prejudice petition under section 994 of the Companies Act 2006 (“section 994” and “the 2006 Act”). The Judge ordered the Appellants (“Vollin”, “Minden” and “Aldon”, together “the Investors”) to buy the shares of the Petitioners (“Dr. Sachs”, “Mr. Faulkner” and 68 other shareholders, together “the Minorities”) in Compound Photonics Group Limited (“CPGL” or “the Company”) at a value to be determined.
The core of the case for the Minorities, which the Judge accepted, was that they had been unfairly prejudiced by the Investors when Dr. Sachs and Mr. Faulkner were respectively forced to resign and removed from office as directors and thereby excluded from any continuing role in the management of the Company.
It was, however, common ground that the Company was not a “quasi-partnership” company to which any equitable considerations of the type identified by Lord Hoffmann in O'Neill v Phillips [1999] 1 WLR 1092 might apply. Instead, the Judge accepted that, in excluding Dr. Sachs and Mr. Faulkner, the Investors had acted in breach of the terms of a shareholders' agreement relating to the Company. The Judge also found that the directors nominated by the Investors had acted in breach of their duties to the Company under sections 171(a) and 172 of the 2006 Act.
At the heart of the Judge's decision was the finding that the shareholders' agreement and the Company's articles comprised a “constitutional settlement” reached between the shareholders under which (i) Dr. Sachs and Mr. Faulkner were entrenched in office as directors; and (ii) even though the Investors had provided very substantial capital for the Company's business and as a result held 93% of the shares, if they voted in favour of removing Dr. Sachs or Mr. Faulkner from office or sought to obtain control of the board, that would be a breach of contract.
There were, however, no express terms of the shareholders' agreement to that effect. The central component of the Judge's reasoning in this regard was the meaning that he gave to a clause in the shareholders' agreement under which the shareholders undertook to each other and to the Company that they would at all times act “in good faith” to each other in relation to the matters contained in the agreement. In interpreting that clause, the Judge adopted the formulation of HHJ Klein in Unwin v Bond [2020] EWHC 1768 (Comm) of what were described as “minimum standards” of conduct required by a contractual good faith clause.
The Judge held, in particular, that the good faith clause required the Investors to act “with fidelity to the bargain”, and that the bargain that the Investors had made was “expressly designed to avoid the will of the majority prevailing in matters concerned with the commercial future of the Company”. The Judge also held that the contractual duty of good faith included an obligation upon the Investors to deal “fairly and openly” with Dr. Sachs and Mr. Faulkner, and to take account of the interests of the Minorities as well as their own interests.
The Investors appeal, essentially on the basis that the Judge interpreted the “good faith” clause in the shareholders' agreement far too widely. The Investors contend that the clause did not mean that they had given up the right to vote to remove Dr. Sachs and Mr. Faulkner or take control of the management of the Company in which they were very substantial investors and majority shareholders; and neither did it impose upon them any duties of procedural fairness or require them to take into account the interests of the Minorities when deciding how to exercise their right to vote as majority shareholders.
On the facts, the Investors rely on the finding by the Judge that they had genuinely and reasonably formed the view that it was necessary for Dr. Sachs to cease to be involved in the management of the business for the good of the Company. On that basis they contend that they did not act in breach of their obligation of good faith when they required the resignation of Dr. Sachs as a condition of providing the substantial further financial investment that the Company needed. The Investors also deny any wrongdoing by themselves or their nominee directors when they subsequently assumed control of the management of the Company's business and removed Mr. Faulkner as a director.
B. Factual Background
The factual background is set out in considerable and lucid detail at paragraphs 1 to 333 of the Judgment. Although the Investors challenge a number of the characterisations and legal conclusions that the Judge drew, there was no direct challenge to any of his findings of fact. What follows is therefore a simplified (and necessarily incomplete) overview of some of the key events for the purposes of understanding the legal issues arising on this appeal.
The Company and its subsidiary, Compound Photonics UK Limited (“CPUK”) were the vehicles for the intended development and commercialisation of academic research by Dr. Sachs into gallium arsenide and liquid crystal technology. The Company was formed in 2009 to become the holding company of CPUK, which had been formed in 2006. The focus of the plan was to develop, manufacture and sell a very small (“Pico”) projector.
Dr. Sachs was Chief Executive Officer (“CEO”) of the Company and an employee of CPUK, and had day-to-day control of the business of the two companies. The Judge described Dr. Sachs as the man whose vision for the exploitation of the technology the Minorities had bought into when investing in the Company: or, more colourfully, as Mr. Faulkner had said in evidence, Dr. Sachs was “ the jockey they were backing”.
Mr. Faulkner was an independent financial adviser, who was the non-executive Chairman of the Company. In his role as financial adviser, Mr. Faulkner had originally introduced the other Minorities to CPUK as shareholders.
Vollin and Aldon are part of an investment structure of which the beneficial owners are Dr. Alexander Abramov and Dr. Alexander Frolov, two Russian businessmen who made substantial sums on the public listing of EVRAZ plc, a mining and metals business. Together, Dr Abramov and Dr Frolov hold approximately 29% of the issued shares in EVRAZ plc. Minden is part of an investment structure of which the Israeli-Russian businessman Mr. Roman Abramovich is the beneficial owner. Mr. Abramovich is also the owner of a 29% stake in EVRAZ plc. During the relevant events, Vollin and Aldon were given investment advice by an entity called Kew Capital LLP (“Kew”) which was based in London, and Minden was given investment advice by an entity named MHC (Services) Limited (“MHC”), also based in London.
Vollin was introduced to the Company and CPUK in about 2010, and made an initial investment of about $20 million, becoming a minority shareholder in the Company on the terms of a detailed shareholders' agreement and new articles of association (the “2010 SHA” and the “2010 Articles”). Those documents entitled Vollin to nominate two directors to the board of the Company. At that time, the board comprised Dr. Sachs, Mr. Faulkner, a Dr. Robert Lind (an associate of Dr. Sachs), and a Mr. Fletcher and a Mr. Bolger from Kew (nominees of Vollin). The Company's business was, however, managed in an informal way. There is no record of any formal board meetings taking place at any time.
In August 2011, further capital was needed and was raised by a rights issue which resulted in Vollin's shareholding in the Company increasing to about 51%. At this time good progress was being made with the Pico projector project and there was confidence in the business.
By April 2013, the project had not kept to the timetable originally envisaged and substantial further investment was required. There was...
To continue reading
Request your trial
-
PD Teesport Ltd v P&O North Sea Ferries Ltd
...core honesty obligation, a good faith obligation can be conditioned by its context (see, by analogy, Re Compound Photonics Group Ltd. [2022] EWCA Civ 1371, a case to which the parties did not refer me) and I do not understand the defendant to allege (and it certainly has not pleaded) that ......
-
Aston Martin Mena Ltd v Aston Martin Lagonda Ltd
...Al Nehayan v Kent [2018] EWHC 333 (Comm). 145. This was recently confirmed by the Court of Appeal in Re Compound Photonics Group Ltd [2022] EWCA Civ 1371…” [emphasis added] 137 The Claimant's submissions above referred to Leggatt J in Yam Seng Pte Ltd v International Trade Corp Ltd [2013......
-
Quantum Advisory Ltd v Quantum Actuarial LLP
...the confines of what the Services Agreement provided for. As Snowden LJ said in Faulkner v Vollin Holdings (Re Compound Photonics) [2022] EWCA Civ 1371 at [205] in the context of an express obligation of good faith, any invocation of a concept of the “spirit of the contract” which such an ......
-
Hikari Miso (UK) Ltd v David Knibbs
...process of interpreting an agreement or implying terms into it.” (emphasis added) 130 Similarly, in Re Compound Photonics Group Ltd [2022] EWCA Civ 1371, Snowden LJ analysed aspects of Arden LJ's decision as set out above, before concluding that: 212. … the concept of fidelity to the barga......
-
2022 Half-year in review M&A legal and market developments
...SHA. Permis sion has been requested to appeal to the Supreme Court. (Re Compoun d Photonics Group Ltd , Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371) ...
-
Good Faith Obligations ' Context Is Everything
...of dispute, it is likely to fall to the courts to determine the scope of that clause, as happened in Compound Photonics Group Ltd, Re [2022] EWCA Civ 1371. The clause in In this case, minority shareholders brought a petition under s.994 Companies Act 2006. The minority claimed that they had......
-
Court Gives Limited Interpretation To Express 'good Faith' Clause
...Photonics Group Ltd, Re [2022] EWCA Civ 1371 the Court of Appeal gave a limited interpretation to an express 'good' faith' clause in a shareholders' agreement. The clause did not prevent the majority shareholders of a company from removing a director. The Court of Appeal unanimously agreed ......
-
Court Of Appeal Guidance On Good Faith Obligations In Shareholders' Agreements
...scope of that intention expressly to avoid reliance on implied terms that will almost invariably be subject to dispute. Footnotes 1 [2022] EWCA Civ 1371 2 [2020] EWHC 1768 (Comm) The content of this article is intended to provide a general guide to the subject matter. Specialist advice shou......