Pride & Unfair Prejudice: shareholders' good faith obligations
19 September 2019
In Brown v Bray and Sharp, Brown, a minority shareholder, applied for relief under section 994 of the Companies Act 2006, claiming Bray and Sharp, who were majority shareholders, had unfairly prejudiced the company's affairs by breaching a contractual duty of good faith.
The parties were directors as well as shareholders. Eventually, their relationship deteriorated. Following failed meetings to buy-out Brown, Bray and Sharp called a "disciplinary hearing" which Brown was required to attend. Later that day, Brown was dismissed as director, and his communication with the company's bank and employees barred.
The shareholders' agreement specifically imposed obligations of good faith on the parties. Having reviewed the case law, including Interfoto, the court held the parties owed one another a duty:
- to act openly and fairly to one another;
- to ensure that the views of each were fully canvassed on important matters relating to the company;
- to avoid acting in the sectional interests of any particular shareholder or for an improper or collateral purpose;
- to use reasonable endeavours to ensure the shareholders' agreement was observed; and,
- to act consistently with the objects of the parties in entering into the shareholders' agreement.
The court held Brown's dismissal was in breach of the good faith obligation. The decision had been made "covertly", prior to initiating the hearing, without joint discussion of concerns, and without warning. It was taken to advance a sectional interest; indeed, the dismissal came shortly after Brown's request for a professional valuation of his shares. Sweeping communication restrictions unreasonably interfered with the office of a director, and shareholder decisions had been made without seeking consent.