Compound Photonics: a shot across the bows of majority shareholders

Posted: 03/09/2021

The majority shareholders of a company are in a powerful position when it comes to decision making. However, care must be taken when exercising such power so that other minority shareholders are not unfairly prejudiced by the actions of the majority – as this could lead to costly liability for the majority shareholders personally.

Here we examine the recent case in which minority shareholders were successful in pursuing their unfair prejudice petition on the basis that they had indeed suffered unfair prejudice at the hands of the majority shareholders (Re Compound Photonics Group Ltd, Faulkner and ors v Vollin Holdings Ltd and ors [2021] EWHC 787 (Ch)).

Case summary

There were two minority shareholder claimants: Mr Faulkner, a director and chairman of Compound Photonics Group Limited (CPGL), and Dr Sachs, a former director and CEO of CPGL. Dr Sachs had set up CPGL to revolutionise the market in projectors between 2010 and 2016 following Dr Sachs’ academic research. During the relevant period, the majority shareholders in CPGL were Minden Worldwide Limited and Vollin Holdings Limited. Vollin made a number of substantial investments starting in 2010, becoming a shareholder in the process. Minden then likewise made substantial investments. By 2013, investors held over 80% of the shares.

The minority shareholders argued that they had been unfairly prejudiced because they were removed as directors from CPGL in 2016, despite it previously being agreed that they would remain involved in the business. They also argued that as a result of that exclusion, the company’s articles, a corresponding shareholders agreement, had been ignored, giving rise to further instances of unfair prejudice.

It was alleged that there were additional breaches, by Vollin and Minden nominee directors, of the duties owed by them under the Companies Act 2006. The allegations included an apparent sale at an undervalue of a property owned by a subsidiary of CPGL.

In response, the majority shareholders argued they had supported Dr Sachs in realising his vision by providing large scale funding, but they eventually lost faith in Dr Sachs and entirely reasonably asked him to resign, which he agreed to do. They argued that they and their nominee directors acted in good faith at all times and as a result they were not in breach of any provisions of the relevant shareholders agreement, nor were the directors in breach of the articles or of any Companies Act duties. They further argued that they had decided to remove Mr Faulkner from the business by exercising their majority vote because his role had become redundant and his unpredictable behaviour was harming CPGL.

Mr Justice Adam Johnson held that the majority shareholders sought to impose their vision of how the business should operate and, in doing so, they essentially usurped the board and took over control of the management of CPGL. They had ignored CPGL's constitution, which included ensuring that Dr Sachs and Mr Faulkner would remain involved in the management of the business. He held that the intention had been that protections be in place to prevent their removal as directors and unfair prejudice had been caused by, amongst other things, forcing Dr Sachs to resign (or be ousted and no further funding provided) and removing Mr Faulkner following his questioning of the corporate governance of CPGL.

Where does this leave the ‘investor majority’?

There are certainly some stark warnings for investors in the findings of this case (although the remedy to be afforded to the petitioners remains to be addressed). Ordinarily it would go without saying but clearly investors looking to drive the direction of a company must do so within the parameters of the company’s constitutional documents (and generally accepted principles of good corporate governance). The case also serves as a reminder that investor nominated directors of a company are, like any other director, bound by the general duties of directors and as such must promote the success of the company and exercise independent judgment (amongst other things) and not merely do the bidding of their appointor.

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