High Court - Shareholders Agreement - Obligation to 'work together in good faith' to seek an exit

In a recent case the High Court determined that an investor shareholder potentially suffered unfair prejudice when the company failed to comply with its obligations in a Shareholders’ Agreement to achieve a sale or listing of the business or company within a certain time period (an Exit). The Exit clause required the Company to: 

• work towards an Exit date,

• consider opportunities for an Exit, or

• failing an Exit, to engage an investment bank to cause an Exit. 

In this case the claimant was a minority investor shareholder (Mr Loy), Mr Loy sought an order against an individual director (Mr Costa) that he be forced to buy Mr Loy’s shares at a price to be determined by the court.

The court agreed the Exit clause had been breached, and among other things rejected Mr Costa’s contentions that executing an Exit in line with the specified timetable would not maximise value for shareholders, and that implied directors’ duties therefore excused compliance. The court decided this was a commercial decision which could not be justified by reference to directors’ duties.

The Exit clause did not impose a strict timetable but it was implied that the Exit take place as soon as reasonably practicable after 31 December 2019. The purpose of the clause was to achieve an Exit by a date, and therefore construing that no further urgency after 31 December was needed, was counter-intuitive.

The court determined that Mr Costa had controlled the sale process, limited information flow to the other directors and Mr Loy and, in so doing, led the company into breaching its obligations in the Shareholders’ Agreement.

As a result of Mr Costa’s acts, Mr Loy had been unable to realise the value of his shares. This breached the terms the parties had agreed upon to conduct the company’s affairs and amounted to unfair prejudice. 

What the case means in practice

This is a good example of the English courts striving to give effect to the commercial intention of an agreement, in this case, to actively pursue an Exit within a timeframe.

Investors will usually want a timeframe around their investment and this case brings some degree of comfort that even without definite parameters this is enforceable.

Practical Application

• Consider existing Exit obligations within Shareholder Agreements. What are your obligations as directors to achieve this? Consider opportunities? Engage professional advisers?;

• Is “Exit” clearly defined in the Shareholders Agreement? Do you know what amounts to an Exit? The 3 common types are:

  • sale of the Company;

  • sale of business and assets;

  • IPO

• Does the Exit Clause require you to sell the entire issued share capital (as in the case above) or to achieve an Exit at a minimum value for investors only? This will be an important distinction for Founders.

• Directors should ensure that they communicate information on strategy, value and opportunities required to be shared under a Shareholders’ Agreement in connection with an Exit Clause (or otherwise). Failure to do so could lead to an unfair prejudice petition or action for breach of duty.

For advice on existing Investment Agreements, Shareholders’ Agreements or putting a new Shareholders’ Agreement or Investment Agreement in place, contact our Corporate Commercial Team.