In 2022, the Court of Appeal of England and Wales decided that majority shareholders of a company did not act unfairly towards the minority shareholders when they asked directors to resign. The court also made some interesting comments on good faith. This month the UK Supreme Court declined to hear an appeal.

The minority shareholders argued that the majority shareholders had unfairly harmed them by making two directors resign. The judge in the first trial agreed. He based his reasoning on how he understood a clause in the shareholders' agreement that said the shareholders agreed among themselves and with the company to act in good faith in all their dealings related to the matters in the shareholders' agreement. The judge said this obligation meant the majority shareholders had to act "loyally to the agreement", and that the agreement they had made was "explicitly intended to prevent the majority from having their way in matters affecting the company's commercial future".

The appeal was successful because this interpretation was too broad. The Court of Appeal emphasized that the meaning of "good faith" depended on the context where it was used, and previous cases might not be very useful or relevant. Good faith does not always mean the same thing. For example, the duty of good faith that partners in a partnership owe each other was different from the duty that the shareholders in this case owed each other.

According to the Court of Appeal, the parties could break the obligation by being dishonest, acting in bad faith or also by acting in a way that reasonable and honest people would consider commercially unacceptable, even if they would not necessarily think of it as dishonest. The court had serious doubts about finding a duty of loyalty to the agreement to be part of a good faith clause in a shareholders' agreement. In any case, the shareholders' agreement did not give the two directors a "permanent balance of power", nor did it require the majority shareholders to deal with the two directors fairly and openly, and neither did it require the majority shareholders to consider the interests of the minority shareholders in some vague way beyond the general requirement of company law.

When drafting a contract and intentionally including a reference to good faith, it is a good practice to think about what exactly you mean by that term (and, just as importantly, what you don't mean) and, sometimes, it may be helpful, if you have something specific in mind, to draft it in.