When Good Intentions Are Not Enough: The Supreme Court on Directors’ Duties

The Supreme Court have delivered a significant judgment on directors’ duties, confirming that a sincere belief in what is best for the company is not enough where a director’s conduct is objectively disloyal.

The decision of Saxon Woods Investments Ltd v Costa provides valuable guidance on the meaning of good faith under section 172 of the Companies Act 2006.

Director Duties

Directors of a company owe various duties to their company. This case concerned the duty under section 172 of the Companies Act 2006 (“section 172”), which requires directors to act in good faith in the way they consider most likely to promote the success of the company for the benefit of its members as a whole.

Background

Saxon Woods was a minority shareholder in Spring Media Investments Limited (the “Company”). Mr Costa was a substantial indirect shareholder and chairman of the board until July 2024.

Pursuant to a shareholders’ agreement, the Company and its shareholders were obliged to cooperate in good faith towards achieving an exit by 31 December 2019. The Company’s board of directors entrusted sole responsibility for the sale process to Mr Costa.

Mr Costa believed that delaying the sale beyond the end of 2019 would produce a better outcome for the Company’s shareholders. However, rather than openly presenting that view to the board, he appeared to have deliberately delayed the sale process; taken control of decision-making; excluded other directors and shareholders; misled the board into believing the exit obligations under the shareholders’ agreement were being fulfilled and instructed advisers in a manner that prevented a sale from taking place in 2019. As a result, no exit occurred by the end of 2019, and the Company breached its obligations under the shareholders’ agreement. The Covid-19 pandemic then ended the prospects of a beneficial exit for the shareholders.

In 2021, Saxon Woods brought an unfair prejudice petition alleging that Mr Costa had breached both the shareholders’ agreement and his duties under section 172.

Prior Court Decisions

The High Court found that Saxon Woods had suffered unfair prejudice but held that Mr Costa had not breached section 172 because he genuinely believed he was acting in the Company’s best interests. As a result, the Court made a conditional buy-out order, requiring Mr Costa to purchase Saxon Woods’ shares at their 2019 value only if it could later be shown that the Company would have received an offer of more than US$75 million by the end of 2019.

On appeal, the Court of Appeal found that Mr Costa had breached section 172 and replaced the conditional order with an unconditional order requiring him to purchase Saxon Woods’ shares at their full undiscounted value as at 31 December 2019.

Mr Costa appealed to the Supreme Court, arguing that the duty of good faith under section 172 is purely subjective and depends only on a director’s honest belief.

The Supreme Court’s Decision

The Supreme Court unanimously dismissed Mr Costa’s appeal. They confirmed that the duty of good faith under section 172 extends beyond a director’s subjective belief and applies equally to their conduct.  A director cannot justify covertly pursuing their own preferred strategy simply because they genuinely believe it is in the company’s best interests. The Court made clear that the absence of an express statutory prohibition on undermining the board does not prevent such conduct from amounting to a breach of fiduciary duty.

The judgment also emphasised the importance of collective decision-making. Where the board has resolved upon a particular course of action, a director who disagrees must raise their concerns openly and seek to persuade their fellow directors through the proper governance process. A director cannot use delegated authority to pursue a conflicting strategy behind the board’s back. Doing so may amount to a breach of both sections 171 and 172 of the Companies Act 2006.

In addition, the Supreme Court did not assess whether Mr Costa had acted dishonestly. Instead, it assessed Mr Costa’s conduct through the wider fiduciary duties of loyalty and good faith. The Court also did not suggest that a shareholders’ agreement prevents a board from changing strategy where circumstances change. Rather, the issue was the covert and disloyal manner in which Mr Costa sought to pursue his own course.

What Does This Mean for Directors?

This decision provides important guidance on the standard of conduct expected of directors, particularly where they disagree with the board’s view of what is in the company’s best interests.

The judgment offers the following guidance for directors:

• Section 172 has both subjective and objective elements: a director’s genuine belief is not a defence to objectively disloyal conduct.

• Delegated powers must be used for their intended purpose and not to pursue a personal strategy contrary to the board’s decisions.

• Directors must work openly and collaboratively with the board, rather than acting covertly or undermining collaborative decision-making.

If you are a director and are unsure whether your actions comply with your legal duties, it is important to seek legal advice as soon as possible. For help with your situation, call 01254 606008, get in touch by email, or use the online chat below.