Think, then act: key takeaways from the Supreme Court's judgment in Saxon Woods Investments Limited and others v Costa

The Supreme Court has clarified that a director's duty under section 172 of the Companies Act 2006 requires directors to act loyally and in good faith, and the duty is not satisfied merely where directors honestly consider they are pursuing the company's best interests.  

Saxon Woods Investments Limited (Saxon Woods) brought an unfair prejudice petition under s994 of the Companies Act 2006 in relation to its shareholding in Spring Media Investments Limited (the Company). A shareholders' agreement required that the Company work towards a sale of the company by the end of 2019. With responsibility for the sale process, its chairman, Mr Costa, believed that delaying the sale would produce a better return and covertly pursued this strategy, withholding information from and misleading the board. The anticipated exit was not achieved before the COVID-19 pandemic adversely impacting the business. 

The High Court found that Mr Costa was responsible for the Company's breach but declined to order the compulsory purchase of Saxon Woods' shares and did not find that the s172 duty had been breached. The Court of Appeal allowed the Company's' appeal on these points, and the Supreme Court rejected Mr Costa's subsequent appeal, identifying the key takeaways below.

The duty under s172

Duty to promote the success of the company … A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company …

Good faith under s172 is not purely subjective

The Supreme Court rejected the argument that the duty under s172 is purely subjective: that is, it is blindly judged according to whether the director genuinely believed that their conduct was in the company's best interests. Instead, the Supreme Court found that whilst courts will respect the genuine business judgement of a board of directors, this subjective element is not conclusive and a director's own belief, however genuinely held, not a panacea. In particular, a duty of loyalty and good faith must be assessed objectively, and a director cannot use deliberately hidden or misleading means merely on the basis they believe it in the company's best interests.

A central point was the dual aspect of 'considering' and 'acting' within the language of s172. The duty is not simply concerned with what a director thinks: how they go on to act in implementing their belief is equally important. A director can start with good intentions, but in putting these into action veer off down a different path that leads to breach.

Boards govern collectively

Directors who disagree with views of the board should participate in collective decision-making and not pursue their own clandestine strategy or undermine decisions made by the board. Boards bear responsibility for a company's decisions and direction as a whole.

Fiduciary loyalty remains central / Dishonesty was not the real issue

The relevant test is the fiduciary duty of loyalty enshrined within s172 rather than a free-standing assessment of dishonesty. Although dishonesty may evidence a breach, the central question is whether a director has acted loyally and in good faith towards the company. Mr Costa failed that test by undermining the board’s strategy and misleading his fellow directors, despite a genuine belief that delaying the sale was in the company’s interests.

Breach of contract does not automatically equal breach of s172

The Supreme Court left undecided the contractual point made by the Court of Appeal, being that Mr Costa caused the Company to breach a contract (the shareholders' agreement) which necessarily amounts to a breach of s172. The judgment set out that circumstances may arise after the date of a contract that require directors to reconsider the course initially taken, and that this is a question of the board's business judgement.

So, what's the current legal test?

The court will begin its consideration of a breach of duty with a subjective test of the director's/board's genuine business judgement. However, the court will not accept satisfaction of this subjective test if, objectively, a director has been disloyal and acted in bad faith – no matter how genuinely they believed their course of action to promote the success of the company.