In a recent decision, the Court of Appeal has considered section 172 of the Companies Act 2006, which requires a director to act in the way they consider, "in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole":Saxon Woods Investments Limited v Francesco Costa [2025] EWCA Civ 708.
The decision emphasises that, as a core fiduciary duty, this requirement cannot be met where a director has acted dishonestly, and that the test for honesty is not purely subjective, based on whether the director personally believed they were acting in the company's best interests. Rather, honesty is also to be assessed objectively: the court must consider whether the director's conduct was objectively honest, by the standards of ordinary decent people.
The Court of Appeal's judgment also gives helpful guidance on the relevance of a shareholders' agreement in assessing the meaningof"the success of the company" for the purposes of section 172. Where a shareholders' agreement identifies the shareholders' objectives, it may be taken to indicate what is meant by the company achieving success for the benefit of its members. This suggests that directors taking decisions which run contrary to a provision of a shareholders' agreement may breach section 172.
Separately, the decision confirms that a finding of unfair prejudice under section 994 of the Companies Act is not dependent on the petitioner suffering financial loss, and that the court has wide discretion in granting relief.
Background
The claimant, Saxon Woods, brought an unfair prejudice petition under section 994 of the Companies Act against Spring Media Investments Limited (the "Company"), of which Saxon Woods was a minority shareholder, and its chairman, Mr Costa, who was also an indirect shareholder with a controlling stake in the Company.
Saxon Woods alleged that Mr Costa had breached a clause in the Company's shareholders' agreement, which stipulated that the parties would work together in good faith towards the sale of the Company by a set date, and give good faith consideration to any opportunities for such a sale in that period (the "Exit Clause"). The Exit Clause further provided that if the sale was not achieved by the specified date, an investment bank would be instructed to effect a sale.
Saxon Woods argued that Mr Costa caused the Company to breach the Exit Clause, and that this amounted to unfair prejudice and meant Mr Costa had breached his duties as a director.
The High Court found that the Company had breached the Exit Clause by not working in good faith towards a sale by the relevant date and failing to give good faith consideration to offers received. It further held that the Company's breach was the result of Mr Costa's conduct. Mr Costa had delayed a sale because he believed a better price could be achieved in the future, despite this being contrary to the Company's obligations under the Exit Clause. He had also misled the Company's board and concealed the fact that he was doing nothing to achieve a sale of the Company.
However, the court found that Mr Costa had "sincerely" believed it was in the shareholders' best interests to delay an exit and potentially achieve a better result at a later date, after the deadline specified in the shareholders' agreement. The court found that this meant that Mr Costa had not breached his duties towards the Company as director under sections 172 (duty to promote the interests of the company) and 174 (duty of reasonable care, skill and diligence) of the Companies Act.
The court found that Saxon Woods had suffered unfair prejudice as a result of Mr Costa's conduct in causing the Company to breach the Exit Clause, but whether or not any relief should be granted depended on whether Saxon Woods had in fact suffered any loss as a result. This depended on whether a better offer, which was acceptable to the shareholders, would have been obtained for the sale of the Company, had Mr Costa complied with his obligations.
The court therefore ordered that Mr Costa should buy Saxon Woods' shares in the company, but this order was conditional on a finding (which was to be considered at a second trial) that a binding offer of more than US $75 million would have been received for the Company.
Both parties appealed.
Decision
The Court of Appeal (Lord Justices Edis, Snowden and Zacaroli) found in favour of Saxon Woods.
Breach of directors' duties
The Court of Appeal overturned the High Court's decision that Mr Costa had not breached his directors' duties. It emphasised that the core meaning of a good faith obligation (such as in section 172) is that it requires honesty. The shareholders' agreement had not modified that duty – it also required the parties to work towards a sale of the Company "in good faith".
The Court of Appeal noted the judge's finding that, subjectively, Mr Costa had sincerely believed he was acting in the shareholders' best interests. However, the judge had failed to take account of the objective element of the test for honesty, which asks whether the relevant conduct was honest or dishonest by the standards of ordinary decent people. In light of the judge's findings that Mr Costa had deliberately misled the board, this limb could not be satisfied. Therefore, the Court of Appeal found that Mr Costa had acted dishonestly, and had breached section 172. In doing so, the court noted that deliberately misleading the board of a company will almost always be inconsistent with the duty under section 172.
The Court of Appeal also accepted Saxon Woods' argument that, by causing the Company to breach its obligations under the shareholders' agreement, Mr Costa must have breached his fiduciary duties. The shareholders' agreement constituted an agreement by which the Company and all the members had identified their objectives, during a time when the members were investors in the Company. They had therefore identified what "success of the company for the benefit of its members as a whole" meant – in this case, the achievement of an exit on the best available terms in the specified timeframe. By acting contrary to that objective, Mr Costa was not acting in accordance with his section 172 duty.
Given these findings, the Court of Appeal did not need to go on to consider whether Mr Costa had also acted negligently in breach of his duty under section 174.
Establishing unfair prejudice
The Court of Appeal upheld the High Court's finding that Mr Costa's actions in pursuing a strategy contrary to the shareholders' agreement amounted to unfairly prejudicial conduct. Saxon Woods' rights as a member of the Company included the benefit of the Company's obligations under the Exit Clause, and so its rights were prejudiced by the loss of that opportunity when Mr Costa caused the company to breach its obligations to secure or work towards an Exit.
Noting contradictory passages in the first instance judgment, the Court of Appeal also confirmed that unfair prejudice can be established irrespective of whether financial loss has been suffered.
Remedies for unfair prejudice
The Court of Appeal noted the wide discretion available when granting relief for unfair prejudice.
In view of the judge's finding that Mr Costa had caused the Company to breach the Exit Clause, but had acted in accordance with his fiduciary duties when doing so, it may have been appropriate for the judge to grant the conditional relief that he did, designed to replicate the position that Saxon Woods would have been in had it brought a breach of contract claim.
However, the Court of Appeal had reached a fundamentally different conclusion, finding that Mr Costa had acted in breach of his fiduciary duties. Therefore, the Court of Appeal considered it appropriate to exercise the discretion as to the appropriate relief afresh.
In doing so, the Court of Appeal considered whether it would be just to leave Saxon Woods as a minority shareholder with a continuing investment controlled by Mr Costa, recognising that remedies under section 996 of the Companies Act can seek to cure unfair prejudice for the future, as well as putting right past unfair prejudice. The Court of Appeal concluded that it would not be just, because it had no confidence that Mr Costa's prejudicial behaviour would be a one-off. Since it could not conceive of any regime that would be an effective safeguard for Saxon Woods' rights in the future, the Court of Appeal found there was a clear case for a buy-out order, which should not be subject to a condition modelled on a claim for breach of contract.
Date of valuation of shares
The Court of Appeal ordered that Saxon Woods' shares should be valued as at the date the Company should have been sold pursuant to the Exit Clause (31 December 2019), despite the value of the shares having dropped significantly since that date due to Covid-19, and even though there was no evidence that a sale could have been achieved by that date.
However, the court emphasised that it was exercising a wide discretion under section 996, and not awarding damages for a breach of contract, so there was no need to establish strict "but for" causation. In addition, the court said that since Mr Costa had chosen to "gamble" with the shares of investors by delaying a sale past 2019, he could not "complain when his gamble failed" and he lost out due to a subsequent drop in the value of the shares.
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