The Court of Appeal in Saxon Woods Investments Limited v Costa [2025] EWCA Civ 708has clarified that assessing compliance with a director's duty under section 172 of the Companies Act 2006 (CA 2006), to promote the success of the company for the benefit of its members as a whole, involves an objective assessment of honesty. The judgment also illustrates that where a shareholders' agreement requires a company to pursue a certain course (in this case, an exit by a certain date), a director who knowingly causes a breach of that agreement will likely also be in breach of their fiduciary duty to the company.
The dispute
Key to the dispute was a shareholders' agreement (SHA) between the Company and all of its shareholders (the Investors), requiring the Company and the Investors to "work together in good faith towards an Exit no later than 31 December 2019" (clause 6.2). An "Exit" was defined as meaning a sale of all or substantially all of the shares of the Company or its business and assets.
Instead of directing the Company to work with the Investors in good faith towards an Exit and giving good faith consideration to Exit opportunities, Mr Costa delayed matters, believing that a better purchase price might be obtained at a later date, which would be to his personal benefit. Critically, while the board had formally endorsed commencing an exit process, Mr Costa controlled instructions to the investment bankers, gave them no proper mandate to find a buyer and misled other directors. Mr Costa's attitude and approach was summarised as "they wouldn't like it now if they knew, but they will thank me in the long run."
Mr Costa's strategy failed spectacularly. When the Covid pandemic struck in early 2020, the value of the Company dropped significantly, leaving the value of SW's shareholding severely diminished.
SW argued that Mr Costa's actions in causing the Company to fail to perform its obligations under the SHA were in breach of his director's duties to the Company, which conduct had unfairly prejudiced SW's position. SW's claim was focussed on breaches of the duties under sections 172 and 174 CA 2006 (to promote the success of the Company and to exercise reasonable skill, care and diligence) and it sought a buy-out order, requiring Mr Costa to purchase SW's shares in the Company.
High Court decision
At first instance, the High Court judge held that Mr Costa had caused the Company to breach its obligation under clause 6.2 of the SHA to work in good faith towards an Exit by the end of 2019 and to give good faith consideration of offers received. Mr Costa had prevented a genuine marketing of the Company. He knew or should have known that the strategy which he pursued was contrary to the Company's obligations. The judge found that SW had been unfairly prejudiced since the essential right to exit its investment had been blocked.
Notwithstanding this, the judge determined that Mr Costa had not acted in breach of his fiduciary duty to promote the success of the Company for the benefit of its members as a whole, under section 172 CA 2006, because he considered that duty was purely subjective: if a director sincerely believed he was acting in the best interests of the company and its shareholders, he would not be in breach. Focussed on Mr Costa's subjective state of mind, the judge reasoned that Mr Costa honestly believed that it was in the best interests of the Company and its shareholders for it not to comply with the requirements of clause 6.2 of the SHA on the specified timetable, on the basis that a considerably higher value might have been obtained by delaying the process. This was despite the fact that Mr Costa's actions included concealing his true approach from the board. The judge also concluded that Mr Costa was not in breach of his duty under section 174 CA 2006.
The judge ordered that SW would be entitled to an order that its shares be purchased by Mr Costa, if it was found that, but for Mr Costa's conduct, a final offer for the purchase of the shares in the Company would have been received from a third party by the end of 2019 in the amount of more than $75 million. The judge directed that there should be a second trial to determine whether such an offer would have been received.
The appeal
SW appealed the High Court decision, challenging the conclusion that Mr Costa had not breached his duties under sections 172 and 174 CA 2006. SW also argued that the judge erred in tying relief solely to whether a binding offer exceeding a specific threshold would have materialised by the end of 2019.
The Court of Appeal agreed with SW's submissions and overturned the High Court's conclusion on section 172, stressing that a director's duty to act in the way they consider most likely to promote the success of the company is not purely subjective. The Court explained that acting in good faith (as required by section 172, as well as clause 6.2 of the SHA here) involves a requirement of honesty, and the relevant test is therefore an objective assessment of the conduct of the relevant individual, in the light of the facts as they knew or believed them to be when they embarked on their course of conduct (as per Ivey v Genting Casinos [2017] UKSC 57). If the director's conduct, even if supposedly "sincere" in their own mind, involved misleading other directors as Mr Costa's did, it would always or almost always fail the objective test of honesty under ordinary standards.
The Court of Appeal found that Mr Costa had knowingly caused the Company to breach the SHA by halting or seriously delaying any meaningful sale process, concealed those delays from his fellow board members, and proceeded on the basis that his personal hopes of a later, better sale price superseded the contractual exit that he knew certain shareholders were expecting pursuant to the SHA. That dishonest conduct was inconsistent with his fiduciary duty to the Company under section 172.
Given this finding, the Court of Appeal found it unnecessary to decide whether Mr Costa was also in breach of his duty under section 174.
On the question of the appropriate remedy, the Court of Appeal held that the High Court had been wrong to suggest that no relief could be granted unless SW could demonstrate it had suffered financial loss. Prejudice does not need to be financial in character.
Given Mr Costa's deliberate dishonest conduct, disregard of minority rights in pursuit of his own personal strategy and his control of the Company, the Court of Appeal concluded that it would be unjust to SW if it were to be left as a minority shareholder. The court held that this was a clear case for a buy-out order, and it ordered Mr Costa to purchase SW's shares unconditionally, valuing them as of 31 December 2019 (to be determined by the High Court after hearing expert evidence).
Practical takeaways
In practical terms, this ruling provides important guidance for directors and shareholders alike:
- Directors are reminded that section 172 CA 2006 is not judged on a subjective standard, based on that individual director's belief as to the right or wrong course of action. The assessment as to whether a director has acted in good faith in compliance with their fiduciary duty under section 172 will be assessed objectively, based on the facts they knew or believed them to be. If a director hides critical information from fellow board members or deliberately frustrates a shareholders' agreement, they are likely to have acted dishonestly by objective standards and therefore in breach of their fiduciary duty.
- Shareholders' agreements are powerful instruments and can define the "success" the directors must promote. Ignoring such an agreement or subverting its obligations because a director thinks it best to pursue a different plan is likely to be in breach of their duties and could expose them to liability.
- Exit clauses, depending on the contractual drafting, do not represent an aspirational target or a starting point for negotiation at some future time. If there is a clear requirement in a shareholders' agreement setting out that a company and its shareholders must work towards an exit by a specific date, then this is a binding contractual obligation.
- The minority shareholders in this case were in the dark as to Mr Costa's actions (or inaction). Parties might consider including information reporting requirements in shareholders' agreements as to the progress of key contractual obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
