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Lessons from Saxon Woods v Costa
This case explores the intersection of contractual duties of good faith in shareholder agreements and directors' statutory duties, highlighting the risks for directors of not being completely transparent with the board or relying solely on personal belief when making management decisions. It serves as a cautionary tale for directors navigating exit strategies and governance obligations.
Background:
- Saxon Woods was a minority shareholder in Spring Media Investments Limited
- Mr Costa was a controlling indirect shareholder and chair of the board
- The shareholders' agreement included an exit clause which required the company and the shareholders to work together in good faith to achieve an exit by the end of 2019 and to give good faith consideration to any exit opportunities
- Exit was not achieved by the end of 2019 and in 2020 the COVID-19 pandemic lockdowns damaged the business of the company leading to Saxon Wood's claim that Mr Costa had caused the company to breach the shareholders' agreement by failing to work towards an exit in good faith through controlling the sale process and passing only selective information to the board and declining a potential offer from a buyer that another investor had introduced
In the first instance, the High Court found that Saxon Woods had suffered unfair prejudice under s.994 of the Companies Act 2006. It did not however find that Mr Costa had breached his fiduciary duties under s.172 of the Companies Act 2006 as while there had been no effort to act in good faith, it found that Mr Costa had behaved in a way in which he sincerely believed would maximise the value for the Company.
However, the Court of Appeal disagreed that Mr Costa had complied with his duty to promote the success of the company for the benefit of its members as a whole under s.172 of the Companies Act 2006 on the basis that the High Court's analysis was wrong and put too much emphasis on Mr Costa's belief which would allow a director to do anything so long as they believed, however flawed, that in doing so would promote the success of the company. It held that the High Court had failed to properly consider the requirement under s.172 to act in good faith towards the company as well as the core principles of honesty, fidelity and loyalty associated with these duties.
Deliberately withholding information from co-directors amounted to behaving dishonestly and Mr Costa was ordered to buy out Saxon Woods shares at the market value on 31 December 2019 notwithstanding that it was unlikely that an exit could have been achieved by that date. Mr Costa therefore had to make up for the decline in share price.
Practical considerations:
- A director should be careful when withholding information from the board even if they believe that it is the right course of action and more likely to promote the company's success
- A well-intentioned but sufficiently misguided director may also be in breach of the s.172 duty even if their actions were not deliberate nor for private profit
- Directors should ask themselves not only whether they believe that a particular course of action will promote the company's success but also whether a reasonable person would also agree that their course of action was honest and genuine
The consequences can be significant: while breach of a shareholders' agreement will generally result in liability for the company or a shareholder, breach of s.172 will result in personal liability for the director. This decision reinforces that directors must meet objective standards of honesty and loyalty, not just act on personal belief. The result of breaching s.172 can be severe and personal.
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.
