Director’s Liability – Supreme Court Decision Is A Warning To Directors Who Go It Alone

A recent Supreme Court decision is a salutary reminder that directors who covertly pursue their own preferred strategy for a company’s success—rather than a strategy collectively agreed by the board—run the risk of incurring personal liability. 

The decision in Saxon Woods Investments Limited and Others v. Francesco Costa marks the first time the Supreme Court has considered the interpretation of the director’s duty of good faith in section 172 of the Companies Act 2006 (s 172 duty).

The outcome will be of interest to any director of a U.K. company. The facts of the case will be of particular interest to directors of venture capital or private equity backed companies where exit planning is a key element of their role.

Key takeaways: 

• The risk of personal liability for breach of fiduciary duty is real even where a director genuinely believes they are acting in the best interests of the company. 

• The “good faith” requirement in the s 172 duty applies to conduct as well as thought. 

• Not undermining the board’s collective responsibility for managing the company is part of the s 172 duty. 

• Directors with delegated powers must act within those powers and exercise them for the purpose for which they have been given. 

What happened 

Mr Costa was a director of Spring Media Investments Limited (Company). The Company and its investors were parties to a shareholders’ agreement (SHA).

Under the SHA, the parties agreed to work together in good faith toward an “exit” (essentially a sale of the Company’s shares) no later than December 31, 2019. The Company delegated the conduct of the exit process exclusively to Mr Costa.

However, the exit process was not carried out in accordance with the agreed strategy laid down in the SHA. Instead, Mr Costa pursued his own strategy because he believed that delaying the exit beyond the end of 2019 would likely generate a better financial return.

In doing this, Mr Costa concealed his actions from his fellow directors. He ensured that they had no knowledge or involvement in the exit process. He actively misled the board by giving them the impression that the Company was fulfilling its obligations under the SHA when it was not. He also gave instructions to the Company’s advisors in connection with the sale that did not involve achieving an exit by December 2019 and did not disclose this to the board.

Unfortunately, Mr Costa’s covert strategy failed—the Covid pandemic destroyed the prospect of a profitable exit post December 2019. 

Saxon Woods (as a minority shareholder) claimed unfair prejudice against Mr Costa on the basis that, among other things, he was personally responsible for the failed exit and that his conduct amounted to a breach of his s 172 duty. Mr Costa argued that he was not in breach of duty because he genuinely believed that his preferred way forward was in the Company’s (and the other investors’) best interests. 

What was the outcome? 

The Supreme Court ultimately found Mr Costa was in breach of the s 172 duty.

He was ordered to buy out Saxon Woods’ shares at a price based on what they would have been worth had an exit been achieved in 2019. 

The s 172 duty required that Mr Costa exercise “good faith” in acting to promote the success of the company, and this meant both in belief and conduct. 

Mr Costa’s covert and disloyal conduct in concealing his plans from the board, and his failure to collaborate with his fellow directors on a deviation from the strategy the board had agreed to in the SHA, meant that he had clearly not met this standard of behavior. 

The genuine belief that his conduct would better promote the success of the company was not enough to relieve him. While the court affirmed that it would start by accepting the genuine subjective business judgment of a board (or dissenting director) when considering a breach of fiduciary duty, this did not give a director carte blanche to pursue their own opinion about the best way to secure the company’s success by any means.

What this means 

Disagreements among directors are inevitable. However, the Supreme Court in Saxon Woods sets out clearly the standard of behavior required when they occur.

Dishonesty, concealment, and misleading fellow board members are fundamentally incompatible with the fiduciary duties a director owes to the company. A director who acts in this way risks being held personally financially liable. 

Where disagreements arise, these should be raised with the board as a whole and discussions recorded formally, rather than alternative strategies being pursued covertly. 

Directors with delegated responsibilities also should be clear on the scope of their powers, and be careful to act within those powers, following any related processes carefully.