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Supreme Court confirms that a breach of directors’ duties under section 172 is not determined by a purely subjective test
In its first consideration of section 172 of the Companies Act 2006 (the Act) since it came into force, the Supreme Court has confirmed that a director does not satisfy the duty to promote the success of the company merely because they honestly believe they are acting in the company’s best interests (Saxon Woods Investments Limited v Francesco Costa).
Background
Saxon Woods was a minority shareholder in Spring Media Investments Limited. The dispute centred on a shareholders’ agreement between Spring and its shareholders that required the parties to work together in good faith towards a sale of Spring by a specified date and, failing that, to instruct an investment bank to conduct a sale process. Mr Costa, the chair of the company and an indirect shareholder, was entrusted by the board with conduct of the exit process. He, however, believed that delaying the sale would generate a more favourable return for the company and its shareholders. No sale was ultimately achieved by the deadline and the business then suffered a severe downturn as a result of the Covid pandemic. Saxon Woods brought an unfair prejudice petition under section 994 of the Act against Spring and Mr Costa, alleging that Mr Costa had deliberately frustrated the process and caused Spring to breach its obligations under the shareholders’ agreement.
The High Court found that Spring had breached the shareholders' agreement and that this was attributable to Mr Costa’s conduct. However, it also held that although Mr Costa had delayed a sale, misled the board and concealed his failure to pursue the agreed exit strategy, he genuinely believed he was acting in Spring’s best interests and therefore had not breached his statutory directors’ duties. It nevertheless held that Saxon Woods had suffered unfair prejudice and made a conditional buyout order.
On appeal, the Court of Appeal upheld the finding that Spring had breached the shareholders’ agreement but disagreed with the High Court’s approach to directors’ duties, holding that Mr Costa had breached section 172 of the Act in acting dishonestly. It therefore replaced the conditional buyout order with an unconditional order requiring Mr Costa to buy Saxon Woods’ shares in Spring.
Mr Costa appealed to the Supreme Court.
Supreme Court decision
The Supreme Court held that compliance with section 172 of the Act is not determined solely by whether a director honestly believes they are acting in the company’s best interests. A director’s conduct must also be consistent with the fiduciary duties of loyalty and good faith that underpin section 172 of the Act. The Court found that Mr Costa’s deliberate frustration of the agreed sale process, coupled with his misleading of fellow directors and concealment of relevant information, was incompatible with those duties. Accordingly, the Court dismissed Mr Costa’s appeal and upheld the Court of Appeal’s conclusion that he had acted in breach of section 172 of the Act.
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