In a recently handed down judgment in Saxon Woods Investments Limited v Francesco Costa [2025] EWCA Civ 708 overturning a first instance decision of the High Court, the Court of Appeal has found that in considering whether a director has acted honestly or dishonestly in complying with their fiduciary duty under s.172 of the Act (duty to promote the success of the company), the Court will assess this both subjectively (whether the director honestly believed that his conduct was in the interests of the company) and objectively (whether by ordinary standards his conduct was honest or dishonest).
Factual background
The case centred on the affairs of Spring Media Investments Limited ("Spring Media") and the conduct of its chairman, Francesco Costa, regarding a contractual obligation to achieve an "Exit" (i.e. a sale) by a specified date.
Saxon Woods Investments Limited ("SW"), a minority shareholder in Spring Media, brought an unfair prejudice petition under s.994 of the Act against Mr Costa due to Mr Costa's failure to facilitate an Exit by 31 December 2019, as stipulated in the Shareholders Agreement ("SHA"). The SHA, crucially, obligated Spring Media and its shareholders to "work together in good faith towards an Exit no later than 31 December 2019" and to "give good faith consideration to any opportunities for an Exit".
Believing that a better price could be achieved later, Mr Costa intentionally delayed the sale and misled the board about the instructions given to the investment bank charged with facilitating the Exit. This strategy ultimately failed, and Spring Media's value plummeted by the onset of the Covid-19 pandemic.
First instance decision
Despite finding a breach of the SHA and unfair prejudice against SW, the Judge at first instance controversially concluded that Mr Costa was not in breach of his fiduciary duty under s.172 of the Act. S.172 of the Act provides that "a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole...". In reaching his findings, the Judge accepted Mr Costa's subjective belief that delaying the sale was in Spring Media's best interests, even if others disagreed, paraphrasing his mindset as, "they wouldn't like it now if they knew, but they will thank me in the long run." However, the Judge gave no consideration of Mr Costa's conduct against the objective standards of ordinary decent people.
Court of Appeal decision
The Court of Appeal unanimously held that Mr Costa's actions (knowingly acting contrary to the SHA and deliberately misleading the board) constituted a clear breach of his fiduciary duty under s.172 of the Act.
The Court of Appeal considered that the requirement to act "in good faith" in s.172 of the Act is a requirement of honesty. Having considered the caselaw, the Court clarified that while a director's belief is subjective, the standard by which honesty is judged is objective. It is also not for the Court to decide whether the Court might have acted differently. It is therefore important that the Court approaches the question of whether a person has acted honestly or dishonestly on two limbs: (1) the (subjective) actual state of the director's knowledge or belief, and (2) whether their conduct was honest or dishonest by applying the (objective) standards of ordinary people.
Closing thoughts
This judgment serves as a critical reminder that while directors may believe that a particular action is in the best interests of the company, their subjective beliefs must align with objective standards of honesty and cannot justify, for example, misleading the board or breaching obligations defined in a shareholder agreement. It also reinforces the importance of transparent conduct by directors in the management of company affairs, including ensuring that their reasons for reaching a particular decision that they consider to be in the best interests of the company are properly documented in board Minutes.
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