The English Court of Appeal's recent decision in Saxon Woods Investments Limited v. Francesco Costa ([2025] EWCA Civ 708) provides clarification on the application of directors' fiduciary duties and the interpretation of good faith obligations in shareholders' agreements (SHAs). The judgment — which upheld a finding of unfair prejudice at first instance — concerns the exit provisions in the SHA.
Key Takeaways
- SHAs — exit provisions: The decision highlights the importance of carefully drafted exit provisions and good faith obligations. The court will apply a literal approach to questions of interpretation and will uphold the bargain agreed between the parties. The Court of Appeal confirmed that the requirement in the SHA to work "in good faith towards an Exit" created enforceable legal obligations that could not be circumvented by unilateral decision-making by a director. Attempts by a controlling shareholder to unilaterally delay or undermine the sale in breach of express obligations may result in a finding of unfair prejudice.
- Companies Act 2006, section 172 — good faith obligations of directors: The duty of a director to "'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'" must meet an objective standard of honesty. Notably, the Court of Appeal held that "[d]eliberately deceiving the board of a company must, either always or almost always, be inconsistent with a director's duty under section 172," even when a director (subjectively) believes that their action is the best course for the company to follow. The Court of Appeal also observed that it is possible for a contract to limit or modify the scope of fiduciary duties. In this case, the SHA imposed additional contractual duties upon the company and investors to work together in good faith and give good faith consideration to any opportunities for an exit.
- Companies Act, section 994 — scope of unfair prejudice: Unfairly prejudicial conduct may arise from breaches of contractual rights (such as obligations in agreements between shareholders) even if the prejudicial consequences are not purely financial. In cases in which minority shareholders lose rights important to their investment strategy (e.g., a promised exit opportunity), a section 994 unfair prejudice petition may provide relief.
Background and Facts
Saxon Woods Investments Limited (Saxon Woods) held a minority shareholding in Spring Media Investments Limited (the company). Francesco Costa served as chairman. Costa held substantial indirect control over the company as a result of both a corporate shareholding and the fact that his interests were aligned with other investors whom he had introduced to the company and those investors were content to defer to Costa regarding decisions concerning the company.
The dispute arose from the company's SHA, which contained an exit provision requiring all parties to "'work together in good faith towards an Exit no later than 31 December 2019.'" The SHA defined "'Exit'" as "'the sale of all or substantially all of [...] [the company's] share capital'" or business or assets.'"
No exit materialised by the 2019 deadline or, indeed, at all. The COVID-19 pandemic, which followed, had a disastrous impact on the business, and the value of Saxon Woods' shares materially decreased. Saxon Woods commenced an unfair prejudice petition alleging that Costa, who had control of the exit process, caused the company to breach its SHA obligations by failing to procure that the company worked with its investors in good faith towards an exit by the specified deadline and by failing to give good faith consideration to exit opportunities.
The High Court Decision
The High Court held that Costa controlled the exit process and misled the board on the steps being taken. Although Costa nominally engaged an investment bank, in reality, Costa wanted to delay any potential sale, believing that he would not be able to secure a good price until 2020 at the earliest. Costa's conduct in pursuing this strategy was held to have resulted in the company breaching its SHA obligations. Whilst there was not an absolute obligation to procure an exit by the end of 2019, there was an obligation to work in good faith towards an exit by that date. The company's affairs had therefore been conducted in a manner that was unfairly prejudicial to Saxon Woods, and it was entitled to an order that Costa purchase its shares. However, the High Court imposed a conditional remedy requiring Saxon Woods to prove at a later trial that the company would have been sold for a specified amount.
The judge also rejected the claim that Costa had breached his directors' duties (section 172 — promoting the success of the company — and section 174 — exercising reasonable care, skill and diligence), finding that Costa "'sincerely'" believed he was acting in the company's best interests by deferring the exit process and taking steps that he believed would benefit the company and its shareholders. The judge summarised Costa's state of mind as "'they wouldn't like it now if they knew, but they will thank me in the long run'".
The Court of Appeal Decision
Both parties appealed on various grounds. The Court of Appeal dismissed Costa's appeal in relation to the findings on the company's breach of the SHA and found in favour of Saxon Woods in agreeing that: (i) the terms of the SHA required the parties to work together in good faith towards an exit to take place before the specified date; (ii) the company's failure to engage with expressions of interest was a breach of the SHA obligation to give good faith consideration to exit opportunities; (iii) Costa's conduct in causing the company to breach its SHA obligations was unfairly prejudicial; (iv) Costa had breached his section 172 duty to promote the success of the company; and (v) as a result, Saxon Woods was entitled to a non-discounted unconditional buy-out order by reference to the value of the company as at 31 December 2019.
Section 172 Duties and the Limits of Subjective Assessment of Good Faith
The Court of Appeal held that the High Court applied an incorrect (purely subjective) test and failed to address the modern objective standard of dishonesty. Section 172 "requires a director, in all he does, to act in good faith towards the company, in the way he considers would be most likely to promote the success of the company for the benefit of its members as a whole; and the requirement that the director acts in good faith includes, as a core fiduciary duty, a requirement that the director acts honestly towards the company." A director's belief must be both honestly held and consistent with objective standards of honesty and fair dealing. Costa's conduct in deliberately misleading the board that he was taking steps to achieve an exit was incompatible with good faith under section 172.
The Court of Appeal noted that the alternative would be that a director could feasibly do anything in the course of their duties if they subjectively believed they were following the course that was most likely to promote the success of the company — a potentially dystopian utilitarianism. This provides a reminder that while directors retain broad discretion in their business judgment, they cannot shelter behind their subjective views if their conduct fails to meet fundamental standards of honesty and good faith.
Unfair Prejudice: A "Sweetshop" of Remedies
Rather than requiring Saxon Woods to prove specific financial loss at a further trial, per the judgment at first instance, the Court of Appeal made an unconditional order pursuant to section 996 of the Companies Act 2006, requiring Costa to purchase Saxon Woods' minority shareholding, based on the non-discounted, pre-COVID-19 valuation (with the valuation to be determined by the High Court after hearing expert evidence). This was on the basis that it would be unjust to leave Saxon Woods locked into a company controlled by a director who had deliberately disregarded minority rights and misled fellow board members.
This approach recognises that unfair prejudice can be established without proof of specific financial loss when there has been a clear breach of SHA obligations coupled with director misconduct. If unfair prejudice is established, section 996 gives the court power to grant appropriate (and wide ranging) relief. Adapting what the Court of Appeal described as a "colourful analogy" by Costa's counsel, once unfair prejudice is established, it grants entry "'into the sweetshop'" of remedies permitted under section 996.
We would like to thank Gaspard du Chaffaut for his assistance with this insight.
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