In our previous article, we examined the Court of Appeal's decision in Saxon Woods Investments Ltd v Costa and its confirmation that unfair prejudice under section 994 of the Companies Act 2006 can extend beyond purely financial harm.
The Supreme Court has since unanimously dismissed Mr Costa's appeal, providing significant guidance on the scope of directors' duties (including under section 172 of the Companies Act 2006) and, in particular, whether Mr Costa’s failure to collaborate with his fellow directors, and his covert pursuit of his own objective, breached the general duties of directors under the Companies Act 2006. The Supreme Court held that it did. Mr Costa’s conduct was held to be manifestly disloyal to Spring Media Investments Limited (“the Company”), and therefore a breach of section 172.
The Supreme Court's reasoning is notable for directors and shareholders. The judgment makes clear that a director cannot rely on a sincere belief that they are acting in the company's best interests to justify conduct that is covert, disloyal or designed to circumvent collective board decision-making. In other words, as put simply at the beginning of the judgment, “The individual director cannot go it alone.”
Beyond the governance issues, the case also serves as a timely reminder that, where disputes involve international corporate structures such as holding companies, or overseas interests or assets, parties should consider enforcement strategy from the outset. While the litigation in this case has been concluded, it remains to be seen what practical steps will be required to give effect to the remedies awarded.
Background
The dispute arose from a shareholders' agreement relating to the Company. The shareholders had agreed to work together in good faith towards an "Exit" by the end of 2019 and, failing that, to appoint an investment bank to procure one. Saxon Woods, a minority shareholder, brought an unfair prejudice petition against Mr Costa on the basis that rather than working towards the agreed Exit process, Mr Costa deliberately frustrated and delayed it because he believed that retaining the business for longer would ultimately generate greater value. In doing so, he was said to have acted contrary to the interests of the Company and in breach of the fiduciary duties he owed as a director.
At first instance, the court found that Mr Costa had caused the company to breach the shareholders' agreement and that Saxon Woods had suffered unfair prejudice, but the court declined to find that he had breached his fiduciary duties.
The Court of Appeal found that Mr Costa's conduct did amount to a breach of duty to promote the success of the Company, and ordered an unconditional buyout of Saxon Woods' shares by Mr Costa.
The Supreme Court's key message: good faith applies to conduct as well as a director’s thinking
Before the Supreme Court, Mr Costa argued that section 172 (i.e. the general duty 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…”) should remain essentially a subjective test. If a director honestly believes that a particular course of action will promote the success of the company, then the court should not second-guess the means used to achieve that objective.
The Supreme Court rejected that argument. The Court emphasised that section 172 sits within the wider framework of fiduciary duties owed by directors to the company. While courts will generally respect directors' commercial judgment and will not substitute their own view of what would best promote the company's success, a director must nevertheless act loyally and in good faith towards the company when pursuing that objective. Furthermore, rather than focusing on whether there has been dishonesty (when considering a breach of section 172 or indeed the fiduciary duty of loyalty), there should be a broader consideration of whether or not the director acted consistently with the fiduciary duty owed to the company (i.e. the duty of good faith).
Crucially, a director who disagrees with colleagues about strategy cannot secretly pursue an alternative course while subverting the board's decisions- “Such conduct is so obviously disloyal”. The problem was that, rather than openly advancing his position and allowing the board to decide, the court found that he concealed his true intentions, misled fellow directors and effectively subverted the agreed governance process.
The Supreme Court therefore confirmed that a duty not to subvert the management of the company’s affairs by the board is best regarded as part of the section 172 general duty. Furthermore, the requirement for good faith extends beyond a director’s thought processes to their conduct in pursuit of their objectives.
Cross-border structures: remedies need a route to recovery
Although the Supreme Court's judgment is principally concerned with directors' duties and unfair prejudice, the facts also underline a related practical point for disputes involving international corporate structures. Mr Costa’s interest in Spring Media Investments Limited was held indirectly through a Luxembourg company (Greencage S.A.), which in turn had interests in the respondent companies. That structure does not alter the analysis of Mr Costa’s duties under English law, but may be relevant to efforts to enforce the judgment. The order for the buy-out of Saxon Woods’ shares was made against Mr Costa only, not against Greencage S.A. In circumstances such as this, the question of whether the local law of the relevant country would permit enforcement of a compulsory purchase order made against an individual who was not the direct shareholder, may become relevant to enforcement.
In unfair prejudice petitions, and particularly where a buyout order is sought, attention will naturally focus on liability, valuation and the form of relief. However, where shares, assets or control rights sit within a cross-border structure, parties should also test enforcement and recovery at an early stage to avoid wasting the time and expense of a long litigation process only to be disappointed by a lack of - or difficulties with achieving - a practical remedy.
In some cases, a successful petitioner may need to take further steps to secure recognition or enforcement abroad, or to identify assets against which an English order can be made effective. It reinforces the need to plan enforcement alongside the substantive claim.
Implications for directors and shareholders
The decision contains several practical lessons for directors, particularly founder-directors, majority shareholders and board members who have significant influence over strategic transactions.
Good intentions are not enough
Directors cannot justify misleading or covert conduct simply because they believe the eventual outcome will benefit the company. A sincere belief may be relevant, but it will not excuse conduct that undermines the company's governance structures or deceives fellow directors.
Strategic disagreements should be addressed openly
Boards frequently disagree about timing, transactions and commercial strategy. The judgment confirms that directors are entitled to disagree but must do so through proper governance channels. If a director believes that the board has chosen the wrong course, the appropriate response is to raise objections openly and seek to persuade the board, not to pursue a parallel strategy behind the scenes.
Transparency
The case reinforces the importance of accurate reporting to fellow directors and advisers. A lack of or incomplete information can quickly become a governance issue where key decision-makers are prevented from understanding the true position or evaluating alternatives.
Shareholders' agreements will be taken seriously
The courts continue to demonstrate a willingness to enforce agreed shareholder arrangements robustly. Directors cannot assume that contractual exit provisions or governance mechanisms can be sidelined because circumstances have changed or because they believe a better commercial opportunity may emerge.
Always consider enforcement from the outset
From the earliest stage of a dispute, especially if you are seriously contemplating litigation, conduct a thorough assessment of where the relevant assets or shares are located, whether the respondent holds them directly or through intermediate entities and the basis on which the relevant jurisdiction will recognise and enforce English judgments or orders. Rules of enforcement and jurisdiction are complex, and you may need to seek local advice or consider interim protection needed to preserve value pending any judgment. Mapping this out from the start is an important strategic step.
Conclusion
The Supreme Court's decision confirms that the “good faith” requirement in section 172 applies also to a director’s conduct in pursuing what the director may individually believe is a preferred course of action for the company to promote its success.
A director may genuinely believe that an alternative strategy will create greater value. However, where that strategy is pursued through concealment, misinformation or the deliberate circumvention of collective decision-making, the director risks breaching their duties and exposing themselves to substantial remedies in unfair prejudice proceedings.
For directors: if you disagree with the board, make your case openly. Good faith requires loyalty to the company's governance processes.
Finally, the case is a reminder that remedies in shareholder disputes should be considered in practical as well as legal terms. Where corporate structures, assets or control rights cross borders, early enforcement considerations can be critical to ensuring that a successful judgment translates into a meaningful recovery.
