Directors must not pursue a “Secret Strategy”: Supreme Court clarifies the scope of directors’ duties under section 172

Background

The case arose from a dispute concerning Spring Media Investments Limited (“the Company”). Under a shareholders’ agreement, the Company and its investors had agreed to work together in good faith towards achieving a sale of the business by the end of 2019. Responsibility for managing the sale process was delegated to the Company’s chairman, Mr Costa.

However, Mr Costa believed that delaying a sale would generate a better financial return and pursued that strategy instead. Ultimately, a sale did not occur before the Covid-19 pandemic significantly affected the business.

The trial judge found that he concealed material information from the board, restricted other directors’ involvement in the sale process and gave the impression that the agreed exit strategy was being followed when, in reality, it was not.

A minority shareholder brought an unfair prejudice petition under sections 994 to 996 of the Companies Act 2006, alleging that Mr Costa’s conduct had caused the Company to depart from the agreed exit strategy.

The Key Issue

The central question before the Supreme Court was whether a director who genuinely believes that an alternative strategy is in the company’s best interests can nevertheless be acting in breach of section 172 if that strategy is pursued covertly and contrary to decisions made by the board. 

Mr Costa argued that the duty of good faith under section 172 focuses on the director’s genuine belief as to what would promote the success of the company. Because he honestly considered that delaying the sale would achieve a better outcome, he contended that he had not breached his duties. 

Supreme Court Decision

The Supreme Court unanimously dismissed the appeal.

 Lord Briggs held that a director cannot rely solely on a genuine belief that a different strategy is preferable where that strategy is pursued through conduct that undermines the board’s collective decision-making. 

The Supreme Court emphasised that directors owe duties of loyalty to the company and that section 172 should be understood as imposing a communal obligation on board members to promote the company’s success. A director who disagrees with the board must put forward their views openly and seek to persuade colleagues through proper governance processes. They cannot secretly pursue an alternative course of action. 

Importantly, the Supreme Court confirmed that the duty of good faith extends not only to a director’s thinking but also to their conduct. A director cannot justify deception, concealment or other disloyal behaviour simply because they genuinely believe the outcome they seek is best for the company.

The Supreme Court agreed that Mr Costa had breached his duty under section 172 and upheld the Court of Appeal’s decision requiring him to buy out the petitioner’s shares. 

Why This Matters

The judgment is notable because it clarifies the limits of the well-established principle that courts will not generally second-guess directors’ business decisions. 

Whilst directors retain considerable discretion in exercising business judgment, that protection does not extend to conduct that subverts collective board decision-making or conceals material information from fellow directors. 

For insolvency practitioners, the decision offers a useful reminder that directors’ duties are not assessed solely by reference to the outcome achieved or the director’s subjective motivation. 

Conduct, transparency and adherence to proper governance processes remain critical considerations when evaluating directors’ behaviour. 

Practical Takeaways 

• Directors who disagree with board strategy must raise their concerns openly through board processes rather than pursuing an alternative course covertly.
• A genuine belief that a particular strategy is best for the company will not excuse conduct involving deception, concealment or disloyalty.
• Good faith under section 172 applies to both a director’s decision-making and their conduct in implementing that decision.
• The judgment reinforces the importance of collective board governance and transparent decision-making.
• In shareholder and insolvency disputes, conduct that undermines agreed corporate strategies may have significant consequences when courts consider remedies. 

Conclusion

The Supreme Court’s decision provides a significant clarification of directors’ duties under section 172. 

Directors are entitled to exercise commercial judgment and may legitimately disagree with colleagues, but those disagreements must be addressed openly. 

Pursuing a “secret strategy” that undermines agreed board decisions is inconsistent with the duty of loyalty owed to the company and may expose directors to substantial personal liability. 

For insolvency professionals investigating directors’ conduct, the judgment provides further authority that corporate governance failures, concealment and board subversion may amount to breaches of statutory duty even where a director believed they were acting in the company’s best interests.