Saxon Woods v Costa - standard of conduct required by a director in seeking to promote the success of the company

A recent decision however has clarified that a genuine belief in acting for the company’s benefit will not be enough if the way in which that belief is pursued involves conduct that falls short of the standards of good faith expected of directors.

The Companies Act 2006 sets out various general duties which a director of a company owes to that company. One of those general duties is set out at section 172 Companies Act 2006 (“the section 172 duty”). Broadly speaking, the section 172 duty requires a director to act in the way which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole. 

The Supreme Court in Saxon Woods Investments Limited and others vs Francesco Costa [2026] UKSC 21 recently had to determine whether a director would be in breach of the section 172 duty if he genuinely believed that he was acting in a way which would promote the success of a company but adopted a course of conduct in doing so which a reasonable person would consider to be in bad faith (e.g. by adopting a course of conduct which involved lies, cheating, deception, dishonesty or disloyalty). 

Lord Briggs summarised the issue which the Supreme Court was being asked to determine as being “Is a director required by section 172 to act, or merely to think, in good faith?”.   

In summary, the Supreme Court held that the requirement of good faith in section 172 Companies Act 2006 applied both to a director’s belief and his conduct. It required a director not only genuinely to believe that he was acting in a way which would promote the success of the company but also to adopt a course of conduct in doing so which a reasonable person would consider to be in good faith. 

Summary of the facts of the case 

Saxon Woods Investments Limited (“Saxon Woods”) was a minority shareholder in a company called Spring Media Investments Limited (“Spring Media”). Mr Costa was a director of Spring Media and the chairman of the board of the directors. 

Spring Media and its shareholders entered into a shareholders’ agreement which provided for the Company and its shareholders to work together in good faith towards an exit (which was defined in the agreement as a sale of all, or substantially all, of the shares in Spring Media) by 31 December 2019. 

Spring Media’s board of directors entrusted Mr Costa with the task of seeking to achieve an exit before 31 December 2019. Mr Costa believed, however, that a sale of the business after 31 December 2019 would be much more likely to generate a better financial return for the shareholders. He therefore sought to delay any sale beyond the end of 2019 and, in doing so, he misled the other directors of Spring Media by concealing information from them and giving them the impression that steps were being taken to try and achieve an exit by 31 December 2019 when he knew that was not the case. 

Unfortunately for Mr Costa, his strategy backfired as the prospect of a sale of the business being achieved on beneficial terms for the shareholders after 31 December 2019 was destroyed by the adverse impact of the Covid Pandemic on the business.

Saxon Woods presented an unfair prejudice petition (this is a remedy available to shareholders where they allege that a company’s affairs have been conducted in a way that unfairly harms their interests as shareholders) against Mr Costa on the basis, amongst other matters, that Mr Costa’s failure to comply with the exit strategy set out within the shareholders’ agreement amounted to a breach both of the section 172 duty which he owed to Spring Media and the terms of the shareholders’ agreement.

At first instance, the High Court held that Saxon Woods’ case on unfair prejudice had been made out but that Mr Costa’s conduct did not amount to a breach of the section 172 duty which he owed to Spring Media as Mr Costa had sincerely believed at the time that he was acting in the best interests of Spring Media and its shareholders in seeking to delay the sale of the business beyond 31 December 2019. Both parties appealed to the Court of Appeal.

The Court of Appeal dismissed Mr Costa’s appeal. 

It held, amongst other matters, that Mr Costa had acted in breach of the section 172 duty which he owed to Spring Media as he had deceived the other directors of Spring Media and that conduct had been both dishonest and not in good faith. 

The Supreme Court’s decision 

The Supreme Court affirmed the longstanding principle that it is for directors of a company to exercise their own business judgment in determining what is in the best interests of the company and that the Court will not interfere with that judgment as long as the directors genuinely believed that what they were doing was in the best interests of the company. 

It held, however, that this longstanding principle did not give directors carte blanche to implement their genuine belief as to what would be in the best interests of the company by any means, however covert or disloyal, and that directors would be in breach of the section 172 duty if they did so in a way which a reasonable person would consider as being in bad faith. 

Applying the above principle to Mr Costa’s conduct, the Supreme Court held that Mr Costa had acted in breach of the section 172 duty which he owed to Spring Media. Although he sincerely believed at the time that he was acting in the best interests of both Spring Media and its shareholders by delaying a sale of the business, his conduct in misleading the other directors as to his intentions had been manifestly disloyal to the company and in bad faith. 

The Supreme Court also commented that Mr Costa’s conduct amounted to a breach of his duty to exercise his powers for the purposes for which they had been conferred. The board of directors of Spring Media had entrusted Mr Costa with the task of securing a sale of the business by the end of 2019 in accordance with the strategy approved by the company in the shareholders’ agreement. By pursuing a completely different strategy of seeking to delay the sale beyond 2019, Mr Costa had abused the powers with which he had been given by the board of directors. 

Summary

This case is a significant one for directors especially in circumstances where they disagree with other directors of the company as to what may be in the best interests of the company. Even if a director genuinely believes that he is acting the best interests of the company, he will be in breach of the section 172 duty if he does so in way which a reasonable person would consider to be in bad faith (e.g. by deceiving or being disloyal to his fellow directors). Directors should therefore seek to be open and honest with their fellow directors regarding any disagreements which they may have about business strategy. They should not pursue secretly a strategy with which their fellow directors disagree even if they believe that the pursuit of that strategy will be in the best interests of the company.

Directors should also be careful to exercise powers delegated to them for the purpose for which they have been delegated. If a board of directors has a delegated a particular task to a director, that director should act in a way which is consistent with the instructions given to him or her by the board.