The decision settles a significant question of company law: when determining a director's duty of good faith under section 172 of the Companies Act 2006 ("the 2006 Act"), should the court apply a subjective or objective test to the director's conduct?
Background and Facts
Spring Media Investments Limited (the "Company") is a company incorporated in England and Wales. The appellant, Mr Costa, was chairman of the board of the Company until July 2024, and a director of the Company until October 2025. Mr Costa was not a direct shareholder but held a substantial indirect interest in the Company. The first respondent, Saxon Woods Investments Limited ("Saxon Woods"), held a 22.33% shareholding in the Company.
On 20 May 2016, a new shareholders' agreement (the "SHA") was signed in respect of the Company in terms of which it was agreed that the parties to the SHA would work together in good faith towards achieving a sale of the Company by no later than 31 December 2019. Although the conduct of the Company's affairs was primarily entrusted to its board of directors, the Company delegated the conduct of the sale process exclusively to Mr Costa.
The sale process was not carried out in accordance with the SHA because Mr Costa believed that a sale later than the end of 2019 would be likely to generate a better financial return. He ultimately achieved his strategic objective of delaying any sale but unfortunately for the Company, any prospect of a profitable sale was destroyed by the adverse impact of the Covid pandemic on the Company's business.
The Proceedings Below
Saxon Woods lodged a petition under section 994 of the 2006 Act claiming that the Company's conduct was unfairly prejudicial to its interests as a minority shareholder. The trial judge in the High Court found that Mr Costa had adopted various tactics to achieve his objective of delaying the sale including: ensuring that no other director (save for one) had any knowledge of or involvement in the sale process; misleading the board by giving his fellow directors the impression that the Company was fulfilling its obligations under the SHA (whereas to his knowledge it was not); and failing to disclose to the board that his instructions to the Company's advisers in connection with the sale did not encompass achieving a 2019 exit.
In February 2024, the High Court held that Saxon Woods had suffered unfair prejudice and ordered Mr Costa to buy out Saxon Woods' shares on the condition that the Company would have been sold for more than US$75 million (which was to be determined at a further trial). The court found that Mr Costa had not breached section 172 because he genuinely believed delaying the sale was in the Company's best interests.
Both Saxon Woods and Mr Costa appealed. The Court of Appeal dismissed Mr Costa's appeal and allowed Saxon Woods' appeal, ordering an unconditional buy-out by Mr Costa of Saxon Woods' shares, with the exact value (as at the end of 2019) to be determined at a further hearing.
The primary reason for the Court of Appeal's departure from the trial judge's order was that it considered that Mr Costa had been in breach of his fiduciary duty under section 172. In its view, Mr Costa's deception of the board was dishonest according to the modern objective test of dishonesty in Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club) [2017] UKSC 67; [2018] AC 391 ("Ivey"), and therefore not in good faith. In addition, the Court of Appeal held that it was not open to Mr Costa to formulate or act upon his own judgment about a strategy for the success of the Company, since that had been conclusively determined by the SHA. Mr Costa appealed against both conclusions to the Supreme Court.
The Supreme Court's Decision
Generally, the court will not interfere with the exercise of the business judgment of directors in managing the affairs of a company if the directors act bona fide in what they consider to be in the best interests of the company. This is a fiduciary duty of loyalty and the test to determine whether it has been breached, whether by the board or by individual directors, has previously been described as "subjective".
Mr Costa argued that the court should not interfere with the subjective view of the directors merely because it forms a different objective view of what was really in the best interests of the Company.
The Supreme Court rejected Mr Costa's arguments and held that the test to be applied when considering whether a director's duty under section 172 had been breached is essentially an objective one. While consideration of the board's business judgement involves an element of subjectivity, directors cannot do whatever they want when, objectively, their conduct would be regarded as being in bad faith. The Court of Appeal had concluded that Mr Costa had acted dishonestly, applying the objective test, but the Supreme Court's analysis proceeded upon a broader basis, concentrating on the requirement for good faith rather than dishonesty on its own.
The Supreme Court also noted that any overlap with other general duties under Chapter 2 of the 2006 Act is not a bar to a claim under section 172. In this case, Mr Costa's conduct might have been characterised as a breach of section 171, but that did not exclude it from the ambit of section 172.
Remedy
The Supreme Court agreed with the Court of Appeal that the trial judge had erred in ruling that Mr Costa did not act in breach of his section 172 duty to the Company. The Court of Appeal was therefore entitled to hold that the appropriate remedy was the unconditional buy-out order which it made. The value of Saxon Woods' shares as at the end of 2019 remains to be determined at a further hearing in the High Court.
Key Takeaways
This is a landmark judgment for company law practitioners and directors alike. The key principles to draw from the decision are:
- Good faith extends to conduct, not just belief. A director cannot hide behind a genuine subjective belief in the merits of his preferred strategy if he does not act in good faith in pursuing that strategy.
- Covert strategies are incompatible with fiduciary duty. A director who pursues his preferred course by concealing his actions from the board, misleading colleagues, or withholding material information from fellow directors will be in breach of section 172, regardless of his intentions.
- The board acts collectively. Section 172 imposes a communal obligation on the board to promote the success of the company. An individual director who substitutes his own strategy for the strategy resolved upon by the board as a whole, without the board's knowledge, fundamentally undermines the governance framework that the Companies Act is designed to uphold.
