Saxon Woods v Costa: Supreme Court clarifies directors’ duties and the meaning of good faith

Background

The dispute arose from the affairs of Spring Media Investments Limited (“Company”).

Under a shareholders’ agreement, the shareholders and the Company had agreed to work together in good faith towards an exit (by way of a sale of the Company or its assets) by 31 December 2019.

However, the Company’s chairman of its board of directors, Francesco Costa, believed that delaying a sale would ultimately create greater value.

Rather than openly presenting that view to the board, the courts found that he deliberately delayed the sale process, and restricted the flow of information to other directors, preventing the agreed strategy from being properly pursued.

As market conditions deteriorated following the Covid-19 pandemic, the opportunity to achieve the planned exit was lost.

Saxon Woods Investments Limited (“Saxon Woods”), a minority shareholder in the Company, subsequently brought an unfair prejudice petition under section 994 of the CA 2006 alleging that Mr Costa’s actions led to the Company breaching the shareholders’ agreement and his duties as a director.

The High Court initially found that Mr Costa’s conduct had unfairly prejudiced Saxon Woods, but concluded that he had not breached section 172 because he genuinely believed he was acting in the Company’s best interests. However, the Court of Appeal disagreed, finding that his conduct amounted to a breach of duty and that the question of good faith could not be determined solely by reference to his subjective belief. The court therefore ordered an unconditional buyout of Saxon Woods’ shares.

The Supreme Court decision

Mr Costa appealed to the Supreme Court, arguing that compliance with section 172 should be assessed by reference to a director’s honest and subjective belief as to what would promote the company’s success.

However, the Supreme Court rejected this argument. While section 172 gives directors latitude in exercising commercial judgement, the Court held that the requirement of good faith applies not only to the director’s belief, but also to their conduct. Accordingly, a genuine belief that a particular course of action is in the company’s interests will not, by itself, excuse conduct which falls short of the standards of good faith expected of directors. The Supreme Court favoured an approach where, while not second guessing director’s views, a requirement for good faith does involve an objective element.

The Court emphasised that the management of a company is ordinarily entrusted to the board as a whole. A director who secretly pursues their own preferred strategy, while withholding material information or circumventing agreed decision-making processes, risks undermining that collective responsibility. Such conduct is inconsistent with the loyalty and good faith expected of fiduciaries, even where the director genuinely believes that the ultimate outcome will benefit the company.

In unanimously dismissing the appeal, the Supreme Court confirmed that directors cannot justify conduct simply by pointing to their belief that they were acting in the company’s best interests.  The way in which a director pursues a strategy matters as much as the strategy itself.

Why should boards take note?

Whilst the decision arose in the context of a shareholder dispute, its implications extend far beyond litigation.

Most companies will, at some point, face disagreements about strategy, investment, timing, succession or growth.

The Supreme Court’s judgment serves as a reminder that directors are not judged solely by the outcome they are seeking to achieve. They must also ensure decisions are made transparently, through appropriate governance processes and with proper engagement from the board.

For directors and business owners, good governance is not simply about compliance. It can play a critical role in protecting relationships, avoiding disputes and preserving value.

What does this mean in practice?

The judgment confirms that directors cannot simply rely on their own belief that they are acting in the company’s best interests.

How they conduct themselves matters just as much as the outcome they are seeking to achieve.

For boards, this decision is also a timely reminder of the importance of:

• clear governance arrangements;
• robust decision-making processes;
• open discussions and challenge;
• accurate management information; and
• proper recording of key decisions.

These issues often appear administrative in nature until a dispute arises. When relationships break down, they frequently become central to the arguments being advanced by the parties on both sides.

Directors who seek to circumvent agreed governance arrangements, withhold material information, or pursue a strategy without proper board engagement may find it difficult to argue they acted in good faith.

The case also serves as a reminder that where directors disagree with an agreed commercial strategy, the appropriate course is to raise those concerns openly and through the company’s governance process, rather than attempting to influence the outcome unilaterally.

Conclusion

The judgment in Saxon Woods v Costa is a significant development in company law and will likely become an important authority in shareholder disputes and unfair prejudice petitions.

For the first time, the Supreme Court has considered the meaning of the duty under section 172 of the CA 2006, and, in doing so, has confirmed that a director’s subjective belief is not the end of the enquiry.

Directors must not only believe they are acting to further what they believe to be the company’s  best interests but must also act in a manner consistent with the standards of good faith expected of fiduciaries.

For shareholders, particularly minority shareholders, the decision provides an important safeguard where directors seek to pursue their own agenda while bypassing agreed governance processes.

Ultimately, the Supreme Court’s message is clear: good faith is about more than what a director believes. It is also about how they behave.

For companies, boards and shareholders, the decision highlights the importance of transparency, governance and collective decision-making. Those issues are often the difference between a disagreement being resolved constructively and developing into a costly shareholder dispute.

How Greenwoods can help

Shareholder and boardroom disputes rarely arise overnight.

They often develop from disagreements about strategy, governance, decision-making or the direction of a business.

Early advice can help resolve issues before positions become entrenched and, where disputes cannot be avoided, ensure businesses, directors and shareholders are in the strongest possible position.

Our Disputes team regularly advises shareholders, directors and businesses on:

• shareholder disputes;
• unfair prejudice petitions;
• breach of fiduciary duty claims;
• director and boardroom disputes;
• derivative actions;
• injunctions and urgent applications; and
• complex High Court litigation.

Equally, many disputes can be avoided or better managed through effective governance structures and clear decision-making processes.

Our Corporate & Commercial team advises businesses on shareholder agreements, governance arrangements, directors’ duties and wider corporate governance issues, helping businesses establish robust frameworks before difficulties arise.

If you would like to discuss any of the issues raised in this article, please contact a member of our Disputes or Corporate & Commercial teams.