Section 172 Companies Act 2006: Key lessons from Saxon Woods v Costa

What does Section 172 of the Companies Act 2006 require of directors?

“A director of a company must 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…”

Background to the Saxon Woods v Costa dispute

Pursuant to section 994 of the Companies Act (“CA”) 2006, Saxon Woods, a minority shareholder of Spring Media Investments Limited (the “Company”) had presented an unfair prejudice petition against the Company in relation to its affairs.

The Company was subject to a shareholders’ agreement which, amongst other things, required the Company and its shareholders to work in good faith towards the sale of the Company by 31 December 2019. The board delegated the management of the sale process primarily to Mr Costa, a director (until October 2025) and a substantial indirect shareholder of the Company.

Mr Costa considered that postponing the sale of the Company to beyond December 2019 would result in a greater return for the shareholders. However, instead of openly presenting his thoughts and ideas to the board, Mr Costa solely assumed control of the sale process, excluding and misleading directors, and had instructed Company advisers in a manner which undermined the agreed 2019 sale.

Ultimately, the Company was not sold by 31 December 2019 and as the Covid-19 pandemic struck, the prospect of a profitable sale was destroyed.

Subsequently, Saxon Woods brought an unfair prejudice petition which alleged that Mr Costa acted in breach of the shareholders’ agreement and also breached his fiduciary duty under section 172 CA 2006.

High Court: No Section 172 breach

In February 2024, the High Court concluded that Saxon Woods was unfairly prejudiced but also accepted that Mr Costa genuinely believed that delaying the sale of the Company was in the Company’s best interest. Accordingly, the judge held that Mr Costa had not breached his fiduciary duty under section 172.

The trial judge therefore ordered a conditional buyout which meant that Mr Costa would purchase the shares of Saxon Woods at their 2019 value, provided it could be established that a 2019 sale would have exceeded a certain amount.

Court of Appeal: Breach of Section 172

Both Saxon Woods and Mr Costa appealed. Unanimously, the Court of Appeal dismissed Mr Costa’s appeal but allowed the appeal from Saxon Woods. The Court of Appeal concluded that Mr Costa had breached his fiduciary duty under section 172.

Mr Costa was found to have deceived the board and was considered dishonest pursuant to the objective test for dishonesty confirmed by Ivey v Genting Casinos.

The Court of Appeal then ordered the unconditional buyout of Saxon Woods’ shares valued as at 31 December 2019.

Mr Costa went on to appeal the Court of Appeal’s findings to the Supreme Court. He argued that the concept of ‘good faith’ should relate to a director’s state of mind only, arguing that the section 172 fiduciary duty test is purely a subjective one. Mr Costa identified multiple authorities in his argument.

Supreme Court: Good faith under Section 172

Thus, the central issue before the Supreme Court was whether the requirement of ‘good faith’ pursuant to section 172 was determined solely with regards to a directors’ subjective state of mind, or whether ‘good faith’ encompassed both belief and conduct.

The Supreme Court went on to confirm that the fiduciary duty conferred on directors has both subjective and objective aspects. Although a director can honestly believe they are acting in the company’s best interest, they will still be in breach of their fiduciary duty if their actions fall below the objective standard required of loyalty and good faith. In coming to its decision, the Supreme Court referred to previous case law, the intention of section 172 and discussed the requirement of commercial reality.

The Supreme Court therefore confirmed the appropriate remedy of the unconditional buyout order made by the Court of Appeal.

Key takeaways for directors and company boards

This judgment establishes the standard expected of directors. Good faith is measured not only by a director’s beliefs, but also by their conduct. Simply because a director believes to be acting in the best interests of a company does not give them carte blanche to do whatever they please. Excluding and misleading fellow directors and operating outside of corporate strategy can therefore amount to a breach of section 172.

For the full judgment, see Saxon Woods Investments Limited and others (Respondents) v Costa (Appellant) – UK Supreme Court.

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