A director who genuinely believes that his own strategy is best for the company may not pursue it by misleading the board and acting behind its back. The Supreme Court held that the duty in section 172(1) of the Companies Act 2006 to act in good faith applies to the director’s conduct, not only to his private belief. Mr Costa’s covert delay of an agreed exit breached that duty, and the Court of Appeal’s buy-out order was upheld.
Spring Media Investments and its shareholders agreed to work together in good faith towards an arm’s-length sale of the company’s shares, business or assets by the end of 2019. They also agreed to consider opportunities for such an exit in good faith.
Law Teacher writing support
Writing a law essay?
We choose a writer who is an expert in your area of law and qualified to at least the academic level you select. Most of our writers hold a master’s degree or PhD, have teaching experience, or both.
Send us your question and, if you wish, any marking criteria. We’ll write an essay to your instructions.
The directors entrusted the sale process to their chairman, Francesco Costa. He believed postponing a sale would produce a better return. He kept fellow directors in the dark, led the board to believe the agreed strategy was being followed and withheld the fact that the advisers had not been instructed to pursue a 2019 exit. The sale was delayed beyond 2019. The pandemic then destroyed the prospect of the beneficial exit the shareholders had sought.
Saxon Woods, which held 22.33% of the shares, petitioned for relief from unfair prejudice under the Companies Act 2006. The trial judge found unfair prejudice but no dishonesty or breach of Mr Costa’s section 172 duty. He made a buy-out conditional on what a later hearing established about the prospect of a sufficiently valuable offer in 2019.
The Court of Appeal
The Court of Appeal dismissed Mr Costa’s appeal and allowed Saxon Woods’ appeal. On the judge’s findings, it held that section 172 had been breached. Mr Costa’s deception of the board was dishonest, and therefore not in good faith, under the objective test in Ivey v Genting Casinos. It also held that he could not form or act upon a different strategy because the shareholders’ agreement had determined the route to success. It substituted an unconditional buy-out at the pro rata, undiscounted value of the shares on 31 December 2019, that value to be decided at a further High Court hearing.
Good faith is about conduct as well as belief
Section 172(1) requires a director to 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. The duty is owed to the company. Section 170 provides that the general duties replace, and are to be interpreted by reference to, the earlier common law rules and equitable principles, unless the statutory language clearly provides otherwise.
Mr Costa argued that good faith governs only the director’s thinking. If he genuinely believes his preferred course is best, concealment or even active misleading of his colleagues cannot be a breach of section 172, however damaging the result. Lord Briggs, with whom Lord Sales, Lord Hamblen, Lord Burrows and Lady Rose agreed, rejected that argument.
The company’s constitution had entrusted management to the board collectively. An individual director who believed the chosen strategy was wrong could explain the reasons and try to persuade the board to reconsider. Mr Costa had instead frustrated the collective decision while representing to the board that he was carrying it out.
Lord Briggs treated the duty not covertly to subvert management by the board as part of section 172, rather than as a separate uncodified duty. The individual director must put his view before his colleagues and must not pursue another strategy behind their backs. He also observed that using powers delegated for the agreed exit in order to undermine it, and failing to act in accordance with the constitution, could be described as a breach of section 171, but that did not take the case outside section 172.
Lord Briggs rejected a reading of “in good faith” confined to what a director thought. The statutory language reflected the fiduciary duty of loyalty and had to be read in its corporate setting. An honest preference for a different commercial outcome could not justify deceiving the body responsible for deciding the company’s course.
The deception therefore mattered independently of whether the later sale which Mr Costa preferred would have been good for the company. It prevented the board from exercising its own judgment about whether to change course.
Whether the agreement fixed the strategy
The Court of Appeal also considered that the shareholders’ agreement itself determined the route to the company’s success. Lord Briggs left that question open. The covert frustration of the board’s existing decision was sufficient to resolve the appeal.
The error on section 172 was important to the choice of remedy. For that reason, and for further reasons given by the Court of Appeal with which Lord Briggs agreed, the trial judge’s exercise of discretion could not stand. The Court of Appeal had to exercise the discretion afresh. No criticism was made of that exercise, and it was entitled to replace the conditional order with the buy-out it ordered.
Verdict: The Supreme Court unanimously dismissed Mr Costa’s appeal. The unconditional order requiring him to buy Saxon Woods’ shares at their pro rata, undiscounted value on 31 December 2019 stood. The amount was for a further High Court hearing.
Source: Saxon Woods Investments Limited and others v Francesco Costa [2026] UKSC 21
