Supreme Court weighs in on directors’ duties: Saxon Woods v Costa

It is a longstanding principle of English law that it is for the directors of a company to exercise their business judgment in managing its affairs. The English courts will not interfere providing that the directors act in good faith in what they consider to be the best interests of the company, a principle which is codified in s.172 of the Companies Act 2006 as a core directors’ duty.

What happens, however, when a director genuinely disagrees with their fellow directors as to the best route to achieving success for the company?

Can that director act singlehandedly to drive the company towards their preferred goal, or are they required to discuss their alternative course with the board and form a collective view?

The recent Supreme Court decision in Saxon Woods v Costa – which has implications for all directors of UK companies - very much suggests the latter.

What happened?

As set out in our previous briefing on this case, a company and its shareholders signed a shareholders’ agreement requiring them to work towards a sale of the company by the end of 2019.  

One of the company’s directors, Francesco Costa, was charged with running the sale process.

Mr. Costa unilaterally decided that it would be better for the company if the sale process was delayed.

He therefore pursued a policy of delaying the sale and concealed from the board that this was what he was doing.

Unfortunately for him, the COVID pandemic struck and his decision to delay proved to be a costly one.

He then found himself on the receiving end of an unfair prejudice petition alleging that, by unilaterally choosing to delay the sale process, and concealing from the board that he was doing so, he had breached his duty under s.172 to act in good faith in what he considered to be the best interests of the company.

Mr. Costa responded that he could not have breached his s.172 duty in circumstances where he subjectively believed that his course of action was in the best interests of the company.

What did the Supreme Court decide?

Perhaps unsurprisingly, the Supreme Court held that, by going it alone, and concealing what he was doing from the board, it was objectively clear that Mr. Costa was acting in bad faith towards the company and thereby breaching his s.172 duty. It was irrelevant that he subjectively believed that his course of action was better for the company than the course the board had agreed. This ruling effectively introduces an objective test into the question of whether a director has complied with their s.172 duty.

Key takeaways

Directors who disagree with a collective board strategy open themselves up to legal action if they “go it alone” – and particularly if they conceal what they are doing from the board.  

The fact that they believe in good faith that their alternative strategy is in the best interests of the company will not be a good defence.

Instead, a director must act transparently and seek to persuade the board of their alternative point of view before pursuing it.

As ever, it will remain important to carefully document all board discussions and decisions on the matter.

Our team are on hand to support you with any actual or potential dispute, whether in the form of a litigation, arbitration or investigation - please get in touch with any of our team to discuss the issues raised above or any other needs.

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