Director’s duty to act in the best interests of a company: Honesty really is the best policy

In Saxon Woods Investments Ltd v Costa (Re Spring Media Investments Ltd) [2025] EWCA Civ 708, the Court of Appeal considered whether a director who intentionally delayed the sale of a company, and deliberately concealed that from the board, caused unfair prejudice against a minority shareholder and breached a director’s duty to act in the best interests of a company under section 172 of the Companies Act 2006 (the Best Interest Duty).

The Court of Appeal held that there had been (i) unfair prejudice against a minority shareholder; and (ii) a breach of the Best Interest Duty in circumstances where a director had deliberately misled the board by concealing his strategy to delay a sale in the hope such a delay would result in a significant uplift in the purchase price for the company. The Court imposed limits on the extent to which a director can rely solely upon their subjective opinion of what is in the best interests of a company when defending a claim for breach of the Best Interest Duty.

The case raises several practical issues, particularly as to the scope of the Best Interest Duty and the interaction between directors’ duties and shareholders’ agreements.

Background

The case concerned Spring Media Investments Limited (the Company). Saxon Woods and the Company entered into a shareholders’ agreement (the SHA) which contained a provision whereby the Company and each of its investors agreed to work in good faith towards achieving an exit via a sale of the Company or a sale of the Company’s assets by the end of 2019.

The Company’s Chairman, Mr Costa (who was also a substantial investor in the Company), had effective control of the proposed sale process with the assistance of an investment bank.

Despite Saxon Woods’ best efforts to arrange introductions between the Company and potential buyers, no sale was completed by the deadline. By 2020, COVID hit, the Company was badly impacted and the value of Saxon Woods’ shareholding in the Company fell significantly.

Unfair prejudice

Saxon Woods subsequently brought a claim for unfair prejudice maintaining that Mr Costa “caused the Company to breach its obligation” to work in good faith towards achieving an exit by the end of 2019.

The High Court and the Court of Appeal both agreed with Saxon Woods that Mr Costa’s actions in deliberately slowing the progress of any sale and concealing this from the board amounted to unfair prejudice on Saxon Woods and Mr Costa acted in a way which he knew or should have known was contrary to the Company’s obligations under the terms of the SHA.

Breach of directors’ duty

The Best Interest Duty in section 172 of the Companies Act 2006 provides that “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.”

At first instance, the High Court rejected the claim that Mr Costa had breached the Best Interest Duty because he sincerely believed that delaying the sale of the Company would result in obtaining a higher purchase price (i.e. a wholly subjective test was applied).

Overturning that first instance decision, the Court of Appeal held that Mr Costa had breached the Best Interest Duty. The Court of Appeal found that the High Court had applied the wrong test by only looking at Mr Costa’s subjective state of mind. Section 172 of the Companies Act 2006 contains the requirement that a director act in “good faith”. The Court of Appeal clarified that to act in “good faith” a director must act honestly towards the company. The legal test for whether an individual has acted honestly or dishonestly was set out by the Supreme Court in Ivey v Genting Casinos (UK) Ltd in 2017. The honesty test comprises two elements: (1) a subjective assessment of the genuine state of the individual’s knowledge or belief of the facts at the relevant time; and (2) an objective assessment to determine whether the individual’s conduct was dishonest according to the “ordinary standards of decent people”.

Applying the Ivey honesty test, the Court of Appeal found that Mr Costa had breached the Best Interest Duty by misleading the board and concealing that he was, in fact, doing as much as he could to prevent progress of a Company sale; conduct which the Court said “could only have led to a finding that he was behaving dishonestly”. By focusing on the subjective state of Mr Costa’s mind alone, the High Court had not addressed the question of whether his conduct in reliance on his belief was, objectively, honest.

Key takeaways

1. An English court will apply both a subjective and an objective test of honesty when considering whether a director has acted in good faith for the purposes of determining compliance with the Best Interest Duty. The good faith requirement means directors do not have ‘carte blanche’ to do whatever they consider to be in the company’s best interests.
2. Honesty really is the best policy as the Court of Appeal identified “[d]eliberately deceiving the board of a company must, either always or almost always, be inconsistent with a director’s duty under section 172”. It is, therefore, important that directors ensure that (i) they sincerely believe their actions are in the best interests of the company; and (ii) a reasonable person would consider their conduct to be objectively honest.
3. Directors should familiarise themselves with any shareholders’ agreement and ensure they are fully aware of a company’s obligations relating to exit arrangements. If a director deliberately fails to act in accordance with such exit agreements, they are likely to be in breach of their director’s duties.
4. The decision provides comfort to institutional investors regarding their ability to exit an investment at an agreed point (which ought not be contingent on a director’s commercial discretion).

With thanks to Jake Burke for his assistance in preparing this post.