Under the shareholder agreement (SHA) that a company had agreed with its shareholders, the company agreed to work together with the shareholders in good faith for a sale of the company no later than 31 December 2019.
As found by the trial judge:
The company entrusted the conduct of the sale process exclusively to the defendant director Mr Costa.
Mr Costa believed that a sale later than by the end of 2019 would be likely to generate a much better financial return and he sought to pursue a different sale strategy from that laid down in the SHA and approved by the board, pursuing tactics so as to achieve a slower programme for the sale.
Mr Costa achieved his strategic objective of delaying the sale beyond the end of 2019. The prospect of a beneficial exit was, however, then completely destroyed by the adverse impact of the Covid pandemic on the business.
One of the shareholders presented a minority shareholder’s petition against Mr Costa seeking relief from unfair prejudice under section 994 of the Companies Act 2006.
The trial judge determined that it was not Mr Costa’s intention by actively delaying the sale to injure either the company or any investor, the trial judge determining that his state of mind might be summarised as 'they wouldn't like it now if they knew, but they will thank me in the long run'.
The trial judge held that, as a result, Mr Costa was not in breach of his duties under section 172. The trial judge did however hold that the unfair prejudice case had been made out and he made a conditional buy-out order requiring Mr Costa to buy out the shareholder’s shares on condition of its being proved at the later quantum hearing that, had the company complied with the exit strategy agreed in the SHA, a final offer of more than US$75m net of debt would have been received for the company by the end of 2019.
The shareholder appealed to the Court of Appeal. The Court of Appeal held that, on the facts found by the trial judge, Mr Costa was in breach of fiduciary duty; that a ‘but for’ causation test as ordered by the trial judge was inappropriate where a breach of fiduciary duty was made out, and that therefore the appropriate relief was an unconditional buy-out of the shares at their undiscounted value on 31 December 2019.
Mr Costa appealed to the Supreme Court.
Lord Briggs gave the only judgment, with which all the other judges agreed, reasoning as follows:
By section 172 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.
Read in isolation, section 172 could be interpreted as requiring good faith only in the director’s thinking, not their conduct. Grammatically the words "in good faith" appear to be part of the phrase "he considers in good faith". Thus, if the director who genuinely believes a course of action will promote the company’s success could use any means to achieve it - even conduct involving dishonesty, deception or disloyalty that would objectively amount to bad faith.
The alternative view was that the requirement for good faith extends not merely to the director's thinking but also to their conduct in pursuit of achieving what they believe is the best course for the company to take. Even though the court will not second guess the director's genuine view about the best way forward for the company by its own objective assessment, nonetheless the requirement for good faith does involve at least some objective element, if the director's conduct is challenged in court.
While the rigorous application of grammatical rules might be said to favour the first of those alternatives, the second was clearly to be preferred for three main reasons:
It was more consistent with a codification of the pre-existing law.
It fit better into its context as part of the directors’ duties set out in chapter 2 of the Companies Act 2006, and with its purpose: If the requirement of good faith was limited to the director's thought process in forming their business judgment as to strategy, then section 172 would be likely to prove thoroughly disruptive to the good governance of the company in accordance with its constitution.
It strained credulity to think that the first alternative could have been intended, because of its consequences. Was a director required by section 172 to act, or merely to think, in good faith? The notion that the framers of this important codification of directors' duties had thought only the latter was highly unlikely. Far from promoting corporate success in the modern world, it would be a recipe for chaos and paralysis in corporate governance, and destructive of the collegiality of the board of directors as a whole.
By contrast with the Supreme Court, the Court of Appeal had focused its analysis upon a conclusion that Mr Costa had acted dishonestly, applying the objective test laid down in Ivey v Genting Casinos [2018] AC 391. Lord Briggs noted that his analysis proceeded upon a somewhat broader basis, concentrating on the requirement for good faith rather than dishonesty on its own. An elaborated test for dishonesty as set out in the Ivey case made sense in the context of legal duties which arose irrespective of a separate fiduciary relationship but where the defendant owed a fiduciary duty of loyalty. The question was whether that duty had been breached, and while dishonesty might be evidence of that, the duty itself supplied the relevant analytical framework; it was unnecessary to elaborate it by reference to the Ivey case.
The Court of Appeal had also concluded that it was not open to Mr Costa to formulate, or to act upon, his own different judgment about a strategy for the success of the company since that had been determined by the SHA. If the case of breach of fiduciary duty by Mr Costa had depended entirely upon this second reason, Lord Briggs stated that he would not have found it easy to determine. The mere fact that a company had contracted with others (here its shareholders) to pursue a certain route to success could not in his view altogether close off any analysis by its directors whether it would be better served by changing course, even if that were to involve a breach of contract.
The Supreme Court therefore dismissed the appeal and upheld the Court of Appeal’s relief order on different grounds.
Saxon Woods Investments v Costa [2026] UKSC 21
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