Section 172(1) of the UK Companies Act 2006 requires directors to act in the way they consider, in good faith, would be most likely to promote the company’s success. But what standard of behaviour does this require? The Supreme Court recently considered this in the case of Saxon Woods Investments Limited and others v Francesco Costa [2026] UKSC 21, confirming that although courts will defer to directors’ commercial judgment on how best to promote a company’s success, whether a director has breached that duty still turns partly on an objective standard. Genuine belief in a chosen course does not entitle a director to pursue it by any means necessary.
The Background
The Supreme Court was required to determine the appeal of Mr Francesco Costa, a former director and chairman of Spring Media Investments Limited, against an unfair prejudice order that required him to buy out a minority shareholder.
Under a 2016 shareholders’ agreement, the company and its investors had agreed to work in good faith towards a sale of the business by 31 December 2019. The board delegated conduct of the sale process to Mr Costa. The trial judge found that Mr Costa believed a later sale would achieve a substantially better price, and set out, in effect, to engineer that outcome by keeping his fellow directors in the dark. Mr Costa concealed the true state of the sale process, rebuffed enquiries from fellow directors, misled the board into believing the company was complying with its contractual exit obligations when in fact it was not, and gave instructions to the company's advisers that did not reflect what the board had resolved.
Mr Costa’s strategy succeeded in delaying any sale past the end of 2019, shortly before the COVID-19 pandemic destroyed the value of the business.
Saxon Woods, a minority shareholder, subsequently petitioned for relief from unfair prejudice under sections 994–996 of the Companies Act 2006. The trial judge found that Saxon Woods’ case on unfair prejudice had been made out, but concluded, applying a subjective test of good faith, that Mr Costa had not breached section 172 because he believed he was acting in the company’s best interests, and he had not been dishonest. The trial judge therefore made only a conditional buy-out order.
This decision was then overturned by the Court of Appeal, which applied an objective test of dishonesty. The Court of Appeal found Mr Costa’s deception to have been dishonest, and therefore not in good faith, and ordered an unconditional buy out.
The Supreme Court’s Decision
This decision was then appealed to the Supreme Court. Mr Costa’s case was that the words “in good faith” qualify only the director’s own thought process, i.e., that a subjective test was to be applied to the construction of section 172.
Although the Supreme Court recognised that “the rigorous application of grammatical rules” might be said to favour this argument, it was ultimately dismissed. However, its reasoning on section 172 differed slightly from the Court of Appeal.
The Supreme Court recognised the longstanding principle that the court will not interfere with the directors’ exercise of the business judgment in managing the affairs of a company provided that the directors act bona fide in what they consider to be in the best interests of the company. However, there is also long-standing support for the proposition that a director’s professed genuine belief cannot sanitise objectively disloyal conduct. The court will respect a director’s honest business judgment about strategy, but that respect does not extend to licensing covert or deceptive methods of implementing that judgment against the wishes of the board. Good faith does not only apply to a directors’ thought process, but also their conduct. To require otherwise would, in the words of Lord Briggs, “be a recipe for chaos and paralysis in corporate governance, and destructive of the collegiality of the board of directors as a whole which all stakeholders in limited companies are entitled to expect.”
The Supreme Court declined to rule on the separate question of whether a shareholders’ agreement fixing an “exit strategy” automatically forecloses a director’s ability to depart from it in the company’s changed circumstances. Lord Briggs did, however, note that the fact that a company has contracted with others to pursue a certain route to success cannot, in his view, completely close off any analysis by its directors as to whether it would be better served by changing course, even if that amounted a breach of contract.
Key Takeaways
This decision may provide clarity for directors and shareholders:
- A director’s duty of good faith is not confined to subjective belief: a genuine belief on the part of a director that they are acting in the best interests of the company is not sufficient.
- Good faith governs both what a director believes and how that director conducts themselves in furtherance of that belief.
- Honest belief that a different course would benefit the company does not justify misleading colleagues or pursuing a covert strategy.