By Matthew Butler & Graham Briggs
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Published 28 September 2026
Imagine that you are on the board of a company. The board has entrusted the Chairman with selling the company by the end of the year. Yet after a while, you discover that the Chairman has - in clear violation of this mandate - been covertly plotting to sell the company at a later date, misleading the board about what he was doing and concealing information from them. When challenged, he explains that his attitude was "I thought you wouldn't like it now, but you'd thank me in the long run". You realise that he genuinely thought what he was doing was right, yet he had intentionally deceived his fellow directors.
You may feel horrified at such disloyalty and aggrieved at this breach of the collegiality by which directors' decisions should naturally be made. And, delving into the directors' duties set out in the Companies Act 2006 ("the Act"), your eyes would naturally alight on the duty to promote the success of the company at 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 for the benefit of its members as a whole."
By its very nature, the rogue director's behaviour was not in good faith, since it involved deception. So, surely he is in breach of that duty in such as way as to support an unfair prejudice petition by a minority shareholder?
Saxon Woods at first instance
This is what the court considered in the case of Saxon Woods Investments Ltd v Costa – and, perhaps surprisingly, at first instance the answer to that question was no. The trial judge, applying a strict interpretation of section 172, found that the requirement to have "good faith" only applied to considering what "would be most likely to promote the success of the company". In other words, all that matters was that the director's belief that he was acting in the company's interests was genuine. It did not matter whether that director was acting in good faith generally.
The Saxon Woods case concerned a company known as Spring Media Investments Ltd ("the Company"). In 2016 the Company entered into a shareholders' agreement with all the shareholders - including Saxon Woods Investments Ltd ("Saxon Woods") - which required all parties to work towards a sale of the Company by 31 December 2019.
However, Mr Costa, the Chairman of the board, believed this was the wrong strategy and that a later sale would be much more profitable. He therefore went about secretively aiming to sell it at a later date, while pretending to the board that he was adhering to the agreed strategy. The sale did not proceed in 2019 and the following year, the prospect of a sale on more favourable terms vanished with the arrival of Covid-19.
This led Saxon Woods to present an unfair prejudice petition, which failed at first instance for the reasons above.
Court of Appeal and basis of appeal to the Supreme Court
The Court of Appeal reversed the trial judge's decision on the basis that Mr Costa's decision had been dishonest and therefore not in good faith.
Mr Costa appealed to the Supreme Court, arguing that it had never been permissible to apply an objective test to determine whether a director had breached the duty at section 172. Rather, as long as a director genuinely believes that a certain strategy would promote the company's success, he is free to choose any course of conduct even if doing so involves lies, deception, dishonesty of disloyalty.
Supreme Court's judgment
The Supreme Court roundly rejected this argument in a unanimous judgment delivered by Lord Reed, who appealed not simply to the wording of section 172 but also to the equitable principles governing the duties of fiduciaries that had been developed in case law before the Act came into force.
In summary, the Court's reasoning was as follows:
- The core duty of those equitable principles was a duty of loyalty, which had historically been determined by an objective test. The directors' duties at sections 170-181 of the Act should be interpreted in light of those principles (and indeed this is expressly stated at section 170(4)). For those statutory duties to have dispensed with the long-standing principle of objectivity would have required the "clearest words" (which the Act does not contain). Therefore, while the court will start by accepting a genuine belief by a dissentient director, such a director "does not thereby obtain carte blanche to seek to implement his dissenting view by any means, however covert or disloyal, he thinks necessary".
- The statutory directors' duties in the Act were intended to operate together in harmony with each other and with good governance of a company. Allowing section 172 to bear the meaning for which Mr Costa contended would have put it in conflict with section 171, which requires a director to act in accordance with the company's constitution and to exercise powers for the purposes for which they are conferred. Here, the board gave Mr Costa the power to secure the sale by the end of 2019, yet used that power to pursue an irreconcilably opposed strategy; this was a plain abuse of that power.
- In general, it simply strained credulity that Parliament would have intended section 172 merely to require directors to think in good faith, and not to act in good faith. That would 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".
Conclusions
The effect of the Supreme Court's judgment is to clarify that a director's sincere, subjective belief that an action is in the best interests of the company does not excuse covert, disloyal behaviour that deceives the board and subverts the agreed strategy. Rather, the requirement under section 172 of the Act - that a director must act in a way that he considers "in good faith" would be most likely to promote the success of the company - can be judged objectively and not merely with reference to the director's inner thoughts.
In other words, this case concerns the manner in which decisions are reached, rather than what decision is actually reached. The directors should act with collegiality and should not attempt to undermine the board's collective governance to achieve their ends, even if they sincerely believe that they are doing the right thing.
