In brief
In Saxon Woods Investments Limited and others v. Francesco Costa [2026] UKSC 21, the Supreme Court (“SC”) confirmed that the test for acting in good faith under section 172 (“section 172”) of the Companies Act 2006 (“CA 2006”) involves both a subjective and an objective assessment, with a genuine subjective belief in the benefit of a proposed act representing only the first step. The judgment affirms that CA 2006 requires directors to operate within the company’s constitutional framework, act transparently and bring dissenting views to the board for collective consideration.
Facts and background
The SC’s consideration of the case predominantly relates to the application and discharge of the section 172 duty. In summary, section 172 requires a director to act in good faith with regard to stakeholder factors, the likely impact of decisions for the company in the long term and the duty to act fairly as between members as a whole.
Mr Costa was a director of Spring Media Investments Limited (“Company”) of which Saxon Woods Investments Limited (“Saxon Woods”) was a shareholder. Mr Costa pursued an exit strategy that deviated from that agreed in the shareholders’ agreement (SHA) and the board’s delegation to him. The strategy operated at a materially slower pace than was required by the SHA (being by the end of 2019) and exposed all shareholders to significant losses during the 2020 pandemic.
The High Court found that Saxon Woods had suffered unfair prejudice under sections 994 to 996 CA 2006. The Court of Appeal upheld that finding and ordered an unconditional buy-out at the pro rata undiscounted value as at December 2019, and applied the objective dishonesty test from Ivey v. Genting Casinos (UK) Ltd [2017] UKSC 67 to conclude that Mr Costa had acted dishonestly and not in good faith. Ivey confirmed that, in assessing dishonesty, the courts will apply a test which involves both a subjective and objective element: in summary, whether on the defendant’s knowledge of the facts, his conduct was contrary to normally acceptable standards of honest conduct.
Importantly, the SC did not base its analysis that section 172 had been breached on that dishonesty test. It instead held that Mr Costa’s breach of section 172 derived from his failure to comply with the fiduciary duty of loyalty. The fiduciary duty of loyalty was summarized in Bristol & West Building Society v. Mothew [1998] Ch 1 (Court of Appeal): “A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary…”.
Key takeaways
- The subjective and objective elements of the good faith test operate at distinct stages. The SC reaffirmed that it will not substitute its view for directors’ subjective and genuine business judgment but confirmed that in assessing the manner in which directors exercise that judgment in the context of section 172, further assessment will be applied after the subjective analysis, where the court will objectively assess for consistency with their fiduciary obligations and other directors’ duties under CA 2006.
- The interaction of individual and collective judgement under the “business judgment” test: where a director acts on their own in discharging their individual responsibility under section 172, contrary to a collective board decision where the board have collectively applied the business judgment test, it is not generally acceptable for a director to unilaterally act in contravention of the collective board decision even if in their opinion the business judgement assessment of the full board might be wrong.
- Covert action by a director can be subject to section 172. The duty not to subvert the board or act covertly, though not a defined duty, is encompassed under section 172 as a general fiduciary duty. Directors generally make decisions collectively under articles of association and must bring unilateral actions to the attention of the board.
- Breach of another general duty does not preclude a concurrent breach of section 172 - it may instead signal a complementary breach of section 172.
- Director conduct must operate within the company’s constitutional framework where performance of duties should affirm, not impede, proper governance of the company.
Conclusion
Whilst the SC accepted Mr Costa’s belief that he was acting in good faith as genuinely held, it still found a breach of section 172 on the facts. This confirmed that genuine subjective belief is necessary, but not sufficient, for compliance with section 172. As the SC made clear, “the individual 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 SC confirmed that a purely subjective reading of section 172 would be “a recipe for chaos and paralysis in corporate governance” as all directors would be empowered to take their own path.
Lily Jones, Trainee Solicitor, has contributed to this legal update.