Saxon Woods Investments Ltd v Costa: A Warning to Maverick Directors

History is littered with examples of high-profile leaders who were sure they were right until disaster struck. Honest people’s judgments can become misguided or even delusional. According to legend or Hollywood, Captain Edward Smith took The Titanic full steam ahead into an ice field believing it couldn’t sink.  In the corporate context, Adam Neumann drove WeWork into a frenzy of long-term leases and debt-fuelled expansion; Richard Fuld at Lehman Brothers kept doubling down on mortgage-backed risk. 

The Supreme Court’s decision in Saxon Woods Investments Ltd v Costa is a sharp reminder that section 172 of the Companies Act 2006 is not a safe-harbour for ‘I know best’ directors. Francesco Costa (director and chairman of the board of Spring Media Investments) genuinely believed that delaying the sale of the business would maximise value for him and other shareholders. But instead of arguing that case openly at board level, he sidelined his colleagues, kept the investment bank’s true mandate to himself and quietly steered the process away from the agreed timetable. When Covid struck, the value of the company collapsed. The Court’s decision confirms that the section 172 duty to promote the success of the company is a loyalty-based duty with an objective ‘good faith’ component that governs what directors do and how they go about doing it. The judgment is interesting less because it gives a major new shape or scope to an existing statutory duty than as a practical illustration of the limits of ‘good faith’ and how it’s not enough for a director to say he believed his decisions would maximise shareholder value.

Good faith: not just in your head

Section 172(1) requires a director to ‘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’, taking into account a number of broad factors listed in the statute. The words ‘considers in good faith’ have commonly been understood as allowing a director to make a wholly subjective business judgment. In other words, provided that director honestly believes that he is acting in the best interests of the company, then he is not, on that understanding, in breach of section 172 because that belief appears to a judge to be unreasonable, or because his actions happen to cause damage to the company. Costa tried to push that door open very wide. He argued that since he sincerely believed a delayed sale would maximise exit value for shareholders, he could run a covert strategy behind the board’s back and bear no liability for the consequences. 

The Supreme Court has now firmly closed that door. Costa’s appeal turned on a narrow, but important, argument about the meaning of section 172(1). The Court held that ‘good faith’ in section 172 applies to the means chosen to implement a director’s judgment, as well as the judgment itself. The requirement of ‘good faith’ thus extends to his conduct in pursuing what he believes is the best course for the company to take. The Court drew on a line of caselaw that treats proof of director’s core fiduciary duty of loyalty as a matter of conduct to be judged objectively, not just inner belief. Costa’s breach of section 172(1), in the Court’s view, consisted of excluding and misleading the board, and using delegated authority to undermine the board’s agreed exit strategy. Judged against objective fiduciary standards, this was not acting in a way which Costa considered, in good faith, would be most likely to promote the success of Spring Media. It was no defence that he honestly believed at the time that what he was doing was in shareholders’ best interests.

Strong leaders, collective governance

Fundamentally, Saxon Woods is a case about the tension between strong individual leadership and collective governance. Section 172 draws a boundary: a director is free to hold his own view of how to promote the company’s success, but he must pursue it with (not against) his fellow board members, and within the confines of the company’s constitutional documents.

The Supreme Court’s decision is an evolution, not a revolution. Section 172(1) already had an objective component in certain limited factual scenarios—most clearly in cases of misapplication or misappropriation of funds (In re National Funds Assurance Company), and where a director fails to consider the company’s interests at all in relation to a transaction, or unreasonably overlooks a major creditor or shareholder whose interests ought to be taken into account (Charterbridge v Lloyds Bank, Re HLC Environmental Projects Ltd, Bouchier v Booth). A director’s subjective belief clearly continues to be relevant under section 172 post-Saxon Woods, and not every allegation of breach of section 172 should now be assessed wholly or primarily against objective standards of fiduciary conduct. 

The key question is: if the Supreme Court has extended the objective component of section 172 as it was previously understood by corporate lawyers to new factual scenarios, what is the practical impact for directors, companies and shareholders?

Practical impact: section 172 as part of a statutory package

Section 172 sits within a statutory package of directors’ duties regulating the conduct of well-intentioned but wilful directors, duties which frequently overlap in practice. Of particular importance here are sections 171 and 174. Section 171 requires directors to act only within the powers conferred by the company’s constitution and for proper purposes; section 174 requires them to exercise the care, skill and diligence that a reasonably diligent person would show in their position. On any view, Costa was in breach of section 171: he used powers delegated by the board to evade the exit strategy and timetable agreed by the shareholders. Breach of section 174 was alleged too, although the Court of Appeal preferred to base its decision on section 172 on the facts of the case (the Supreme Court did not consider the point).

A graphic metaphor may help to show the essential difference between sections 171 and 172. Whereas section 171 asks whether a director has coloured inside the lines created by the constitution: section 172, on the other hand and as Saxon Woods now makes clear, asks whether he has respected the picture those lines were meant to create—the objectives agreed by the shareholders, the board’s role, and respect for others as well as his own view of success. That is a practical difference, not just a narrow conceptual one. Courts can now say to the Costa-type director: ‘even if your use of formal powers was proper, even if you believed what you were doing was in the company’s best interests, even if you acted without negligence or conflict of interest, your way of behaving towards the board and the agreed objectives was disloyal’. The lesson for directors, in a nutshell, is that you can still have a bold vision about the ends, but you are now on much thinner ice if you cheat on the means.

Duncan Henderson is a Partner at Marriott Harrison LLP.