Background
Spring Media Investments Limited, a company providing creative services to luxury brands, was party to a Shareholders’ Agreement (SHA) dated May 2016 requiring the company to pursue an “Exit” (sale) no later than December 31, 2019. Francesco Costa, a director and former chairman with a substantial indirect shareholding, disagreed with this timeline. He believed delaying the sale beyond 2019 would generate substantially better financial returns for the company and its investors.
Rather than raising this disagreement openly with fellow directors or seeking to change the board’s strategy, Costa embarked on a covert campaign. He excluded other directors from the exit process, misled the board about its progress, gave undisclosed instructions to financial advisors that did not encompass achieving a 2019 sale, and employed delaying tactics—all while genuinely believing his approach served the company’s best interests. The company missed the 2019 deadline; the COVID-19 pandemic subsequently devastated its business, destroying any realistic exit opportunity.
Saxon Woods Investments Limited, a minority shareholder holding approximately 22% of the company, petitioned for relief from unfair prejudice under the Companies Act 2006, seeking to force Costa to purchase its shares at their value as of December 31, 2019.
The Court’s Holding
The Supreme Court unanimously held (Lord Briggs delivering judgment) that Costa had breached his fiduciary duty under section 172(1) of the Companies Act 2006. The court clarified a fundamental principle: while the common law business judgment rule traditionally shields directors from judicial second-guessing of their decisions, that protection applies to the board’s collective judgments and does not permit an individual director to pursue his own minority strategy through concealment and deception.
Section 172(1) requires directors to act “in the way [they consider], in good faith, would be most likely to promote the success of the company.” The court held that “good faith” cannot be satisfied by a director’s subjective internal belief that his chosen course serves the company; rather, it requires conduct demonstrating actual good faith. A director who conceals his disagreement with board strategy, misleads colleagues about the implementation of agreed plans, and pursues his own objectives covertly breaches the duty to act in good faith. This duty encompasses an affirmative obligation to bring independent views openly to the board, to collaborate with fellow directors, and to refrain from covertly subverting the board’s constitutional authority.
The court drew on the principle from Item Software (UK) Ltd v Fassihi [2004], which located a duty of disclosure within the broader fiduciary duty of loyalty. This principle, the court held, applies with full force to section 172. The court also noted that pre-2006 authorities—particularly the reasoning in In re National Funds Assurance Company (1878)—established that good faith requires examination of a director’s actual conduct, not merely his internal thought process. A director cannot justify objectively wrongful conduct by claiming he genuinely believed it was right.
Key Takeaways
- Section 172(1)’s fiduciary duty of loyalty requires honest disclosure and open collaboration with fellow directors; a director cannot unilaterally pursue his own strategic judgment covertly in opposition to board decisions.
- Good faith is not satisfied by a director’s subjective belief that his actions serve the company; it requires conduct consistent with transparency and loyalty to the company’s established governance.
- The business judgment rule protects the board’s collective decisions from judicial interference but does not shield an individual director who circumvents board authority through concealment.
- A director who disagrees with board strategy must raise that disagreement openly and abide by the board’s decision (or resign); covert action is a breach of fiduciary duty.
Why It Matters
This decision significantly strengthens protections for minority shareholders and clarifies the boundaries of director autonomy. The court rejected an interpretation of section 172 that would have permitted a director to act unilaterally based on his internal conviction that his course was right for the company. Instead, it anchored the statutory duty in the foundational principle that directors are collegial fiduciaries owing duties to the company as a legal entity, not autonomous agents.
The holding has broad implications for disputes involving director conduct. It expands the scope of section 172 liability to encompass concealment and non-disclosure that were previously thought to fall outside the duty to promote company success. For corporate governance, the decision reaffirms that the constitutional structure of a company—which typically vests management authority in a board that resolves disagreements by majority vote—is not subordinate to an individual director’s judgment, no matter how sincere. The decision thus protects both the formal governance framework and the legitimate expectations of minority shareholders who rely on the board’s strategic decisions.