A director who deliberately deceives the board, even if they sincerely believe they are doing so in the company’s best interests, will be in breach of their fiduciary duties.
The Court of Appeal has handed down a ruling involving a director who deliberately, but with apparently good intentions, misled the board - causing unfair prejudice to a minority shareholder.
The decision emphasises that a director always owes a duty to act in the best interests of the company and to promote its success: it’s a core fiduciary duty under s172 Companies Act 2006.
What’s the background?
In Saxon Woods Investments v Costa (Re Spring Media Investments) [2025] EWCA Civ 708, the parties entered into a shareholders agreement in February 2013, which was amended in May 2016 (the SHA).
The exit provisions provided that Spring Media Investments (SM) and its investors agreed to work together in good faith towards an exit by 31 December 2019 (the expiry of the investment period); and “to give good faith consideration to any opportunities for an Exit” during the investment period.
The defendant, Francesco Costa, held a substantial indirect interest and was chairman of SM. The claimant, Saxon Woods (SW), was a minority shareholder. In November 2018, the board agreed that SM would hire an investment bank to start the exit process with Mr Costa in control of the process.
However, he misled the Board and concealed the fact that he was doing nothing to achieve a sale of the shares before 31 December 2019. He was doing as much as he could to prevent it on the basis that delaying a sale would mean achieving a better price in the future. He believed this was in the best interests of the shareholders.
No exit was ever achieved – and covid-19 hit with devastating effect on SM and, consequently, SW’s share value. SW brought an unfair petition under s994 Companies Act 2006, arguing that Mr Costa caused SM to breach its good faith obligations under the SHA.
Unfair prejudice arises where a company’s directors (or majority shareholders) abuse their powers to further their own interest, to the detriment of minority shareholders (eg devaluing their shares).
High Court decision
The trial judge declined to find that Mr Costa had breached his duties. He held that the fiduciary duties under s172 were subjective - the question being whether "the director honestly believed that his act or omission was in the interests of the company".
His conclusion was based on his finding that Mr Costa’s state of mind was, "they wouldn't like it now if they knew, but they will thank me in the long run".
Objective test
The Court of Appeal has now overturned that decision. The correct test requires an objective assessment of the director’s conduct, in light of the facts as they knew or believed them to be at the time.
Here, Mr Costa had deliberately misled the board and had behaved dishonestly in breach of his fiduciary duty. His claim that he sincerely believed it was in everyone's interests to delay an exit was no defence. He had breached his duty and his conduct amounted to unfair prejudice against the minority shareholder SW.
To hold otherwise and focus on a director’s subjective state of mind could, eg mean that provided they believed they were promoting the success of the company, ‘the ends would justify the means’ (even to the extent of misleading other directors and shareholders as to the ends and the means). Mr Costa was ordered to buy out SW's shares, at a final value to be determined by the High Court once expert evidence is obtained.
Get in touch
For expert advice on commercial and corporate disputes, contact the commercial litigation team at mfg Solicitors by calling Sam Pedley on 01562 820181, or emailing samuel.pedley@mfgsolicitors.com. Alternatively, you can complete our online form and we will get back to you as soon as possible.
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