Objective Standard of Honesty in Section 172 Directors’ Duty Clarified by Saxon Woods v Costa

Introduction

The Court of Appeal’s decision in Saxon Woods Investments Ltd v Costa (Re Spring Media Investments Ltd) [2025] EWCA Civ 708 addresses a section 994 unfair prejudice petition under the Companies Act 2006. The petitioner, Saxon Woods Investments Ltd (“SW”), held 22.33% of the shares in Spring Media Investments Ltd (“the Company”). The respondent, Francesco Costa, was chairman and, through investment vehicles, controlled a majority shareholding. SW alleged that Costa caused the Company to breach its shareholders’ agreement by failing to work in good faith towards an “Exit” by 31 December 2019 and thus acted in a manner unfairly prejudicial to SW’s interests. The landmark holding is that the statutory duty under section 172—“to act in the way he considers, in good faith, would be most likely to promote the success of the company”—incorporates an objective requirement of honesty and cannot be satisfied by a director’s purely subjective belief.

Summary of the Judgment

The Court of Appeal:

Upheld the construction and breach of the contractual obligation in Article 6.2 of the 2016 Shareholders’ Agreement (“SHA”) requiring the Company and investors to work together in good faith towards an Exit no later than 31 December 2019.
Confirmed that Costa’s concealment and misleading of the board about Jefferies’ mandate amounted to a breach of that contractual obligation and gave rise to unfair prejudice under section 994.
Overturned the trial judge’s finding that Costa was not in breach of his fiduciary duty under section 172, holding that deliberate deception cannot be reconciled with the statutory duty to act in good faith—which the Court read to include an objective requirement of honesty.
Exercised its fresh discretion under section 996 to order an unconditional buy-out of SW’s shares at their open-market value as at 31 December 2019.

Analysis

Precedents Cited

Re Smith & Fawcett Ltd [1942] Ch 304: Directors must exercise discretion bona fide in what they consider in the interests of the company.
Regentcrest plc v Cohen [2001] 2 BCLC 80: Held that the test for a director’s fiduciary duty is subjective—whether the director honestly believed his act was in the company’s interest.
Ivey v Genting Casinos [2017] UKSC 67: Established the objective test for dishonesty in civil and criminal contexts—first ascertain the director’s actual belief as to facts, then apply the ordinary standards of decent people.
Re Saul D Harrison & Sons plc [1994] BCLC 475 and Re Southern Counties Fresh Food Ltd [2008] EWHC 2810 (Ch): Defined the elements of unfair prejudice—conduct must be both prejudicial and unfair, with a causal link to the petitioner’s loss.
Rock Nominees Ltd v RCO (Holdings) plc [2004] BCC 466: If the petitioner is no worse off, relief may be refused even if prejudice is established.

Legal Reasoning

1. Construction of Article 6.2
The Court confirmed that Article 6.2 imposes:

An obligation to work together in good faith towards an Exit by 31 December 2019.
If no Exit occurs by that date, to engage an investment bank to procure an Exit as soon as reasonably practicable thereafter.

2. Breach of Contractual Duty
Costa confined communications with Jefferies to a small sub-group, misrepresented Jefferies’ mandate, failed to solicit genuine bids before the deadline, and ignored Metric Capital’s expressions of interest. The Court upheld the finding that the Company breached Article 6.2, and that these breaches were attributable to Costa’s conduct.

3. Unfair Prejudice under Section 994
The deprivation of SW’s contractual right to pursue an Exit was found to constitute unfair prejudice, irrespective of whether a transaction would ultimately have closed by the end-2019 deadline.

4. Fiduciary Duty under Section 172
The critical new precedent established by the Court is that the statutory duty under section 172 includes an element of honesty enforceable by objective standards. The trial judge had applied a purely subjective test—whether Costa genuinely believed he was acting in the Company’s interests even while misleading the board. The Court of Appeal rejected that approach on three grounds:

Section 172’s requirement “to act in good faith” must carry content. A wholly subjective test would render those words redundant.
By deliberately deceiving fellow directors and subverting the Exit process, Costa’s conduct was inconsistent with an honest approach to company decision-making.
Following Ivey, the assessment of honesty must apply the standards of ordinary decent people as to whether deliberate concealment and misleading can be reconciled with “good faith.”

5. Remedy under Section 996
Given the aggravated nature of Costa’s conduct and the impossibility of effective future safeguards, the Court exercised its broad equitable discretion to order a buy-out of SW’s shares at a price reflecting their open-market value on 31 December 2019, thereby curing both past and future prejudice.

Impact

This decision has three major consequences:

It clarifies that the director’s duty under section 172 is a true fiduciary duty requiring objective honesty, not merely a subjective belief in acting for the company’s benefit.
It reinforces the flexibility of section 996 relief, showing that the Court may order an unconditional buy-out where a director’s breach of fiduciary duty has caused unfair prejudice that cannot be remedied by contractual compensation alone.
It sends a strong deterrent signal: directors who manipulate decision-making processes and deceive boards risk personal liability and equitable relief beyond private contractual rights.

Complex Concepts Simplified

Section 994 Unfair Prejudice Petition: A minority shareholder’s claim that the company’s affairs are run in a way that unjustly harms its interests.
Section 172 Duty to Promote Success: Statutory rule that directors must act in good faith to benefit all members; now clarified to require honesty by objective standards.
Equitable Buy-Out Order: A broad remedy under section 996, allowing the Court to force a purchase of shares to resolve unfair prejudice.
“Exit” in the SHA: Defined transaction by which all or substantially all shares or assets are sold; parties agreed to pursue this by a fixed date.

Conclusion

The Court of Appeal in Saxon Woods v Costa has established a new precedent: a director’s duty under section 172 of the Companies Act 2006 demands honesty ascertainable by objective standards and cannot be satisfied by a subjective belief alone. Where a director’s dishonest actions have caused unfair prejudice that cannot be remedied by straightforward contractual compensation, the Court will not hesitate to employ its equitable power under section 996 to order a buy-out. This ruling underscores that good faith in company law is grounded in integrity, reinforcing corporate governance and minority protection.