Saxon Woods Investments Ltd v Costa (Re Spring Media Investments Ltd)

Factual and Procedural Background

This opinion concerns appeals from a decision dated 17 April 2024 by Judge Gleeson, acting as a Deputy High Court Judge, on a petition under section 994 of the Companies Act 2006 regarding the affairs of Company A. The petitioner, Company B, held 22.33% of the shares in Company A. The sole active respondent, Defendant, was chairman of Company A and controlled a substantial indirect shareholding.

The initial judgment, delivered on 22 February 2024, found that Company A's affairs were conducted in a manner unfairly prejudicial to Company B and conditionally entitled Company B to a buy-out order of its shares by Defendant. The condition required proof at a second trial that a third-party offer exceeding US$75 million, net of debt, had been received by the end of 2019. The judge reserved costs until after the second trial. Both parties appealed different aspects of this decision.

Company A operates in the creative services sector for fashion, beauty, and luxury brands. The business was founded in 1996 by a former CEO, who remained involved until 2017. Expansion into New York in 2012 necessitated external investment, leading to Defendant's involvement via an investment vehicle and appointment to the board.

A shareholders' agreement (SHA) was entered into in 2013 and amended in 2016, containing key provisions regarding an "Exit"—defined as the sale of substantially all of Company A's equity or assets on arm's length terms. The SHA imposed an obligation on the Company and investors to work in good faith towards an Exit no later than 31 December 2019.

Following a board meeting in November 2018, Company A engaged an investment bank to commence the Exit process, led by Defendant. Company B alleged Defendant caused breaches of the SHA by failing to work in good faith towards an Exit by the specified date and failing to consider offers in good faith. No Exit was achieved by the deadline or subsequently, with the Covid-19 pandemic impacting the Company's business and share value.

Legal Issues Presented

1. The proper construction of the obligation to work together in good faith towards an Exit under Article 6.2 of the SHA, and whether it was breached.
2. The meaning of "Exit" in the SHA and whether the obligation to give good faith consideration to opportunities for an Exit was breached by failing to consider a particular offer.
3. Whether Defendant's conduct in causing Company A to breach Article 6.2 was unfairly prejudicial to Company B.
4. Whether Defendant breached fiduciary duties under section 172 of the Companies Act 2006.
5. Whether the judge erred in imposing a condition on the buy-out order requiring proof of a third-party offer exceeding US$75 million.
6. The appropriate relief following conclusions on the above issues.

Arguments of the Parties

Appellant's Arguments (Company B)

• Defendant breached fiduciary duties under sections 172 and 174 of the Companies Act 2006.
• The judge erred in equating prejudice with financial loss and misapplied the purpose of section 996 relief.
• The prejudice suffered was the denial of the opportunity to Exit by the deadline, regardless of whether a binding offer would have been accepted by shareholders.
• The judge lacked evidential basis for concluding shareholders would reject offers at or below US$75 million.
• The judge failed to consider the ongoing control of Company A by Defendant, who was responsible for the prejudice, in exercising discretion under section 996.
• The judge erred by reserving costs until after the second trial.

Respondent's Arguments (Defendant)

• The obligation in the first sentence of Article 6.2 was only to work in good faith towards an Exit during the Investment Period, not necessarily before its end, so no breach occurred.
• The Metric offer was not an "Exit" as it involved rollover equity by existing shareholders.
• The judge failed to properly assess causation and should have found no unfair prejudice as no Exit would have been achieved anyway.
• The judge erred in the directions for the counterfactual assumptions at the second trial.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first addressed the construction of Article 6.2 of the SHA. It rejected Defendant's argument that the obligation to work in good faith towards an Exit was only during, but not by the end of, the Investment Period. The phrase "no later than 31 December 2019" was held to govern the timing of the Exit, requiring good faith efforts towards achieving it by that date.

The court found no appeal against the factual finding that Defendant pursued a strategy contrary to the SHA obligations, causing Company A to breach Article 6.2.

Regarding the definition of "Exit" and the Metric offer, the court held that a sale involving rollover equity by existing shareholders could still constitute an Exit. The failure to engage with Metric's expressions of interest was a breach of the obligation to give good faith consideration to Exit opportunities.

On unfair prejudice, the court agreed that Defendant's conduct deprived Company B of the opportunity to achieve an Exit, constituting unfair prejudice under section 994. The court clarified that relief under section 996 does not require proof of financial loss, but the judge's conditional approach to relief based on a hypothetical offer exceeding US$75 million was reconsidered.

The court then addressed fiduciary duties under section 172. It found the judge erred by applying a purely subjective test, ignoring the objective standard of honesty established in Ivey. Defendant's deliberate misleading of the board was held to be dishonest and a breach of fiduciary duty. The court rejected the judge's conclusion that Defendant acted honestly in good faith.

In exercising its discretion under section 996, the court emphasized that Defendant's breach of fiduciary duty justified a remedy beyond contractual breach. Leaving Company B as a minority shareholder under Defendant's control, who had acted dishonestly and disregarded minority rights, would be unjust. No effective regime could safeguard Company B's interests.

The court concluded that an unconditional buy-out order was appropriate, requiring Defendant to purchase Company B's shares at open market value as of 31 December 2019, determined by the High Court with expert evidence. Arguments that this date overvalues shares due to lack of an unconditional offer or pre-Covid valuation were rejected, as Defendant's deliberate delay exposed shareholders to risk.

Holding and Implications

The court ALLOWED THE APPEAL, set aside the previous judge's order, and ordered Defendant to buy Company B's shares in Company A on a non-discounted basis at open market value as at 31 December 2019.

This decision affirms that directors must act honestly and in good faith under section 172, including not misleading their boards or shareholders, and that breaches causing unfair prejudice can justify a buy-out remedy without conditions tied to hypothetical offers. The ruling underscores the court's broad discretionary power under section 996 to remedy unfair prejudice, particularly where fiduciary breaches are involved. No new precedent beyond the application of established principles was set; the decision directly affects the parties by providing Company B with a definitive exit from Company A under equitable terms.