How a director must act to meet his duty to promote the success of a company and the need to respect shareholders agreements confirmed by the Court of Appeal.
In ‘Saxon Woods Investments Limited and others v Costa’ the Court of Appeal held that the duty of a director to promote the success of a company, imposed by section 172(1) Companies Act 2006, required directors to act in a way that is objectively honest, according to the standards of ordinary people, rather than subjectively believing that what he was doing was in the company’s best interests.
In the same case, the court considered the good faith obligations owed to shareholders as part of the provisions of a shareholders agreement.
The case is an interesting study on the implications arising when a director acts in the belief that what he is doing is in the best interests of a company in the long run, despite his actions being contra to the specific terms of a shareholders agreement. It serves as a reminder that while directors retain broad discretion in the decisions they take in the management of the company’s business, they must ensure that their conduct meets fundamental standards of honesty and good faith.
In this case, the Court of Appeal considered the duty of a director to act in the best interests of a company under section 172 (1) Companies Act 2006, which requires that a director of a company must 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, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long term, and the need to act fairly as between members of the company. Subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
In this case, Mr Costa was the chairman of Spring Media Investments Limited (“the company”). He also held an indirect interest in the company through investment vehicles.
The shareholders in the company entered into a shareholders agreement (“the SA”) by which they undertook to work together to effect a sale of the company by the end of 2019 and, failing that, to instruct an investment bank to “cause” an Exit, which was defined as a sale of the shares in the company or of its assets. As part of this agreement, the shareholders undertook to give good faith consideration to any opportunity for a sale before the end of 2019. During 2019, a number of potential buyers were found but no sale took place. The Covid-19 pandemic then had a devastating impact on the company’s business resulting in the value of its share materially decreasing.
The minority shareholder brought an unfair prejudice petition against the company, under section 994 Companies Act 2006 alleging that Mr Costa’s conduct had caused unfair prejudice to him as a shareholder; that he was in breach of the SA and alleging that the lack of sale was due to the behaviour of Mr Costa, who, it was said, obstructed the sale of the company. Mr Costa admitted that he had delayed the sale, believing that a better price could be obtained at a later time and that the other shareholders would ‘thank him in the end’; and he admitted that he had misled the company’s board regarding the expressions of interest and progress of proposed sales.
In the first instance, the High Court dismissed the s172(1) claim on the grounds that Mr Costa had acted in good faith as he had subjectively believed that what he was doing was in the best interests of the company.
The Court of Appeal reversed that decision on the grounds that s172(1) required that the director’s conduct be honest according to the standards of ordinary people. It held that Section 172 “requires a director, in all he does, to act in good faith towards the company, in the way he considers would be most likely to promote the success of the company for the benefit of its members as a whole; and the requirement that the director acts in good faith includes, as a core fiduciary duty, a requirement that the director acts honestly towards the company.” A director’s belief must be both honestly held and consistent with objective standards of honesty and fair dealing. Costa’s conduct in deliberately misleading the board that he was taking steps to achieve an exit was incompatible with good faith under section 172.
The court also found that the company’s failure to engage with expressions of interest from potential buyers was a breach of the obligations in the SA and that Costa’s conduct in causing the company to breach its SA obligations was unfairly prejudicial; that Mr Costa had breached his section 172 duty to promote the success of the company and that consequently, as it would be unjust to leave Saxon Woods locked into a company controlled by a director who had deliberately disregarded minority rights and misled fellow board members, Saxon Woods was entitled to a non-discounted unconditional buy-out order by reference to the value of the company as at 31 December 2019.
The court’s decision highlights the need for directors to comply with and honour the terms of Shareholder Agreements and reinforces the position that directors cannot override shareholder agreements for strategic convenience. Courts will protect minority shareholders and hold directors accountable when they do not act in good faith or breach the terms of shareholder agreements.
Stephensons commercial department assists directors and shareholders in all aspects of corporate transactions, advising and assisting on the drafting of shareholder agreements and assisting in cases where shareholders’ rights have been, or are alleged to have been, breached.
For more information, or for bespoke advice on director’s duties and any issue arising from shareholder agreements, contact Stephensons commercial team today on 0161 696 6170.
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