Directors who think independently and back their own commercial instincts are highly valuable within a business. In exercising their judgment, however, directors remain bound by their statutory duties under the Companies Act 2006. In particular, section 172 requires a director to act in the way he considers, in good faith, to be most likely to promote the success of the company for the benefit of its members as a whole.
In the recent judgment in Saxon Woods Investments Ltd v Costa [2026] UKSC 21, the Supreme Court considered whether a director’s genuine belief that he was acting in the company’s best interests was, by itself, sufficient to satisfy that duty. The judgment now provides a leading authority on the meaning of good faith and the standards of honesty and loyalty expected of directors.
Directors’ Duties Under Section 172
Spring Media Investments Limited (the Company) was the holding company of a media and creative services group operating in the fashion and beauty sectors. Under a shareholders’ agreement, the Company and its investors had agreed to work towards a sale of the business by the end of 2019, with responsibility for progressing a board-approved strategy delegated to the Company’s chair, Francesco Costa (the Director). Saxon Woods Investments Limited (Saxon Woods) was a significant minority shareholder in the Company.
Mr Costa believed that an immediate sale would undervalue the business and that delaying the sale would ultimately achieve a higher valuation for shareholders. Instead of pursuing the agreed timetable, he sought to delay the sale process, a position the trial judge summarised as “they would thank me in the long run”.
The anticipated sale never materialised, and Saxon Woods brought an unfair prejudice petition against the Director, alleging he had frustrated the agreed strategy and breached his duties as a director.
Can a Director’s Best Intentions Satisfy Good Faith?
The High Court found that the Director genuinely believed he was acting in the Company’s best interests and therefore had not breached section 172, but the Court of Appeal disagreed. The Director appealed the Court of Appeal decision, and the matter came before the Supreme Court.
The case raised a fundamental question: is compliance with section 172 determined solely by a director’s honest belief, or does the requirement of good faith also extend to the manner in which that belief is pursued? The significance of this question extended beyond the facts of Saxon Woods. If good faith depends solely upon a director’s subjective belief, conduct which appears misleading or disloyal could potentially be justified provided the director sincerely believed they were acting for the benefit of the company.
Supreme Court’s Judgment
The Supreme Court accepted that directors are entitled to exercise independent commercial judgment, and that a business decision does not become a breach of duty simply because it later proves commercially unsuccessful.
In considering the purpose of section 172, the Court emphasised that it reflects the longstanding fiduciary duty of loyalty owed to the company by its directors. Good faith is therefore concerned not only with a director’s motives and intentions, but also with the manner in which those objectives are pursued.
The Supreme Court rejected the argument that compliance with section 172 depends solely upon the director’s honest belief. Whilst a genuine belief remains relevant, it is only part of the analysis, and the court must consider whether the director acted consistently with the duty of loyalty owed to the company.
A director cannot justify misleading or disloyal conduct simply by asserting that he believed his actions would ultimately benefit the company. Lord Briggs held that a purely subjective approach would permit a director who believed they knew better than the board to pursue an alternative strategy in secret, which would be fundamentally inconsistent with the fiduciary duty of loyalty owed by the director to the company.
Implications of Saxon Woods v Costa for Directors
- Good intentions are insufficient
The central lesson is straightforward: a director’s genuinely held belief that a particular course of action represents the best outcome for the company does not alone satisfy section 172. Good faith requires honesty and loyalty in the way that the director’s belief is pursued. - Honesty to the board
The difficulty in Saxon Woods was not simply that the Director preferred a different strategy: it was the manner in which that strategy was pursued. Where a director considers that a different course would better serve the company, that position should be raised openly with the board and addressed through the company’s decision-making processes, rather than advanced in secret. - Delegated powers
Where authority is delegated by the board for a particular purpose, the director exercising that authority should act consistently with the mandate they have been given. Saxon Woods illustrates the risks which arise where delegated powers are used to pursue a strategy which differs from the strategy approved by the board. - Process matters
The manner in which a decision is reached may prove just as important as the decision itself. Board minutes, recorded discussions and documented decisions may become important evidence if a director’s conduct is later scrutinised. The courts may be concerned not only with the outcome of a decision, but also with the process by which it was reached.
Conclusion
Saxon Woods confirms that good faith under section 172 requires more than good intentions. A genuine belief that a particular strategy will benefit the company remains relevant, but it is no longer enough to ask only whether the director believed they were acting in the company’s interests. Good faith under section 172 also requires directors to act honestly and loyally in pursuing those objectives.
If you have any questions regarding directors’ duties, shareholder disputes, unfair prejudice petitions or corporate governance issues, please contact the Dispute Resolution team at Herrington Carmichael.
