I did it my way: Supreme Court applies objective test to director duty to exercise good faith to promote success of the company

The Supreme Court has unanimously held that a director’s duty to act in good faith under section 172(1) of the Companies Act 2006 governs not only the director’s thinking but also their conduct, which is essentially to be interpreted objectively. A director who genuinely believes they are acting in the company’s best interests cannot rely on that subjective belief as a defence if they pursue it through deception, concealment or covert subversion of a board-approved strategy. The decision in Saxon Woods Investments Limited v Francesco Costa [2026] UKSC 21 provides important clarity on the scope of directors’ fiduciary duties and has significant implications for corporate governance across all sectors.

Background

The case concerned Spring Media Investments Limited, a creative services business. Francesco Costa, the company’s chairman, was entrusted with running a sale process under a shareholders’ agreement (the “SHA”) which required the company and its investors to work in good faith towards an exit by the end of 2019. Costa believed a later sale would achieve a better price. He pursued a covert strategy to delay the sale: he misled the board about the progress of the sale process, concealed information from fellow directors, and gave instructions to the company’s advisers that did not reflect the agreed deadline – all without the board’s knowledge.

The trial judge found that Costa genuinely believed he was acting in the company’s best interests, summarising his mindset as “they wouldn’t like it now if they knew, but they will thank me in the long run.” Costa succeeded in delaying the sale, but shortly afterwards the Covid-19 pandemic destroyed the business’s value. Saxon Woods, a minority shareholder holding about 22% of the shares, brought an unfair prejudice petition.

Issues before the Supreme Court

The Supreme Court addressed two main issues:

• Whether the “good faith” requirement in section 172(1) governs only a director’s thought process (a purely subjective test) or also his conduct (requiring an objective element).
• Whether a director’s decision to cause the company to act in breach of a contract is automatically a breach of section 172.

As part of its conclusion on the main issues, the Supreme Court also considered whether the Court of Appeal was entitled to set aside the trial judge’s conditional buy-out order and substitute its own discretionary remedy (an immediate buy-out order).

Good faith governs conduct, not just thought

The central question, and the one that will be of broadest significance, was whether a director’s genuine subjective belief that he is acting in the company’s interests provides a complete defence, regardless of how he pursues that belief. The Supreme Court (Lord Briggs giving the sole judgment with Lord Sales, Lord Hamblen, Lord Burrows and Lady Rose agreeing) held that it does not. The requirement of good faith in section 172(1) qualifies both the director’s thinking and his conduct. A director does not get a free pass to use deceptive or disloyal means merely because he sincerely believes his preferred course is best for the company.

Three main reasons supported this conclusion:

• Consistency with the pre-2006 common law: Section 172 codifies (rather than changes) the pre-existing equitable duty of loyalty. The common law has always applied an objective standard to fiduciary conduct – a genuine belief has never, by itself, been a defence to a breach of the duty of loyalty.
• Consistency with the governance framework: The Companies Act’s general duties of directors are designed to work within the company’s constitutional governance structure, under which the board collectively – not any individual director – has primary responsibility for strategy. A director who covertly acts against a board-resolved strategy undermines that structure.
• The “straining credulity” point: It would be an implausible and unworkable reading of section 172 if a director could lawfully lie to, mislead or deceive fellow directors and shareholders provided only that he sincerely believed his preferred course was for the company’s ultimate benefit. As Lord Briggs stated: “Far from promoting corporate success in the modern world, it would be a recipe for chaos and paralysis in corporate governance, and destructive of the collegiality of the board of directors as a whole which all stakeholders in limited companies are entitled to expect”.

The court noted that the Court of Appeal had reached the same result by applying the objective dishonesty test from Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 67; [2018] AC 391. Lord Briggs took a slightly different route: as Costa already owed a fiduciary duty of loyalty, it was unnecessary to import the separate Ivey framework. The question was simply whether the section 172 good faith duty (which has an objective element as to conduct) was breached – and it plainly was.

The SHA

The Supreme Court found it unnecessary to decide the broader question of whether any departure from a shareholders’ agreement-mandated strategy is automatically a breach of section 172. Lord Briggs observed that this would not have been straightforward: the mere fact that a company has contracted to pursue a particular course does not necessarily prevent directors from reconsidering that course if circumstances change, or indeed breaching the contract – provided this is done through proper collective board decision-making, not by one director acting unilaterally and covertly.

Remedy

As the trial judge had wrongly found no breach of fiduciary duty, his exercise of discretion in imposing a conditional buy-out order could not stand. The Court of Appeal had been entitled to exercise that discretion afresh, and the Supreme Court upheld its unconditional order requiring Costa to purchase the minority shareholder’s shares at their pro rata undiscounted value as at the end of 2019.

Comment

This is the first time the Supreme Court has considered the proper interpretation of the duty to act in good faith under section 172(1). The decision settles a question of real practical importance: a director’s sincere belief that they know best is not a licence to act covertly or dishonestly. The ruling reinforces that good faith under section 172 demands transparency and loyalty in the manner of a director’s conduct, not merely in their internal thought process. For multinational groups with UK-incorporated entities, the decision is a reminder that English company law imposes meaningful constraints on how individual directors pursue their views – even where those views may ultimately prove commercially sound.

Practical takeaways for in-house teams:

• Board-level transparency: Where a director is delegated responsibility for a significant process (such as an exit or sale), ensure clear reporting protocols so that the board remains informed and in collective control of strategy.
• Escalation mechanisms: If a director disagrees with an agreed strategy, the proper course is to raise it with the board – not to pursue an alternative course covertly. Companies should have clear escalation procedures for directors who wish to challenge existing board decisions.
• Minority shareholder risk: The case is also a reminder of the potency of the unfair prejudice remedy under section 996 of the Companies Act. Where a director’s breach of duty causes loss to minority shareholders, the court can order a buy-out at full undiscounted value – a potentially very significant financial exposure.
• Shareholders’ agreements: While the court left open the question of whether departure from an SHA-mandated strategy is automatically a breach of duty, the decision makes clear that covertly undermining such an agreement is a serious breach. 

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