‘By your works you will know them’: directors, disloyal conduct and good faith 

Company directors are expected to conduct themselves to a certain standard, discharging their good faith duties toward the company and its shareholders. If a director’s conduct is challenged, his conduct may be considered according to an objective standard – in addition to his own subjective intentions.

Recently, the Supreme Court considered the conduct of a director who sincerely believed he was acting in the company’s best interests while pursuing what constituted a “secret strategy”.

Unfortunately, his ‘sincere belief’ was not enough to defeat an unfair prejudice petition against him – he had breached his good faith obligation.

Good faith

A director’s duty of good faith is set out in s172(1) Companies Act 2006 and provides 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 […]” [emphasis ours]

At issue in this case was whether the good faith requirement is to be determined solely by reference to a director’s subjective state of mind. For example, is a director’s “genuine belief” sufficient to establish good faith?

What’s the background?

The petitioner was a minority shareholder in another company (Spring Media Investments Ltd). The defendant (Francesco Costa) was a substantial indirect shareholder in the company (and was previously chair of its board).

Under the shareholders’ agreement, the company and shareholders were expected to work together in good faith to achieve a sale of the company by 31 December 2019 latest. The sale process was delegated exclusively to Mr Costa.

Potential buyers were found but no sale occurred. The petitioner blamed Mr Costa personally for the delay, alleging he obstructed the sale. It brought an unfair prejudice petition under s994 Companies Act 2006 and also alleged a breach of s172.

Mr Costa justified the delay on the basis he believed it was in the company’s best interests and likely to generate better financial returns - but this was not compliant with the terms of the SHA. Significantly, he hid his strategy from all other directors (save for one); misled the board that the company was fulfilling its obligations under the SHA; and failed to disclose material matters to the board of his instructions to the company’s advisors about the sale.

Unfortunately, Mr Costa’s strategy backfired: covid-19 hit and destroyed any prospect of a profitable exit for the company.

The Supreme Court upheld the Court of Appeal decision that Mr Costa had been in breach of fiduciary duty under s172; and he had been objectively dishonest towards the board. He had not acted in good faith.

Further, the strategy had been conclusively determined by the SHA, therefore it was not for Mr Costa to pursue a different strategy for the success of the company .

Disloyalty

Notably, the Supreme Court interpreted s172 a broader meaning: essentially, good faith is determined by reference to whether the director’s subjective state of mind would be characterised as disloyal applying objective standards. The good faith obligation therefore applies both to a director’s “thought processes” and his conduct.

Key takeaway

Lord Briggs’ ruling sums up the key lesson from this case: “A [concealed] covert strategy… to pursue an objective which directly conflicts with [that] already resolved upon by the board as a whole… would appear to be obviously disloyal by a fiduciary, contrary to the mode of governance established by the typical company’s constitution, and not acting in good faith...

“A duty not to covertly or otherwise to subvert the management of the company’s affairs by the board as a whole is not expressly mentioned in s172, but it is best regarded as part of the general duty under s172.”

It is an important reminder for all directors to ensure their actions cannot be interpreted as disloyal, however good their intentions are that drive such actions.

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1Saxon Woods Investments v Costa [2026] UKSC 21