Whenever a shareholder or company is concerned with the actions of a director, sections 171 to 177 of the Companies Act 2006 are often called upon.
These sections of the Act contain a director’s “code of conduct”. All the duties are important, but there’s a good argument that section 172 sits at the core of the code. Section 172 requires a director to “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”. The Scottish courts have not issued much guidance on this duty. But last year the Court of Appeal of England and Wales - in Saxon Woods Investments Ltd v Costa - issued an important judgment on a director’s duty under section 172. Whilst an English decision, a corporate dispute amongst shareholders or directors in Scotland may require an assessment of this decision.
Any statutory duty requires careful interpretation. When relationships are broken or shareholders are concerned about their investments, directors and shareholders can easily take different views on the previous actions of a director. This is called into even closer scrutiny when someone believes that a director has not acted in “good faith”.
Saxon Woods Investments v Costa
In 2025, the English Court of Appeal issued an important judgment on the section 172 duty in Saxon Woods Investments Ltd v Costa. A minority shareholder brought an unfair prejudice petition to court, alleging that the company’s chairman had breached section 172 of the Act. The company and its shareholders had agreed that they would work towards a sale of the company by the end of 2019. The board agreed that an investment bank would start the sale process and that the chairman would be the contact between the company and the bank. No sale was achieved. The pandemic hit. The company’s business was severely disrupted. The minority shareholder’s investment was heavily impacted.
At trial, the judge found that the chairman and the company had failed to work towards a sale by the end of 2019. The judge found that the company’s failure to achieve a sale was because of the chairman’s actions. He had delayed a sale because he thought that the price would increase in the future. He had misled the board and hid the fact that he was doing nothing to sell the company before the end of 2019. Despite this, the trial judge found that the chairman had not breached his section 172 duty. Although the chairman had acted in breach of the agreement between the shareholders and company, to achieve a sale by the end of 2019, the judge did “not believe that it was his intention by doing this actively to injure either the Company or any investor.” The chairman, the judge found, “did sincerely believe that he was acting in the best interest of the Company or its investors”. In effect, so long as the director acted in the honestly held belief that he was acting in the best interests of the company, this was not a breach of section 172 of the Act. This was so even if the director’s actions flew in the face of an agreement between the shareholders and company that the company would do the direct opposite. Although the shareholders and the company had agreed what was to be the “success of the company for the benefit of its members as a whole”, the director could decide to go against this, if he was acting with the honest belief that he was acting in what he considered to be the best interest of the company. A director – content that he solely knew what was in the interests of a company – could act in breach of a shareholder agreement without breaching section 172 of the Act.
Unsurprisingly, the petitioner appealed. The Court of Appeal decided that the trial judge’s finding that the chairman had misled and concealed information from the board (and was actively not pursuing a sale) could only lead to the conclusion that he had breached section 172 of the Act. As the court found:
“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.”
On the Court of Appeal’s analysis, a director who deliberately deceives a company is almost always to be found to have breached section 172 of the Act. This protects the company and its shareholders from a director who thinks that they know better. No doubt directors are to exercise their judgment and skill. But, on the Court of Appeal’s analysis, to act contrary to an agreement setting out what the shareholders and the company consider their objectives will almost inevitably result in a breach of section 172 of the Act.
Impact
The English Court of Appeal’s decision will undoubtedly provide some security to shareholders who have entered into shareholders’ agreements covering the company’s strategy. The Supreme Court granted permission to appeal late last year, so further guidance will be provided from the UK’s highest court on section 172 of the Act.
Brodies' corporate dispute team is well placed to assist on any corporate dispute and regularly acts for companies, directors and shareholders. Contact one of the authors or click on the Brodies’ corporate dispute webpage.
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