Advice for sincerely deluded directors and others

July 2025

Rating system:
Reading time (1-10 minutes): 5ish – sorry
Sophistication level (1 (idiot) – 10 (expert)): 7
Entertainment value (1 (turgid) – 10 (side-splitting)): 6 (starts ok, goes downhill quick)

As Flanders and Swann once sang (or at least Flanders once said), ‘always be sincere – whether you mean it or not’.

But things are even more complicated nowadays in the world of corporate law and directors’ duties, and this recent case shows that it is not enough to be sincere even if you mean it if you are actually deluded in thinking you are being honest. Or something like that.

As well as my useful but possibly rather tedious Guides on things like business sales, joint ventures and shareholder arrangements, I also do the occasional article which I put in the Updates and Tips section of my website. Usually these are based on a recent court decision which covers new or interesting issues in the world of corporate or commercial law. Mostly I cover judgments made by the two bigger UK courts – the Supreme Court and the Court of Appeal – because these often involve changes or at least developments in the law.

Here is a recent Court of Appeal case about directors’ duties, breaches of shareholders agreements and unfair prejudice petitions. It revolved around an agreement between shareholders that they would try to achieve an exit from the company (ie sell it) within an agreed timeframe.

Background

What is ‘unfair prejudice’?

Under section 994 of the Companies Act 2006, a shareholder of a company can petition the court for relief if the company’s affairs are being conducted in a way that is unfairly prejudicial to that person’s interests as a member. ‘Prejudicial’ effectively means causing harm to a shareholder’s financial position or other interests.

Usually unfair prejudice involves a breach of directors’ duties, or a breach of the company’s articles of association or a breach of a shareholders’ agreement.

The courts have very wide discretion to grant almost any remedy they think fit if unfair prejudice has occurred. The most common remedy the courts have applied is to require other shareholders of the company (or the company itself) to acquire the injured party’s shares at a price intended to reverse the prejudice.

This remedy is something the courts can’t order with standard breach of contract cases.

What are directors’ duties?

Directors have all sorts of fiduciary and statutory duties to their company.

Two of these duties set out in the Companies Act 2006 are as follows:

• Section 172: a duty to act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole
• Section 174: a duty to exercise reasonable care, skill and diligence.

My previous Updates and Tips article was also about directors’ duties, viz what directors can or can’t do if they are thinking of leaving and setting up another competing business.

I also wrote an Updates and Tips article  a couple of years ago about what good faith means.

Recent case

What was it about?

The company Spring Media Investments Limited was the parent company of a group whose main business was providing creative services to fashion, beauty and luxury brands. The founder was a Mr Loy (who held shares through his Bahamian company Saxon Woods Investments Limited). After several fundraising rounds the company had a number of investor shareholders, the main ones being Mr Costa and Mr Uberoi (through a company they owned together). Although Mr Loy remained a director, Mr Costa (with Mr Uberoi onside) had effective control over the company.

In a shareholders agreement entered into in 2016 it was agreed that the company and each investor would ‘work together in good faith towards an exit (defined as an arm’s length sale of the company’s shares or of its business and assets) no later than 31 December 2019′, and in the period until then would ‘agree to give good faith consideration to any opportunities for an exit’. It went on to say that if an exit hadn’t occurred by then the directors would engage an investment bank to cause an exit at a valuation ‘devised’ by the investment bank and on terms to which the directors shouldn’t unreasonably withhold their consent.

During that period Mr Costa and Mr Uberoi did instruct a financial advisor to run a process to realise value in the company, although this instruction didn’t set any timetable or deadline and it also envisaged the possibility of doing a fundraising rather than an exit.

Mr Loy became concerned that things weren’t happening fast enough. During 2019 he kept asking Mr Costa for financial and other information on the company to help him engage with potential buyers in parallel with whatever the financial advisors were doing, but kept getting rebuffed.

Later in the year Mr Loy introduced a possible buyer to the company and to the financial advisor. Although a meeting did take place Mr Costa and Mr Uberoi thought the proposed deal undervalued the company and so they stopped engaging with this buyer despite the buyer’s continued interest. They also didn’t engage with another possible private equity buyer introduced by Mr Loy because they learnt that this deal would have involved Mr Loy and some other management shareholders getting a stake in the buyer in return for selling their shares.

2020 brought in the world of Covid lockdowns, which were very damaging to the company’s business and made the value of its shares a whole lot lower.

Mr Loy went to court with a petition claiming he had suffered unfair prejudice. He argued that the company had breached its obligations under the shareholders agreement, and that these breaches were caused by Mr Costa. In particular, he claimed that Mr Costa had exercised almost complete control over the process involving the financial advisors and had failed to involve Mr Loy and other directors. He argued that Mr Costa had breached his duties as a director and had unfairly prejudiced Mr Loy as a shareholder.

Mr Loy sought an order against Mr Costa personally, which was a bit unusual because Mr Costa was not himself a shareholder (the shareholder was the company he and Mr Uberoi owned) and was not personally a party to the shareholders agreement. But he was a director of the company.

Mr Costa argued that it had not been in the company’s best interests to achieve an exit by December 2019, and that his duty as a director to promote the success of the company overrode any obligations in the shareholders agreement, and in his view this involved looking for a more profitable exit at a later date. As he put it, the other shareholders ‘wouldn’t like it now… but they will thank me in the long run’.

What did the High Court judge say?

The judge accepted that Mr Costa had sincerely believed that no exit could have been achieved at an acceptable price by December 2019. But the shareholders agreement had required the company and its shareholders to work towards a sale by then, and Mr Costa had prevented this happening. This contractual obligation was not overridden by what Mr Costa had considered as his duty to achieve a different form of success of the company. So there was a breach of the shareholders agreement.

But the judge ruled that Mr Costa had not breached his duties as a director under s172 Companies  Act to promote the success of the company or under s174 Companies Act to exercise reasonable care, skill and diligence. The judge ruled that Mr Costa had reasonably believed that it was in the company’s best interests not to comply with the shareholders agreement, and had sincerely believed he was doing things ultimately for the company’s benefit. He had certainly not intended to actively injure the company or any of its shareholders.

Although the judge ruled there was no breach of director’ duties, he was still able to rule that there had been unfairly prejudicial conduct on the basis that the shareholders agreement had been breached. And he did.

But to get relief, the judge said that Mr Loy needed to show that the unfairly prejudicial conduct had caused him loss. So the judge felt he would have to decide whether the two potential exit deals which Mr Costa had thwarted might ever have been approved by the shareholder and directors and gone ahead, in which case the judge would order Mr Costa to buy out Mr Loy’s shares at the price he would have received.  To decide this would involve hearing lots of evidence on the value of any offers that might have resulted if there had been fuller marketing and due diligence exercises, and on the kinds of values which the shareholders might have accepted. The judge left this to be decided at a later trial.

But the judge decided that if neither of the potential deals would ever have gone ahead, then Mr Costa’s breach of the shareholders’ agreement would not have resulted in any loss to Mr Loy and so no relief order would be given.

The judge also rejected Mr Costa’s argument that a deal with a private equity buyer which involved Mr Loy and other management rolling over their shares into shares in the buyer would not be a true exit for them. The judge was satisfied that this deal would have put Mr Loy in a very different boat.

Neither side liked the judge’s decision very much, so they both appealed to the Court of Appeal.

What did the Court of Appeal say?

The Court of Appeal agreed with the trial judge that Mr Costa’s behaviour had been in breach of the shareholders agreement and that this amounted to unfair prejudice.

But the Court disagreed with the judge’s decision that Mr Costa had complied with his duties as a director under s172 Companies Act.

The Court said the trial judge had not properly addressed the ‘good faith’ requirement in s172, particularly the core principles of honesty, fidelity and loyalty associated with such ‘good faith’ duties. The Court said that it was not enough that a director should themselves believe that their actions would promote the success of the company (a subjective test). It said a court should also consider whether the director would be thought of by ordinary decent people ‘by ordinary standards’ as being dishonest in view of his conduct (an objective test). This objective test is needed to protect people because, believe it or not, there are some people out there running companies or indeed countries who have deluded themselves into thinking they are behaving honestly or otherwise appropriately when normal people looking on (losers) can see that they aren’t.

The Court ruled that whatever Mr Costa had actually felt, he had clearly on an objective test been dishonest towards others by misleading them and deliberately withholding information from them.

The Court also made clear that directors should understand that in relation to their s172 duty to ‘promote the success of the company’, ‘success’ means whatever the shareholders have agreed it means.

The Court also made clear that, unlike with calculating damages claims under normal breach of contract laws, in the case of s994 unfair prejudice petitions the court had a wide discretion to grant appropriate reliefs even where a shareholder hadn’t been shown to have suffered a specific financial loss.

So here the Court decided that, because of the element of dishonesty and breaching directors’ duties, it would exercise its discretion to order Mr Costa personally to buy out Mr Loy’s shares at whatever their market value was on 31 December 2019, even though an exit would probably never have been achieved by then even if Mr Costa had complied with his duties as a director. This was a very tough verdict for Mr Costa, as of course the market value had since plunged since then due to covid. But the Court decided this was a price he had to pay for a failed gamble with other people’s property.

Case: Saxon Woods Investments Limited v Francesco Costa [2025] EWCA Civ 708.

Key takeaways and tips

• Contract and company laws can be tricky, as borne out by the fact that you can have cases such as this which involve experienced judges making a decision and then being overruled on appeal to the Court of Appeal (and then possibly again on appeal to the Supreme Court…).

 

• Don’t just ignore your contractual or company law obligations. At least get advice on how to skirt them! In this case Mr Costa could probably have achieved his objectives and avoided this damaging buyout ruling by at least pretending to engage and consult more with his fellow shareholders and directors.

 

• If in doubt about the meaning of any contract or the effect of any company laws, or about what you can or cannot do, ask an experienced specialist lawyer, who may be able to remove or at least reduce the doubt, and who can advise on how to deal with things.

 

• Be very careful about what you want to put in a shareholders agreement and about how you draft it.

 

If you are thinking of entering into any shareholder arrangements with business partners or investors or are having any issues or difficulties with existing arrangements please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary ‘Shareholder arrangements’ consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls you might otherwise be exposed to, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.

 

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