Supreme Court Clarifies Directors’ Duties in context of a corporate sale process
Directors often assume that acting with good intentions is enough to satisfy their statutory duties. A recent Supreme Court decision demonstrates that it is not.
The Court has confirmed that a director may breach their duty under section 172 of the Companies Act 2006 even where they genuinely believe they are acting in the company’s best interests. Good faith requires more than good intentions – it also demands openness, loyalty and proper adherence to agreed governance processes.
The judgment has particular relevance for companies involved in strategic transactions, including corporate sales, investments and reorganisations, where directors are expected to implement agreed decisions transparently and collectively.
The background
Spring Media Investments and its shareholders had agreed to pursue a sale of the company by 31 December 2019.
Mr Costa, one of the directors responsible for overseeing the sale process, believed delaying the transaction would ultimately achieve a higher sale price for shareholders. Rather than returning to the board to seek approval for a revised strategy, however, he pursued that course privately.
He allowed the board to believe that the agreed sale timetable remained on track while instructing the company’s advisers in a manner inconsistent with completing a sale by the agreed deadline.
The deadline passed. Shortly afterwards, the COVID-19 pandemic significantly reduced the company’s value, resulting in substantial losses for shareholders.
The legal issue
The question before the Supreme Court was whether Mr Costa had complied with his duty under section 172 of the Companies Act 2006 to act in good faith and promote the success of the company for the benefit of its members.
Importantly, the case was not about whether delaying the sale might, in different circumstances, have produced a better commercial outcome. Rather, it was about whether a director can unilaterally pursue a different strategy from that agreed by the board while concealing that course of action from fellow directors.
Mr Costa’s argument
Mr Costa maintained that he had acted honestly.
He genuinely believed delaying the sale would produce a better result for the company and its shareholders. He was not seeking a personal advantage or attempting to harm the company.
Had he openly presented that view to the board and persuaded his fellow directors to change course, the legal position may have been very different.
Instead, the Court found that he:
- deliberately departed from the agreed sale strategy;
- failed to disclose his true intentions to the board;
- allowed fellow directors to believe the agreed process remained on track; and
- instructed advisers to pursue an alternative course without proper board authority.
What did the Supreme Court decide?
The Supreme Court agreed with the Court of Appeal that Mr Costa had breached his duties under section 172.
The decision confirms that a director cannot rely solely upon a sincere belief that they are acting in the company’s best interests. A professed belief in good faith is not, by itself, enough.
Where a director deliberately withholds material information from fellow directors, frustrates agreed governance processes or prevents the board from making properly informed decisions, that conduct may amount to a breach of duty, even where the director believes the intended commercial outcome would ultimately benefit the company.
Why does this matter?
The significance of the decision extends well beyond the facts of this case.
Corporate sale processes frequently involve difficult commercial judgments. Market conditions change, valuations move and directors may legitimately disagree about the best way forward.
However, where a strategy has been agreed by the board—or by shareholders—an individual director is not free to pursue an alternative course in secret simply because they believe they know better.
If circumstances justify changing direction, the appropriate course is to return to the board, explain the reasons and seek collective approval.
The judgment therefore reinforces an important principle of corporate governance: significant strategic decisions belong to the board collectively, not to individual directors acting alone.
Practical lessons for directors
The case provides several practical reminders for directors, particularly those involved in strategic transactions:
- Follow agreed governance processes. If the board has agreed a strategy, an individual director should not seek to frustrate or alter that strategy without proper authority.
- Be transparent. Material changes in approach should be discussed openly with fellow directors.
- Bring differing views back to the board. Directors are entitled to disagree with an agreed strategy, but the appropriate response is to seek to persuade the board—not to act independently.
- Remember that conduct matters as much as motive. Good intentions will not excuse behaviour that undermines collective decision-making or deprives fellow directors of the opportunity to make informed decisions.
Key takeaway
For directors, the message from the Supreme Court is clear.
Good faith requires more than believing you are doing the right thing. It also requires transparency, loyalty to fellow directors and respect for agreed governance processes.
In the context of a corporate sale process, directors should be particularly cautious about taking unilateral steps (or deliberately failing to take agreed steps) that could frustrate or materially alter a transaction without proper board approval.
The safest course is almost always the simplest one: if circumstances have changed, bring the issue back to the board and allow the company’s governance processes to work as intended.
To discuss any concerns or obtain tailored advice on directors’ duties or corporate transactions, please contact the Beyond Corporate team at [email protected].
