THINKING IN GOOD FAITH VS. ACTING IN GOOD FAITH – WHAT A DIRECTOR IS REQUIRED TO DO
In this short blog, we examine the UK Supreme Court's decision in Saxon Woods Investments Limited v Francesco Costa [2026] UKSC 27 (the "Judgment"), which addressed whether a director is required to only think in good faith, or if a director is also required to act in good faith.
Background. For the sake of brevity, we will just summarise the key details.
A shareholders’ agreement (the “SHA”) was entered into, which committed the company and its investors to “work together in good faith towards an Exit no later than 31 December 2019” (Judgment [14]).
The board of the company entrusted the sale process exclusively to Mr. Costa, the chairman, who believed a later sale would generate a better return (Judgment [19]).
It was how Mr. Costa pursued that belief that mattered and resulted in the suit.
Mr. Costa kept his fellow directors in the dark, rebuffed their attempts to obtain information, misled the board into believing the company was complying with the SHA, and knew that the instructions he gave to the company’s advisers did not encompass a 2019 Exit (Judgment [20]).
The delay proved disastrous: the pandemic destroyed the prospect of a beneficial Exit, and this led to the minority shareholder petitioning for unfair prejudice under sections 994 to 996 of the UK Companies Act 2006 against Mr. Costa, seeking an order for Mr. Costa to buy out their shares in the company (Judgment [22] to [23]).
"They will thank me in the long run." The trial judge accepted that Mr. Costa sincerely 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”, and found no breach of Mr. Costa of his statutory duty to promote the success of the company under section 172(1) of the UK Companies Act 2006 (Judgment [21]).
We set out that section below:
“(1) 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, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.”
And that is the key question squarely before the UK Supreme Court: is a director required to act in good faith, or merely to think in good faith (Judgment [51], [60])?
As Lord Briggs observed, grammatically, since the words “in good faith” appeared to be part of the phrase “he considers in good faith”, a rigorous application of grammatical rules may be said to favour an interpretation that “if the director genuinely believes that a certain course for the company to take is best calculated to promote its success, then the director is free to adopt (indeed, perhaps is obliged to adopt: “must act”) any course of conduct he wishes to secure that the company takes that course, regardless whether, objectively speaking, his conduct involves lies, cheating, deception, dishonesty or disloyalty, ie what any reasonably well-informed observer would regard as plain bad faith” (Judgment [51], [53]).
Genuine belief is not carte blanche. UK Supreme Court handed down a unanimous judgment delivered by Lord Briggs.
And in short, it was held that good faith governs the director's conduct, and not merely his thought processes (Judgment [59]).
In particular, while the court will still respect a director's genuine business judgment (and to that extent the test remains subjective), a dissenting director “does not thereby obtain carte blanche to seek to implement his dissenting view by any means, however covert or disloyal, he thinks necessary” (Judgment [56]).
Notably, the reasoning is grounded in commercial reality. A duty that policed only a director's thinking 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” (Judgment [60]).
Thus, a director who disagrees with the board's strategy must bring his independent view to his colleagues and must not pursue a different strategy by covert conduct (Judgment [44]).
On the facts, Mr. Costa's conduct was “manifestly disloyal”: in concealing his intended sabotage of the Exit strategy from the board, he concealed it from the company itself (Judgment [61]).
The Court of Appeal's order that Mr. Costa buy out the petitioner's shares at their undiscounted 2019 value, unconditionally, was therefore upheld (Judgment [25], [65]).
Importantly, Lord Briggs also made some observations on commercial course-correction. In short, Lord Briggs observed that a contractual commitment to a particular route does not close off the directors' ability to reconsider whether the company would be better served by changing course, even at the risk of a breach of contract; but that is a matter for the business judgment of the board, exercised openly (Judgment [64]).
However, Lord Briggs made clear that this was not a matter which was necessary to resolve the case, and thus, these statements would not form part of the ratio of the case.
The Singapore angle. In Singapore, section 157(1) of the Companies Act 1967 requires that directors must, at all times, act honestly. Singapore courts have also likewise held that a director's assertion of genuine belief is not the end of the enquiry: the courts will test that belief against the objective circumstances. See, e.g., the Court of Appeal in Ho Kang Peng v Scintronix Corp Ltd (formerly known as TTL Holdings Ltd) [2014] 3 SLR 329 at [37] – [38].
It is therefore likely that, if the case been before the Singapore Courts, a similar result would have been reached.
But it bears noting Lord Brigg’s statement at Judgment [33], which highlights just how unique the circumstances were:
“I have however been unable to trace any authority or any academic writing prior to 2006 which suggests that the court’s respect for the business judgment of directors extends to a case where one director has sought to pursue his own judgment as to the best way to promote the company’s best interests by a covert strategy (ie concealed from his fellow directors) to pursue an objective which directly conflicts with the business judgment and strategy already resolved upon by the board as a whole. I would have been surprised to find one, because such conduct would appear to be obviously disloyal by a fiduciary, and contrary to the mode of governance of the company laid down by its typical constitution. …”
Takeaways. A director's honest belief that he knows best is not a defence to disloyal conduct. While disagreement with board strategy is legitimate, the answer is to persuade the board openly, not to conceal and subvert.
This applies even where the board as delegated a particular function to a director: that director cannot use such a delegation as a license for him (or her) to pursue his (or her) own covert strategy on the subject belief that it is best for the company, when such an approach conflicts with the overall judgment and strategy resolved by the board as a whole.
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