A recent UK Supreme Court decision^[1] confirms that a director’s duty to act in the best interests of the company requires good faith not only in the director’s motives and decision-making, but also in how the director goes about pursuing those objectives.

A director who fails to raise a dissenting view openly with the board and instead pursues it through covert means may breach that duty, even if they genuinely believed they were acting in the company’s best interests.

In boardroom terms, it is as much about how decisions are made as what decisions are made. It makes clear that a genuine belief that a course of action is in the company’s best interests does not give a director carte blanche to mislead colleagues, bypass collective decision-making, or undermine an agreed strategy.

For New Zealand directors, the judgment is likely to be persuasive authority where a director seeks to justify unilateral or covert conduct on the basis that they believed they were acting in the company’s best interests.

What happened?

Spring Media Investments Limited and its shareholders had agreed to work towards a sale of the company by 31 December 2019. The board delegated responsibility for the sale process to its chair, Mr Costa, who held a substantial indirect shareholding in the company.

Mr Costa believed a later sale would deliver a better return. Rather than putting that view to the board and seeking a change in strategy, he:

• covertly pursued tactics designed to delay the sale process beyond 2019;

• excluded other directors and shareholders from meaningful involvement in the process;

• aggressively rebuffed any attempt by his fellow directors to obtain knowledge about the exit process;

• misled the board into thinking the company was complying with the agreed exit plan; and

• instructed advisers in a manner that did not prioritise achieving a 2019 sale.

While Mr Costa genuinely believed that the company and its shareholders would “thank me in the long run”, the strategy backfired when the Covid-19 pandemic undermined the prospects of a sale after 2019.

A minority shareholder, Saxon Woods, brought an unfair prejudice claim against Mr Costa, seeking an order that he buy out its shares at their 2019 value.

The High Court found unfair prejudice but no breach of directors’ duties, accepting that Mr Costa honestly believed he was acting in the company’s best interests. The Court of Appeal disagreed, holding that Mr Costa’s deception of the board was inconsistent with good faith and that he was not entitled to pursue his own strategy in place of the agreed exit plan. The Supreme Court upheld that decision and went further in its reasoning.

The Companies Act

The Supreme Court considered two key directors’ duties under the UK Companies Act 2006:

• section 171, which requires directors to act in accordance with the company’s constitution and exercise their powers only for the purposes for which they are conferred; and

• section 172, which requires directors to act in good faith in the way they consider most likely to promote the success of the company for the benefit of its members as a whole.

These duties are equivalent to the duties in sections 133 and 131 of the New Zealand Companies Act 1993, which require directors to exercise powers for a proper purpose and to act in good faith and in what they believe to be the best interests of the company.

The Supreme Court’s decision

The Supreme Court reaffirmed the longstanding principle that directors are generally free to exercise their own business judgment when determining what is in the company’s best interests and confirmed that the test is subjective: courts will not second-guess a decision simply because they would have reached a different conclusion.

However, the Court held that a genuine belief that a course of action is in the company’s best interests does not give a director carte blanche to pursue that outcome by covert or disloyal means. Good faith applies not only to a director’s decision-making, but also to their conduct in implementing that decision.

The Court rejected Mr Costa’s argument that the duty of good faith was confined to his thought process and not his actions. It held that directors must engage openly with their fellow directors and cannot pursue an alternative strategy behind the board’s back. As the Court observed, any other interpretation 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”.

The Supreme Court upheld the Court of Appeal’s finding that Saxon Wood had been unfairly prejudiced, and confirmed the order requiring Mr Costa to buy out its shares at their 2019 value.

Get in touch

To discuss any of the issues raised by this judgment, please contact one of our experts or your usual Simpson Grierson contact.