Ordinary, decent people in the boardroom:  Objective standards of honesty and corporate decision making

Facts

Mr Costa was chairman of Spring Media Investments Limited (the Company). A shareholder’s agreement (SHA) entered into in 2016 provided that the Company would work toward achieving an exit for shareholders by 31 December 2019, failing which an investment bank would be instructed to cause an exit. No exit was achieved by 31 December 2019, or indeed following the instruction of an investment bank. The Covid-19 pandemic then decimated the Company’s share value. 

Saxon Woods Investments Limited (SW) petitioned for unfair prejudice, alleging (amongst other things) that Mr Costa deliberately failed to achieve an exit, thereby breaching his duty under section 172 of the Companies Act 2006 (CA 06) to act in the best interests of the Company (the 172 Ground). Mr Costa argued that he had believed a better price could be obtained later, so delaying the sale was in the best interests of the Company. 

Finding for SW on other grounds, the first instance judge rejected the 172 Ground. He relied on cases indicating that the question of whether a director honestly believed his actions were in the Company’s best interests was subjective in nature. In his judgment, he found that Mr Costa sincerely believed he was acting in the best interests of the Company by not seeking an exit. Mr Costa believed “they wouldn’t like it now if they knew, but they’ll thank me in the end”. SW appealed this finding.

Court of Appeal decision

The Court of Appeal noted s.172 CA 06 entails that directors act in a way they consider, in good faith, would promote the company’s best interest. Good faith necessitates honesty. The cases relied upon by the first instance judge were decided before the seminal Supreme Court case of Ivey v. Genting Casinos (UK) Ltd [2017], which established that determining honesty was a two-stage test: 1) what was the individual’s subjective state of mind; and 2) was the conduct honest by the standard of ordinary decent people. 

The Court found that Mr Costa had not acted honestly. He concealed from the board that he was doing nothing to achieve an exit by 31 December 2019, and, in fact, was trying to prevent it. Mr Costa’s appreciation that his fellow directors and shareholders “wouldn’t like it now if they knew” underscored his dishonesty.

Comment

It is no longer the case that if a director can demonstrate they sincerely believed their actions were taken in the best interest of the company, they can avoid being found to have breached their section 172 CA 06 duty. A director must also show their conduct is capable of meeting an objective standard of honesty. For professional advisors, this underscores the need for candour with director clients, and a willingness to challenge their proposed actions (or version of events) from the ordinary decent person’s standpoint. If they don’t, the English Court will. 

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Richard Clayman is a Partner in the Dispute Resolution team at Kingsley Napley. Richard’s experience covers a broad range of commercial disputes. He has particular expertise in civil fraud cases, and disputes involving shareholders, directors and partnerships.