One of the cornerstones of company law is set out in Section 172 of the Companies Act 2006. Anybody who has risen to the title of director within a business should be fully aware of this law, particularly as it relates to their duty to act in the best interests of the company.
Most of the time, following this rule is straight-forward. But what about fringe cases where a director genuinely believes the rest of the board is making the wrong decision? Can they quietly pursue their own strategy if they honestly think it will lead to a better outcome for the business.
The UK Supreme Court has now answered that question in Saxon Woods Investments Ltd v Costa. The answer is unequivocally no.
At its heart, the judgment clarifies that acting in the company’s best interests is about more than simply having good intentions. Directors must also act openly, collaboratively and in accordance with the company’s governance arrangements.
In this article, we’ll look at the case, how it affects you and your company, and what you can do to ensure you stay on the right side of the law.
The background
The case in question concerned a director who disagreed with the board’s agreed strategy for selling the company. Rather than raising his concerns and attempting to persuade the other directors to change course, he pursued an alternative strategy himself. In doing so, he deliberately concealed information from the board, withheld key details from his fellow directors and actively delayed the agreed sale process.
An important legal aspect of the case was that the trial judge accepted that the director genuinely believed his approach would ultimately produce a better financial outcome for the company and its shareholders. His motivation was not for personal gain or to sabotage the company. Instead, he believed he was acting in what he saw as the company’s best interests.
The question before the Supreme Court was therefore not whether the director had good intentions, but whether those intentions alone were enough to satisfy his duties under Section 172.
What did the Supreme Court decide?
The Supreme Court held that they were not.
While directors retain discretion to exercise their own business judgment, that judgment cannot be exercised by secretly undermining decisions already made by the board.
The Court made clear that a director cannot pursue a covert strategy behind the backs of fellow directors simply because they believe their own approach is better. By concealing his actions from the rest of the board, the director was effectively concealing them from the company itself, because the board is the body through which the company makes decisions.
In reaching its decision, the Court emphasised that the duty under Section 172 is fundamentally one of loyalty. Good faith is not limited to what a director privately believes. It also extends to how that director behaves towards the company and the rest of the board.
As Supreme Court Justice, Lord Briggs observed, allowing directors to secretly pursue their own agendas would be “a recipe for chaos and paralysis in corporate governance.”
What this means
Disagreement within boardrooms is perfectly normal and something that happens every day across the UK. In fact, healthy challenge is often an important part of effective corporate governance. The significance of this judgment is that it distinguishes legitimate disagreement from conduct that undermines collective decision-making.
Once a board has reached a decision through the company’s constitutional processes, an individual director cannot simply decide to ignore it while continuing to act behind the scenes. If a director believes the board has reached the wrong conclusion, the appropriate course is to raise those concerns openly, provide the evidence supporting an alternative approach and seek to persuade fellow directors to reconsider their decision. If necessary, formal governance procedures should be followed.
What they cannot do is withhold information, mislead colleagues or quietly implement a different strategy without the board’s knowledge.
Practical lessons for directors
Although the facts of this case were unusual, there’s a lot you can learn from it as a director.
As a director, there are a number of practical points to understand. By following them, you can stay on the right side of corporate law, protecting yourself and your business.
Board decisions must remain collective
Individual directors bring their own expertise and independent judgment to the boardroom. However, once a decision has been properly made – usually on the basis of a majority of votes for or against where each director will usually have one vote, responsibility for implementing that decision is collective.
As a director, you should avoid taking unilateral action that conflicts with agreed board strategy unless and until that strategy has been formally reconsidered.
Transparency is essential
Open communication between directors is not simply good governance; it is part of fulfilling directors’ legal duties.
Where concerns arise, you should raise them with fellow board members rather than addressing them through informal or undisclosed action.
Keep proper records
Where directors disagree on significant issues, board minutes should accurately record the discussion, the alternatives considered and the reasons for the final decision.
Clear records can provide important evidence that you and your fellow directors have properly discharged your duties and considered relevant factors in good faith.
Review governance processes
This judgment also serves as a timely reminder for companies to review how board decisions are made and documented.
Clear delegations of authority, robust reporting processes and well-maintained governance procedures all help reduce the risk of misunderstandings and disputes developing into more serious issues.
A reminder that governance matters
The Supreme Court’s decision doesn’t prevent you as a director from challenging the status quo or advocating for different commercial strategies. Rather, it reinforces that you must do so through the proper governance channels.
Section 172 continues to protect directors who make honest commercial judgments, even where those judgments later prove to be wrong. What it doesn’t protect is a director who secretly substitutes their own strategy for one that the board has collectively agreed.
Remember, even if you break these rules with genuine good intentions, you won’t be legally protected.
If you need advice with a legal matter linked to this ruling, contact our corporate law team today. Our experienced team will provide peace of mind and help you find the best route forward.
Call us on 0161 930 5185, email us at Christian.Mancier@gorvins.com or fill in the online form.