Update: Objectivity in section 172 Companies Act 2006: Re-examining the Current Position after Saxon Woods Investments Ltd v Costa

In an article last year, we examined the growing willingness of the courts to incorporate objective elements into the analysis of a director's duty to promote the success of the company under section 172 of the Companies Act 2006 (the s172 duty), drawing in particular on the Court of Appeal's decision in Saxon Woods Investments Ltd v Costa [2025]. That case has now reached the Supreme Court, which handed down its judgment on 14 July 2026.

Recap of the Case

Spring Media Investments Limited (the Company) was the holding company of a group providing creative services to the fashion, beauty and luxury brand sectors. Clause 6.2 of the shareholders' agreement (the SHA) required the Company and each of its investors to work together in good faith towards an exit no later than 31 December 2019. Mr Costa, the chairman and a substantial indirect shareholder, was entrusted with the conduct of the sale process.

Believing that a later sale would generate a much better financial return, Mr Costa pursued his own slower strategy. He ensured that no other director or shareholder had knowledge of or involvement in the exit process, aggressively rebuffed his fellow directors' attempts to obtain information and misled the board into believing that the Company was fulfilling its obligations under the SHA when, to his knowledge, it was not. No exit was achieved by the deadline and the prospect of a beneficial exit was then destroyed by the impact of the 2020 Covid pandemic. Saxon Woods, a minority shareholder in the Company, brought an unfair prejudice petition.

Extending the Objective Element

The Supreme Court held that the requirements of good faith under the s172 duty extend not merely to the director’s thinking, but also to his conduct in pursuit of what he believes to be the best interest of the company.

The Court reasoned that this interpretation is more consistent with the pre-existing case law, under which the courts applied an objective test to determine whether a director’s conduct fell short of the requirements of the duty of loyalty. It also considered that the alternative interpretation (a purely subjective test) is inconsistent with the rest of the statutory duties which operate in harmony with the governance of a company in accordance with its constitution. A purely subjective test ‘would be a recipe for chaos and paralysis in corporate governance, and destructive of the collegiality of the board of directors as a whole’, as directors would be free to adopt any course of conduct they wished to ensure the company takes a course that they believe is best for the company, even if their conduct involves lies, cheating, deception, dishonesty or disloyalty.

Applying this analysis, the Court held that Mr Costa's conduct was manifestly disloyal to the Company and that he had acted in bad faith towards it. His fellow directors were the human manifestation of the Company so far as his conduct was concerned and, in concealing his intended sabotage of the exit strategy from the board, he concealed it from the Company. A director cannot pursue his own dissenting view by covert and disloyal means so as to subvert the constitutional right of the board to manage the company’s affairs.

The key significance here is that the Supreme Court has extended the objective element of the s172 duty by clarifying that the conduct of a director will be examined, in contrast with the traditional highly subjective approach. The Court of Appeal had focused on a conclusion that Mr Costa acted dishonestly, while the Supreme Court proceeded on a broader basis which concentrated on the requirement of good faith rather than dishonesty on its own. It was unnecessary for the Court of Appeal to focus on a separate honesty test, which is more appropriate for legal duties without a pre-existing fiduciary relationship, such as theft.

This is an important clarification of the position described in our earlier article. The objective dimension of the s172 duty does not depend on importing an honesty test but rather flows from the nature of the fiduciary duty of loyalty itself. 

However, the Supreme Court emphasised that it did not dismantle the courts’ traditional respect for the business judgment of directors. The courts will start by accepting the business judgment of the board, or of the individual dissenting director, provided their belief is found to be genuine. To that extent, the test remains subjective. However, this does not give the individual director ‘carte blanche’ to seek to implement his dissenting view by any disloyal or covert means he thinks necessary. Both the intention (subjective) and the conduct (objective) will be scrutinised by the courts.

Implications for Directors

The practical guidance set out in our earlier article remains valid. It is insufficient for a director to rely solely on their own honest belief that they are acting in the company’s best interests. In light of the Supreme Court’s decision, directors should also follow the guidelines set out below:

• Directors should act openly and collaboratively with the rest of the board.
• A director who holds a dissenting view as to the best way to promote the company’s success must bring that view to the attention of other directors, discuss it with them and assist in forming a collective view, rather than pursuing their own strategy covertly and unilaterally.
• A director must also not use powers delegated to them for one purpose to procure an irreconcilably opposed strategy, which would be an abuse of those powers and a breach of statutory duties.
• Good faith is measured by reference to both state of mind and conduct. Lies, deception and the misleading of fellow directors will not be excused by a sincere belief that the ultimate objective was sound.
• Keeping clear records of the decision-making process remains a valuable means of demonstrating that a director has acted openly and in good faith.