Court of Appeal confirms shareholder suffered unfair prejudice

Court of Appeal upheld High Court decision that a shareholder suffered unfair prejudice when company failed to pursue exit

Introduction

In Saxon Woods Investments Ltd v Costa (Re Spring Media Investments Ltd) [2025] EWCA Civ 708, the Court of Appeal upheld a High Court ruling that a shareholder suffered unfair prejudice when a company:

• failed to comply with obligations in a shareholders' agreement to work towards an exit by a specified date; and 
• failed to consider, in good faith, any sale opportunities that arose before that date. 

The Court of Appeal also reversed the High Court's decision on whether a director had breached his duty to promote the success of the company. The Court of Appeal found that there had been a clear breach of this duty because the director's conduct fell below an objective standard of honesty. 

The decision, and its ramifications for directors as well as for investors and advisers, are explored below. 

What happened?

The company, Spring Media Investments Limited (Company) provided creative services to luxury brands. The business had been founded by Mr Loy who, at the time of the unfair prejudice petition, held an interest of 22.23% in the Company via Saxon Woods Investments Ltd (Saxon Woods). Saxon Woods brought an unfair prejudice petition against Mr Costa, the chairman of the Company (Mr Costa). Mr Costa and his associates controlled around 78% of the shares in the Company.

In 2016 the shareholders had entered into an agreement which included this clause (Article 6.2):

Investment Period. The Company and each of the Investors agree to work together in good faith towards an Exit no later than 31 December 2019 (the "Investment Period"). In addition, the Company and each of the Investors agree to give good faith consideration to any opportunities for an Exit during the course of the Investment Period…In the event that an Exit has not occurred upon the expiry of the Investment Period…the Board of Directors shall engage an investment bank to cause an Exit during the Investment Period at a valuation devised by such investment bank and on such terms as shall be consented to by the Board of Directors, which consent shall not be unreasonably withheld.

In November 2018, the board of the Company resolved to appoint Jefferies LLC (Jefferies) as investment bank to commence the Exit process. The board resolved that Mr Costa would lead the process with Jefferies, supported by a sub-committee of four other directors. However, all communications with Jefferies went through Mr Costa, with the help of one other director, a Mr Uberoi. Crucially, Jefferies were not aware that the Company was supposed to be trying to obtain offers for an Exit by the end of 2019, and that the shareholders' agreement mandated them to "cause" a sale immediately after that 31 December 2019 deadline. Mr Costa controlled the sale process. The information that the board had as to what advice the Company was receiving was filtered through Mr Costa. 

No sale was achieved by 31 December 2019. In the weeks that followed, Covid-19 became a global pandemic and the effect of local and national lockdowns brought global trade to a standstill. The pandemic had a devastating impact on the Company's business, and thus on the value of Saxon Woods' shares. 

What did the High Court decide?

Saxon Woods' case was that Mr Costa had caused the Company to breach its obligations under Article 6.2, and that his conduct in relation to the purported Exit process involved breaches of his duties as a director to the Company, particularly his duty to promote the company's success for the benefit of its members as a whole (section 172 of the Companies Act 2006). As a result of Mr Costa's conduct, the affairs of the Company had been conducted in a manner which was unfairly prejudicial to the interests of Saxon Woods.

The judge found that Mr Costa did not want to sell the Company until he was confident that he could get a good price for it, and that he did not expect this to happen until 2020 at the earliest. However, Mr Costa knew that at least some of the shareholders disagreed with him and felt their interests would be best served by complying with the Article 6.2 timetable. The judge stated that Mr Costa's likely state of mind at the time might be summarised as "they wouldn't like it now if they knew, but they will thank me in the long run". 

The High Court found in favour of Saxon Woods. It found that Mr Costa had caused the Company to breach Article 6.2, by not working in good faith towards an Exit and by failing to give good faith consideration to offers received for the purchase of the Company. The breach had resulted in unfair prejudice to Saxon Woods. However, the High Court found that Mr Costa had not breached his duties to the Company, including his duty under section 172. Each party appealed.

The Court of Appeal decision

The Court of Appeal agreed with the High Court that Mr Costa's conduct was responsible for the Company's breach of its obligations and that this had amounted to unfair prejudice against Saxon Woods. 

However, the Court of Appeal disagreed with the High Court on the question of whether Mr Costa had breached his duty as a director to promote the success of the Company for the benefit of the members as a whole (a fiduciary duty). The High Court had taken the view that there was no breach of fiduciary duty, on the basis that Mr Costa did sincerely believe that he was acting in the best interest of the Company and its investors. 

Section 172 requires a director to act in the way he considers, in good faith, would be most likely to promote the success of the company. The Court of Appeal said that the requirement to act in good faith includes, as a core fiduciary duty, a requirement that the director acts honestly towards the company. The test for honesty (or dishonesty) involves first ascertaining the actual state of the individual's knowledge or belief as to the facts, and then applying the objective standards of ordinary decent people to determine whether the conduct was honest or dishonest. The test has both a subjective and objective element. 

In misleading the board of the Company, and withholding information from them, Mr Costa had behaved dishonestly, and so had breached his duty under section 172. 

Mr Costa was personally ordered to buy Saxon Woods' shares at the market value on 31 December 2019. 

Significance of the decision for directors and investors

Section 172 requires a director to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so the director must have regard to a non-exclusive list of factors including the long-term consequences of the decision, the company's employees, suppliers and customers, the community and the environment, the company's business reputation and the need to act fairly as between the members of the company.

This decision provides useful clarification of the nature of the duty under section 172. It makes it clear that a director whose intentions are good (the subjective element) may still breach their duty if they act in a way which an ordinary decent person would regard as dishonest. Directors should be aware that deliberately holding back information from their fellow directors may place them in breach of the section 172 duty, even if they genuinely believe they are acting in the best interests of the company. 

The decision also underlines the need for investors to actively review what is said in shareholders' agreements regarding exits and understand what obligations are imposed on them. They should make sure that any advisers they instruct are aware of the exit provisions and understand what steps the investors are contractually required to take. They should also take care to comply with any information-sharing requirements. Directors appointed to represent particular shareholders should be aware that the section 172 duty requires them to act for the benefit of members as a whole, rather than just the interests of their appointing shareholder.