UK: Supreme Court Clarifies Directors’ Duties When Challenging Board Strategy

A recent UK Supreme Court decision has provided important guidance on how directors should act when they disagree with the strategy adopted by the rest of the board.

The longstanding position under UK company law is that directors are responsible for exercising their business judgement in managing a company’s affairs. Section 172 of the Companies Act 2006 requires a director to act in good faith in the way they consider would be most likely to promote the success of the company.

But what happens when a director genuinely believes that the board has chosen the wrong course?

The Supreme Court’s decision in Saxon Woods v Costa provides an important answer: a director cannot simply pursue an alternative strategy independently and conceal that course of action from fellow board members, even where the director genuinely believes that what they are doing is in the company’s best interests.

What happened?

The dispute arose from a shareholders’ agreement under which a company and its shareholders had agreed to work towards a sale of the company by the end of 2019.

One of the company’s directors, Francesco Costa, was responsible for managing the sale process.

Mr Costa subsequently formed the view that delaying the proposed sale would produce a better outcome for the company. Rather than taking his concerns and proposed alternative strategy back to the board, however, he pursued a policy of delaying the sale and did not disclose to the board that this was what he was doing.

The decision ultimately proved costly when the COVID-19 pandemic subsequently affected the business and the proposed transaction.

Mr Costa faced an unfair prejudice petition alleging that, by independently delaying the sale and concealing his actions from the board, he had breached his duty under section 172 of the Companies Act 2006.

He argued that he could not have breached that duty because he genuinely believed his actions were in the company’s best interests.

What did the Supreme Court decide?

The Supreme Court rejected that argument.

It concluded that Mr Costa’s decision to act independently and conceal his actions from the board demonstrated bad faith towards the company and amounted to a breach of his section 172 duty.

Importantly, the fact that he personally believed delaying the sale was a better strategy for the company did not provide a defence.

The judgment therefore provides important guidance on the relationship between an individual director’s business judgement and the collective decision-making responsibilities of the board.

A director is entitled to disagree with colleagues and advocate a different strategy. What they cannot safely do is bypass the board, implement that strategy independently and keep their actions from fellow directors.

What does this mean for directors?

The decision is an important reminder that directors’ duties are not exercised in isolation from the company’s governance and decision-making structures.

Where a director disagrees with an agreed board strategy, transparency is critical. Concerns should be raised with fellow directors, alternative approaches should be discussed and the board should be given an opportunity to consider the proposed course of action.

If disagreement remains, directors should ensure that their position — and the board’s ultimate decision — is properly documented.

The case also demonstrates why accurate board minutes and clear records of significant strategic discussions remain an important part of good corporate governance. They can provide valuable evidence of what directors considered, the information available to them and how significant decisions were reached.

Wider implications for UK businesses

Although the dispute concerned the conduct of an individual director, the Supreme Court’s reasoning has wider significance for boards and businesses throughout the UK.

Directors frequently encounter legitimate disagreements over transactions, investment decisions, restructuring, financing and wider corporate strategy. Strong corporate governance does not require directors to agree on every issue; indeed, constructive challenge can be an important part of effective board decision-making.

The distinction highlighted by Saxon Woods v Costa is between challenging an agreed strategy through the company’s governance processes and independently undermining that strategy without the board’s knowledge.

Businesses should therefore ensure that significant strategic decisions are considered collectively, disagreements are appropriately escalated and documented, and individual directors understand the boundaries of their authority.

For companies operating internationally, where boards and senior management may be spread across several jurisdictions, clear decision-making processes and well-defined authority can be particularly important.

The judgment provides a straightforward practical message: directors are entitled to disagree, but significant disagreements should be brought into the boardroom rather than acted upon independently behind the board’s back.

By Burness Paull LLP, Scotland, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact ukscotland@transatlanticlaw.com

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