Background to the dispute
Spring Media Investments Limited (SMI) was the subject of a petition by Saxon Woods Investments Limited (SW), a minority shareholder holding 22.33% of the shares in SMI. SW alleged that Francesco Costa, SMI’s chairman (and controller of the majority shareholding through an investment vehicle called Greencage S.A.), caused SMI to breach its obligations under a shareholders’ agreement (SHA) to work in good faith towards an exit by 31 December 2019. The High Court found in favour of SW, concluding that SMI’s affairs had been conducted in a manner that was unfairly prejudicial and that SW was entitled to require Mr Costa to purchase its shares in SMI, subject to a condition to the purchase order.
The condition to the purchase order was that a final offer for the shares would have been received from a third party by the end of 2019 in an amount that was greater than $75 million (net of debt). The basis for the imposition of the condition was the judge’s finding that the shareholders would not have accepted an offer of less than $75 million and that, if no such offer would have been received, SW would not have suffered any loss. The question of whether SMI would have received an offer of this amount was to be the subject of a second trial to determine the value of such a hypothetical buyer. Both SW and Mr Costa appealed: SW against (amongst other matters) the conditional nature of the relief granted by the judge, and Mr Costa against (amongst other matters) the finding of unfair prejudice and the order to purchase SW’s shares.
Key legal issues
1. Construction of shareholders’ agreement and good faith obligations
The first issue considered by the Court of Appeal was whether the wording of clause 6.2 of the SHA required the parties to work together in good faith towards an exit by 31 December 2019. The relevant provision reads as follows:
“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, in addition to any rights provided by Clause 3.5(d) and Article V, the Board of Directors shall engage an investment bank to cause an Exit [after] 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”.
The Court of Appeal held that the provision imposed an obligation on the parties to work together in good faith to achieve an exit from the company by 31 December 2019. While the Court of Appeal accepted that the first sentence of the provision did not impose a hard obligation to “achieve” an exit by the end of 2019, the second part of the clause, including the requirement to engage an investment bank if no exit was achieved by the deadline, imposed a hard-edged obligation to achieve an exit as soon as practicable thereafter.
There was no appeal against the High Court’s finding that Mr Costa had pursued a strategy of delaying the sale of SMI – which he knew or ought to have known was contrary to the obligations of SMI – because he considered that a better price could be achieved in the future. It followed, therefore, that the obligations in clause 6.2 had been breached by SMI as a consequence of Mr Costa pursuing an alternative strategy.
2. What constitutes unfair prejudice?
The Court of Appeal then considered the question of whether Mr Costa’s conduct in causing SMI to breach its obligations under clause 6.2 would amount to unfair prejudice under section 994 CA 2006 if SW would have been in no better position, absent the conduct of Mr Costa which is complained of, because no exit would in any event have been achieved.
The Court of Appeal reaffirmed that unfair prejudice under section 994 does not require financial loss; a serious disregard of a member’s rights, such as being denied the opportunity to exit the company as contractually agreed, is sufficient to engage the relief under section 994. The Court of Appeal held that the prejudice suffered by SW was the loss of the opportunity to realise the value of its shares through an exit, as envisaged by the SHA. This was sufficient “to open the door to the broad array of forms of relief which, under section 996, the Court may grant where unfair prejudice is established” [para 95].
3. Directors’ fiduciary duties and dishonesty
The court’s discretion under section 996 CA 2006 is to be exercised in light of all of the circumstances, which includes whether the unfairly prejudicial conduct involved a breach of fiduciary duty by Mr Costa to SMI.
A central issue in the appeal therefore was whether Mr Costa, in pursuing a strategy that was contrary to SMI’s obligations under clause 6.2 of the SHA and misleading the board about the true nature of the sale process, breached his fiduciary duties under section 172 CA 2006 to promote the success of SMI.
The judge at first instance held that Mr Costa reasonably believed that it was in the best interests of SMI’s shareholders for SMI not to comply with the requirements of clause 6.2 because a higher valuation could be achieved at a later date. Perhaps surprisingly, the judge considered that Mr Costa’s subjective belief that his conduct was in the best interests of SMI was sufficient for the purposes of section 172 CA 2006.
However, the Court of Appeal held that the judge was wrong to focus solely on Mr Costa’s subjective state of mind. The relevant test for dishonesty required an objective test which involved an assessment of whether Mr Costa’s conduct was “objectively honest by the standards of ordinary decent people” [para 115]. The Court of Appeal highlighted that if the test focused solely on the subjective state of mind of a director, then a director of a company could do anything provided that they subjectively considered that it would promote the success of the company for the benefit of its members as a whole. The director would therefore be the sole arbiter of what constituted success and the best course of conduct to achieve that aim.
The Court of Appeal held that such an approach cannot be right. Accordingly, it determined that Mr Costa deliberately misled the board and other shareholders and concealed the fact that he was pursuing a strategy contrary to SMI’s obligations in clause 6.2, which could only have led to a finding that he was behaving dishonestly, and therefore was in breach of his fiduciary duty under section 172 CA 2006.
4. Remedies: Buy-out orders and valuation
The Court of Appeal held that the judge’s exercise of discretion under section 996 CA 2006 at first instance was flawed because it was based on the incorrect finding that Mr Costa had not breached his fiduciary duty. Accordingly, it had to be set aside.
The court emphasised that where a director has acted in breach of their fiduciary duty and unfairly prejudiced a minority shareholder, a buy-out order is often the only effective remedy, especially where there is no confidence that the unfair conduct will not be repeated. However, the Court of Appeal did not consider that the buy-out order should be subject to a condition modelled on breach of contract. Rather, the Court of Appeal held that the appropriate order was for Mr Costa to buy SW’s shares on a non-discounted basis as a pro rata proportion of the open market value of SMI as at 31 December 2019. The value of SMI was to be determined by the High Court after hearing the appropriate expert evidence.
In making the order, the Court of Appeal emphasised that the exercise of its discretion was not constrained by strict considerations of “but for” causation. This was because the exercise of the court’s discretionary power under section 996 was, in this case, to remedy not only the conduct which caused SMI to breach its obligations under clause 6.2 but also Mr Costa’s breaches of his fiduciary duty.
The Court of Appeal held that Mr Costa could not complain that the value of SMI would have been impacted by the COVID-19 pandemic, which followed shortly after 31 December 2019. This was because when Mr Costa caused SMI to breach its obligations, he gambled that SMI would be more valuable in the long run. The Court of Appeal held that Mr Costa could not now complain because his gamble failed.
Conclusion
The Saxon Woods v. Costa decision is a timely reminder of the importance of upholding both the letter and spirit of shareholders’ agreements and the high standards expected of company directors. Minority shareholders are entitled to expect that their rights will be respected, and the courts will not hesitate to intervene where those rights are disregarded.
Directors and controlling shareholders should take care to act transparently, honestly, and in accordance with both their contractual and statutory obligations. The case also serves to remind directors that their fiduciary duties have a subjective and objective standard, and the courts will assess whether a director’s conduct was “objectively honest by the standards of ordinary decent people”.
Mr Costa has now lodged permission to appeal the decision, so this may not be the end of the story for the issues determined in this case.
In-depth 2025-237
