The Supreme Court has confirmed that assessing a director's compliance with his or her duty under section 172 of the Companies Act 2006 (CA 2006), to promote the success of the company for the benefit of its members as a whole, involves an objective assessment of honesty.

The background to this decision can be found in our previous article. 

Fraser McKeating, Managing Associate in Lewis Silkin's Dispute Resolution team, has recently commented on the Supreme Court's decision for Law360: Honesty Best Policy After Top UK Court's 'Good Faith' Ruling - Law360 (note: article requires subscription). 

Fraser's comments in full are as follows:

"The Supreme Court's judgment provides important confirmation on how a director's conduct under section 172 of the Companies Act 2006 is to be measured. Mr Costa's central argument was that the question of whether he had breached that duty was a purely subjective one – that provided he genuinely believed he was acting in the company's best interests, the court could not interfere, regardless of how he went about it. The Supreme Court has firmly rejected that position.

The Court's starting point when considering an alleged breach is that it will respect the business judgment of directors, provided it is genuine. This is assessed subjectively. But crucially, the Court has made clear that a director's genuine belief does not give them carte blanche to pursue their preferred strategy by any means necessary, particularly where those means involve deception, disloyalty, or the covert subversion of the board's collective decision-making. Good faith under section 172 governs a director's conduct in pursuit of achieving what they believe is the best course for the company, not merely their thinking, and this is judged objectively.

This case provides important guidance on how we understand the duty owed by directors under section 172. The judgment reinforces that section 172 has been developed as a fiduciary duty of loyalty, rooted in longstanding common law rules and equitable principles, and that the essential requirement to act in good faith carries an objective element. A director cannot simply assert a sincere belief and expect that to serve as an impenetrable shield against scrutiny. 

The case in general also underscores the importance of shareholders' agreements as a governance tool. Here, the shareholders' agreement defined the company's exit strategy, and the director's unilateral decision to sabotage that strategy, in defiance of the board's collective view and by way of covert means, was key to the court's conclusions. The court did not go so far on this occasion to find that Mr Costa was independently in breach of section 172 simply by failing to follow the plan set out in the shareholders' agreement – it did not have to, based on the prior findings. Nevertheless, for businesses, the lesson is clear: shareholders' agreements are not merely contractual documents sitting in a drawer. They form part of the governance framework within which directors must operate, and a director who unilaterally causes the company to breach its obligations under such an agreement does so at considerable personal risk. 

More broadly, the judgment is a powerful reminder that good corporate governance demands collegiality. Directors are expected to disclose their views to their colleagues, to engage in collective decision-making, and to respect the constitutional mechanisms through which the company's affairs are managed. Businesses should take this opportunity to review their governance arrangements, ensure that decision-making processes are robust and transparent, and remind their boards that loyalty to the company and honesty with other directors are fundamental requirements of the role."

If the implications of this decision impact you or your business and you would like to discuss this, please contact Fraser McKeating.