Our Financial Services Litigation Group examines an English Court of Appeal decision that highlights the need for company directors to fully understand and abide by the exit provisions in their shareholders’ agreements under English law.
- The Court of Appeal found that the shareholders’ agreement containing the exit clause was a meaningful legal record of the investors’ desired outcome and was not for directors to second-guess
- The Court of Appeal found that directors should not withhold information from or act dishonestly to the board, even when they consider it to be in the best interests of the company
- Once a director’s dishonest breach of fiduciary duty is found, the usual rules of causation to assess damages do not apply
Private equity firms have reportedly accumulated a $3 trillion backlog of global assets, making their sale or profitable exit increasingly challenging. Amid this uncertain environment, firms and investors face ever more difficult exit decisions, with the potential for some of those decisions to become contentious.
In Saxon Woods Investments Limited v Francesco Costa ([2025] EWCA Civ 708), the English Court of Appeal considered many of the typical causes of action that can arise when exits and sales processes become contentious. The decision underlines the importance of having due regard to the contractual framework governing a company’s conduct in an exit process and for the directors to have ongoing regard to their fiduciary duties when conducting them. The Court of Appeal found that a minority shareholder suffered ‘unfair prejudice’ when (1) the company failed to comply with contractual provisions set out in the shareholders’ agreement to work ‘in good faith’ towards an exit by a specified date; and (2) a director dishonestly breached his duty to act in good faith to promote the interests of the company.
Factual Background
The exit clause
The relevant exit clause in the shareholders’ agreement provided that Spring Media Investments Limited and its shareholders agreed to (1) work together in good faith towards an exit no later than 31 December 2019, the end of the investment period; and (2) give good-faith consideration to any opportunities for an exit up until that point.
An ‘exit’ was defined as the sale of all or substantially all of the company’s equity, business, or assets on arm’s-length terms. Further, if an exit was not reached by the end of the investment period, the parties agreed to engage an investment bank to ‘cause’ an exit thereafter.
The relevant conduct
Francesco Costa, the chair and substantial shareholder (albeit indirectly) of the company, along with other investors aligned with his decisions, controlled approximately 78% of the company. Costa had sole responsibility for the company’s sale process. Contrary to the requirements of the exit clause, it was found that he sought to delay the exit because he believed that a sale after the investment period would lead to a higher valuation.
Whilst the company instructed the investment bank Jefferies to commence the exit process before the end of the investment period, only Costa and one other director, Hank Uberoi, had any contact with, or gave instructions to, Jefferies. Costa, in particular, was found to have withheld key information from the rest of the board. Attempts by other directors to involve themselves in the sale process, or to liaise with Jefferies, were met with hostility.
Further, it was found that Costa did not communicate to Jefferies that the company was obliged to comply with the exit clause to pursue an exit by the end of the investment period or that Jefferies was mandated to ‘cause’ a sale immediately thereafter. Evidence at trial revealed that Costa had also proposed transactions to Jefferies that postdated the investment period, which were irreconcilable with the requirements of the exit clause.
In March 2019, one minority shareholder, Mark Loy (whose minority shareholding was through a corporate vehicle), became concerned that the company was not on course to exit by the end of the investment period (31 December 2019). Loy therefore introduced a potential buyer, Metric, which produced various proposals and offers. However, the company did not seriously consider these proposals, which ultimately led nowhere. The company also did not follow up with other interested parties.
No exit was achieved by the end of the investment period. In 2020, the Covid-19 pandemic then had a detrimental impact on the company’s business and value. In these circumstances, Loy, in his capacity as a minority shareholder, launched a petition under Section 994 of the Companies Act 2006.
Section 994 of the Companies Act
A Section 994 petition is a mechanism by which a minority shareholder can apply to court for relief from a company’s conduct that is unfairly prejudicial to them.
The conduct that constitutes ‘unfair prejudice’ is broad but may generally involve either (1) a failure by the company to abide by key contractual documents (e.g. articles of association or shareholder agreements); (2) a director’s breach of their duties owed to the company; or (3) conduct by the majority shareholders that is unconscionably harmful to the minority shareholders.
The usual relief granted by the court for a successful Section 994 petition is an order for the majority to purchase the minority’s shares at a price determined by the court, though the court retains wide discretion over the remedy that may be granted.
Directors’ Duties – Misled but in Good Faith?
Good faith requires honesty
A key question in the case was whether Costa’s alleged conduct was in breach of his duties as a director to act in a way in which he considered, in good faith, would be most likely to promote the success of the company (as is required of directors by Section 172 of the Companies Act).
The High Court, in the first-instance judgment (Saxon Woods Investments Limited v Francesco Costa [2024] EWHC 378 (Ch)) did not find that Costa was in breach of his duties because he had acted in a way that he ‘sincerely’ believed was in the best interests of the company.
The Court of Appeal, however, overturned this finding, holding that an inextricable component of a director’s duty to act in good faith towards a company is to act honestly. It was put in stark terms: ‘[d]eliberately deceiving the board of a company must, either always or almost always, be inconsistent with a director’s duty’ to act in good faith to promote the success of the company. Only in extreme circumstances could a director legitimately act in good faith and dishonestly towards the board.
The legal test for honesty
The legal test for honest conduct requires a subjective assessment of what the director honestly believed at the time and an objective assessment of whether what the director subjectively believed at the time would meet the standards of honesty of ordinary decent people.
The High Court judge had not considered the objective assessment. While Costa may have acted ‘sincerely’ in what he personally considered to be in the best interests of the company, it was found that he nevertheless misled the board, withheld critical information about the sale process, and concealed his motive to delay the exit. That conduct was found to be dishonest by the standards of ordinary people.
The Court of Appeal therefore found that Costa had breached his duty to act in good faith towards the company. It would seem that a (subjectively) bona fide end cannot justify a dishonest means.
The Company’s Breach of the Shareholders’ Agreement
Non-compliance with the exit clause caused unfair prejudice
A fundamental issue with the company’s course of conduct was that the shareholders had, by way of the exit clause, contractually agreed what constituted the best interests of the company and its shareholders: (1) to work in good faith towards an exit by the end of the investment period; and (2) to give good-faith consideration to any opportunities arising in the meantime.
The company, controlled by Costa in the sale process, failed to fulfil either of those requirements.
First, it was found that the instructions Costa provided to Jefferies did not mandate an exit within the investment period. Secondly, the company failed to give due consideration to investment opportunities as they arose, in particular the developed proposal and non-binding offers from Metric.
In both respects, the Court of Appeal upheld the High Court’s finding that the company was in breach of its obligations under the exit clause and had, as a result, unfairly prejudiced Loy’s position as a minority shareholder.
Remedies
As a result, the Court of Appeal accepted Loy’s petition of unfair prejudice and ordered Costa to personally buy out Loy’s shares at the market value as of 31 December 2019.
The depreciation in Loy’s share value since the onset of the Covid-19 pandemic was therefore borne by Costa, notwithstanding the fact that the company would have struggled to exit by the end of the investment period. It was the fact that Costa was found to have breached his fiduciary duties that led the Court of Appeal to assess loss unrestrained by the usual rules of causation which, in a typical breach of contract case, may have allowed for arguments about whether an exit would have been realistic by 31 December 2019. In short, the Court of Appeal found that the deliberate delay in seeking an exit ‘was a gamble that Mr Costa was not entitled to take with the property of other Investors, and he cannot be heard to complain when his gamble failed’.
Key Takeaways
- Understand the exit provisions. If you are either a director or investor, and the company is approaching an exit, ensure that you have a full understanding of the exit provisions in the shareholders’ agreement or other governing document and the relevant timescales. In this case, the Court of Appeal found that the shareholder agreement was a record of what the members considered to be their objectives and what a successful outcome looked like. It was not for the director to second-guess that.
- The ends do not justify a dishonest means. The Court of Appeal has unequivocally stated that directors should not withhold information from or act dishonestly to the board, even when they consider this to be in the best interests of the company. The case shows how dangerous ends-versus-means calculations can be when the means include dishonesty.
- Breaches of fiduciary duties can mean more generous loss assessments. Once a dishonest breach of fiduciary duty was found, the usual rules of causation did not apply. Therefore, the buyout position could reflect a potential buyout date which may have been unlikely to be achieved in reality.
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