UK Supreme Court rules a director cannot go it alone

The Companies Act requires each director to act “in good faith and in what the director believes to be the best interests of the company”. But what if a director disagrees with their fellow directors. If that director genuinely believes that a different course of action should be followed, are they entitled to follow that – even if they don’t tell the rest of the board?

A new decision from the UK Supreme Court, applying the analogous UK Companies Act, addresses that question.

The case concerned Spring Media, a company that serviced a number of fashion, beauty and luxury brands. Mr Costa was a director and chair of the board. Under a shareholders agreement, the company and its shareholder investors had agreed to pursue a sale of the company by December 2019. The board delegated conduct of the sale process to Mr Costa.

Mr Costa formed the view that a later sale would generate a much better financial return for the company and its investors. He delayed the sale process, but did not disclose that to the rest of the board. He thought that the remaining directors wouldn’t like it now if they knew, but that they would thank him in the long run.

Unfortunately, just months after the deadline for a sale, the business was adversely impacted by Covid, and any prospect of a sale was lost.

Mr Costa was sued for breach of duty. He argued that there was no breach because he was acting in what he as a director genuinely thought was the best interests of the company.

The Supreme Court accepted that Mr Costa sincerely believed that he was acting in the best interests of the company and its investors. However, the Court still concluded that Mr Costa had breached his duty as a director.

The Court acknowledged that it is for directors to exercise their business judgment in managing the affairs of a company. That principle applies not just to board decisions, but also to the decisions or acts of individual directors.

The Court also acknowledged that the test was subjective. The court will not interfere merely because it forms a different view of what was really in the best interests of the company.

But although the statutory test refers to individual directors, the Court said that a typical constitution makes the board responsible for managing the company. A director therefore has a duty to engage with fellow directors, rather than acting behind their backs. Any other interpretation would be “a recipe for chaos and paralysis in corporate governance, and destructive of the collegiality of the board of directors as a whole which all stakeholders in limited companies are entitled to expect.”

In short, said the Court, an individual director cannot go it alone