Court confirms shareholder suffered unfair prejudice when company did not pursue exit
12 June 2025The company and its investors had contracted to work together in good faith towards an exit by the end of 2019.
The Court of Appeal has upheld a decision of the High Court that a shareholder in a company suffered unfair prejudice when the company failed to comply with its contractual obligations to work towards an exit by 31 December 2019 and to consider any opportunities for an exit that arose in the meantime.
Significantly, however, the Court of Appeal overturned the High Court’s decision that a director had complied with his duties because he believed he was acting in the best interests of the company, because his conduct fell below a minimum objective standard of honesty.
The judgment raises important practical points for founders and institutional private capital investors.
What happened?
We reported on the High Court’s decision back in February 2024. For more detail on the background of the case, you can read our previous in-depth piece.
In short, Saxon Woods Investments Ltd v Costa [2025] EWCA Civ 708 concerned a company owned by several investors. These included Mr Loy (who had founded the business), Mr Costa and Mr Uberoi. Mr Costa and Mr Uberoi were also directors.
(All three individuals had invested in the company through trusts or corporate vehicles, but, for ease, we will refer to them as if they had been the shareholders of record.)
The company and its shareholders had entered into a shareholders’ agreement (SHA), which contained the following clause.
“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.”
The SHA defined an “Exit” as a sale of the shares in the company, or of its business and assets, on arm’s length terms.
Mr Costa and Mr Uberoi instructed a financial adviser to run a process to realise value in the company. Importantly, the instruction was not limited to pursuing an Exit by the end of 2019 and did not specify a deadline for any proposed transaction. In practice, Mr Costa controlled the sale process, liaising with the financial adviser and feeding only selected information back to the board.
Mr Loy became concerned that the sale process would not be completed by the end of 2019. He asked Mr Costa for information on the company so he could engage with potential buyers himself (alongside the process run by the financial adviser), but Mr Costa declined to provide that information.
Subsequently, Mr Loy introduced a potential buyer to the company. However, Mr Costa declined to entertain the offer. Instead, he preferred to delay an Exit until after the end of 2019, as he believed it would create more value for the company and its shareholders.
In short, the company did not achieve an Exit by 31 December 2019. In 2020, lockdowns were imposed due to Covid-19 in territories in which the group operated, damaging its business.
Mr Loy applies to the High Court
Mr Loy launched a petition to the High Court claiming he had suffered unfair prejudice. For more information on petitions for unfair prejudice, see the box “What is unfair prejudice?” below.
He claimed that the company had breached clause 6.2 of the SHA in two respects.
- By giving the financial adviser a broad mandate that was not limited to a sale and incorporated no deadline, the company had failed to work in good faith to achieve an Exit by 31 December 2019.
- By failing to engage with the potential buyer, the company had not given good faith consideration to opportunities for an Exit.
Mr Loy claimed these breaches arose from Mr Costa’s behaviour, particularly his sole control over the sale process and his failure to involve the other directors or keep them abreast of developments.
He also claimed that, by deliberately withholding information on the sale process from the board, Mr Costa had breached his duties to the company, most notably his duty under section 172 of the Companies Act 2006 to promote the company’s success for the benefit of its shareholders.
The High Court agreed that, through Mr Costa’s control of the sale process, the company had breached clause 6.2 of the SHA, both by failing to work towards an Exit and by failing to consider, in good faith, the potential offer it had received. This amounted to unfair prejudice to Mr Loy.
However, it found that Mr Costa had not breached his duties to the company, including his duty under section 172. Although there had been no effort to act in good faith in accordance with the SHA, Mr Costa had behaved in a way in which he sincerely believed would maximise value for the company.
The judge noted that it was possible for Mr Costa to genuinely hold this belief even though the shareholders themselves may have preferred a more immediate Exit, noting Mr Costa’s comments that the shareholders “wouldn’t like it now … but they will thank me in the long run”.
Each side appealed those aspects of the High Court’s judgment that were adverse to them.
What is unfair prejudice?
Under section 994 of the Companies Act 2006, a member (normally, a shareholder) of a company can petition the court for “relief” if the company’s affairs are being conducted in a way that is unfairly prejudicial to that person’s interests as a member.
There is no fixed list of actions or omissions that can amount to unfair prejudice, although generally this requires some breach by the company’s directors of their duties, a breach of the company’s articles of association or a breach of any shareholders’ agreement relating to the company.
The conduct must be both prejudicial (causing harm to a member’s financial position or other interest) and unfair (breaching the agreement between members, even if unwritten or non-contractual).
Examples of behaviour that can amount to unfair prejudice include excluding a shareholder who is also a director from the management of the company, allotting shares to dilute a minority shareholder’s interest, misappropriating company funds, failing to pay dividends in certain circumstances, and deliberately failing to comply with the company’s constitution.
The scope of behaviour that can amount to unfair prejudice is wider if the company is a “quasi-partnership”. A quasi-partnership is a company where there is a relation of mutual confidence between the members and an understanding that they are entitled to be involved in running the company's business in a way similar to the partners of a partnership. Unfair prejudice may occur if a quasi-partnership’s affairs are run in a way that is inconsistent with that mutual understanding, whether or not that amounts to a breach of duty or the company’s constitution.
The courts have wide discretion to grant almost any remedy they think fit if unfair prejudice has occurred. The most common remedy is to require other members of the company (or the company itself) to acquire the injured party’s shares at a price intended to reverse the prejudice.
What did the Court of Appeal say?
In short, the Court of Appeal agreed that Mr Costa’s behaviour had caused the company to breach clause 6.2 of the SHA, and that that breach amounted to unfair prejudice to Mr Loy.
However, the court disagreed with the decision that Mr Costa had complied with his duty under section 172, finding that the High Court’s analysis had been flawed.
The High Court had reached its conclusion on the premise that, so long as Mr Costa had sincerely believed he was promoting the company’s success, he was complying with his duty.
The Court of Appeal said this was too generous an analysis and could allow a director to “do anything” so long as they believed (however erroneously) that the proposed course of action would promote the company’s success.
The judges found that the High Court had applied the wrong test for dishonesty. In particular, it had failed to properly consider the requirement under section 172 to act in “good faith” towards the company, as well as the core principles of honesty, fidelity and loyalty associated with a fiduciary duty such as that in section 172.
Case law had established that a director’s belief – the “subjective” element – is only one part of the analysis when deciding whether the director has complied with section 172.
The court must also ask whether, “by ordinary standards”, the director’s mental state would be described as dishonest. This is the “objective” element, designed to protect against a director who has deluded themselves into believing that a clearly wayward course of action is appropriate.
For more information on a director’s duty to promote the success of the company, see the box “What is the duty in section 172?” below.
In this case, Mr Costa had “clearly” breached his duty, because he had deliberately withheld information from his co-directors. In the court’s words, he had “misled the Board and by doing so had concealed from them the fact that he was doing nothing to achieve a sale of the shares before 31 December 2019”.
By conducting himself in this way, the court found that Mr Costa was “behaving dishonestly” and so had breached his duty in section 172.
As a consequence, Mr Costa was personally ordered to buyout Mr Loy’s shares at the market value on 31 December 2019.
This was an onerous outcome for Mr Costa: it was very unlikely an Exit could ever have been achieved by that date. However, the court chose to ignore this when exercising its broad discretion to remedy the unfair prejudice. This left Mr Costa bearing the brunt of a significant Covid-related decline in share price, but the court viewed this as the price to pay for a failed gamble with other people’s property.
What is the duty in section 172?
The directors of a UK company owe certain duties to the company. These directors’ duties are set out in sections 171 to 177 of the Companies Act 2006. For the most part, they replace and continue the previous collection of somewhat imprecise fiduciary duties that directors owed to a company by virtue of acting as its agents and as custodians (in legal terms, quasi-trustees) of its assets.
Perhaps the most well-known of these is the duty in section 172 to promote the success of the company for the benefit of its members as a whole. This duty pervades everything a company’s directors do and requires them to make decisions with the good of the company itself in mind, subordinating any other priorities.
For a standard commercial company, the “members” are its shareholders and the duty normally equates to maximising the profit available to return to those shareholders.
In discharging their duty under section 172, directors are required by law to “have regard to” certain matters, including the long-term consequences of their decisions, the company’s employees, suppliers and customers, the community and the environment, the company’s business reputation and the need to act fairly as between the members of the company.
These factors can compete with each other, and the directors have freedom to ascribe the weight they deem appropriate to each factor. None of the factors overrides the directors’ overarching duty to promote the company’s success.
These factors have taken on even greater prominence in recent years. Since 2019, large companies have been required to include a “section 172(1) statement” in their strategic report, setting out how the directors have had regard to the various factors when discharging their duty under section 172.
The courts have scrutinised section 172 on numerous occasions and helpfully set out some guiding principles that apply when deciding whether a director has complied with their duty.
As a starting point, the courts recognise that the directors of a company – as individuals with industry and technical expertise, as well as experience and knowledge of the company’s operations and strategy – are best placed to decide what decisions are in the company’s interests.
As a result, judges will not interfere with the decisions of directors, nor will they substitute their own views on the course of action directors should have taken, unless they feel that the directors have acted dishonestly, in bad faith or deliberately contrary to the company’s interests.
When assessing whether a director has acted honestly or dishonestly (and, therefore, whether they have complied with their duty in section 172), a court will ask two questions.
- Did the director honestly and genuinely believe that their conduct would promote the company’s success? This is the subjective test, which goes to the mental state of the director.
- Was the director’s conduct honest by the standards of ordinary decent people? This is the “objective test”, which asks whether an ordinary person could really regard the director’s conduct as honest.
The objective test provides a buffer against directors whose judgment has become so clouded they can no longer distinguish between proper and improper behaviour. The “subjective test” affords directors latitude to reach their own conclusions based on their appraisal of the circumstances.
But, in many ways, these tests are merely two sides of the same coin.
The objective test does not examine the director’s actions – it does not ask whether an ordinary decent person would have made the same decision. Rather, it examines the director’s mental state, asking whether an ordinary decent person would regard the director as having acted honestly.
For this reason, the courts sometimes describe the test as a purely subjective one (albeit analysed from multiple angles): was the director acting honestly and in good faith?
What does this mean for me?
The conclusion that the company had indeed breached the terms of the SHA is not surprising. The High Court had set out in clear terms how the company had failed to pursue an Exit within the agreed timescale.
The decision on the breach of section 172 is more interesting. The court’s comments clarify that a director should be careful of withholding information from their fellow directors, even if they believe that to do so is the better course of action and is more likely to promote the company’s success.
Cases involving section 172 have generally focused on directors who cause deliberate harm to the company, often in pursuit of a private profit. The decision in this case indicates that a well-intentioned but sufficiently misguided director may also be in breach of the duty.
The consequences of this can be significant: while breach of a shareholders’ agreement will generally result in liability for the company or a shareholder, breach of section 172 will result in personal liability for the director.
Perhaps most strikingly, the court made the following comment.
“Deliberately deceiving the board of a company must, either always or almost always, be inconsistent with a director’s duty under section 172. We do not rule out the possibility of wholly exceptional circumstances where this may not hold good, but nothing of the kind exists in this case.”
It is not clear how stringently courts will apply this principle in the future, nor what would amount to “wholly exceptional circumstances”. There may be instances where it is appropriate to withhold information from one or more directors, such as where the board is considering bringing legal proceedings on behalf of the company against a director.
Outside these rare occasions, however, directors should ensure they divulge all relevant information to the entire board. The court’s comments underscore the principle that decision-making is a collective exercise that lies with the board as a whole, and not individual directors.
The case is also a useful reminder for directors. Directors should ask themselves not only whether they genuinely believe that a particular course of action will promote the company’s success, but also whether a reasonable person would also regard them as acting honestly and genuinely.
Alongside this, as with the original High Court judgment, the decision provides useful points for private capital investors who are approaching the end of their contractual investment timeline.
- Examine the shareholders’ or investment agreement. Does it contain any obligations to work towards an exit? If so, what do these obligations involve? Are they merely to consider any opportunities, or do they involve actively engaging a professional adviser and seeking out an exit? Investors should ensure that professional advisers are instructed on terms that closely track the investor’s obligations.
- What would an exit involve? There are commonly three types of exit: a sale of the company itself; a sale of the company’s assets and undertaking; or an IPO on a securities exchange. The contract should stipulate what amounts to an “exit” and, therefore, what the parties may be required to pursue.
- Strike the right balance. Naturally, investors want the best return on their investment and so will push for the approach they feel most maximises value. This may be a particular type of exit or, indeed, delaying an exit into the future. However, an investor should be wary of allowing personal or commercial interests to dictate behaviour that runs counter to any contractual agreement with other shareholders. This could amount to a breach of contract for which the investor may be liable. Instead, investors should engage with other shareholders as and when appropriate and advocate for their own preferred approach.
- Involve the other shareholders. It is normal that some shareholders – usually those appointed to the board (or who have a right to appoint a director) – will have more information on strategy, value and opportunities than others. Directors should not selectively disclose or hide information from other directors, and investors should not withhold information that is required to be shared under the shareholders’ or investment agreement. This is likely only to pave the way for an unfair prejudice petition or an action for breach of duty.
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