Unfair prejudice: Lessons learnt from Saxon Woods v Francesco Costa and others

The facts

Saxon Woods is a minority shareholder in Spring Media Investments Limited (the "Company"), the holding entity for a group of companies providing creative services to luxury fashion and beauty brands. The First Respondent ("Mr Costa") is an Italian high net worth individual who is an indirect shareholder and chairman of the board of directors of the Company. The Company's shareholders' agreement (the "SHA") required shareholders to work together in good faith towards an exit, to occur no later than 31 December 2019.

As things stand in 2024, no such exit has taken place. Saxon Woods alleged that Mr Costa had a substantial indirect and controlling interest over the Company, and in reserving to himself the conduct of a purported sales process, caused the Company to breach the SHA by failing to work towards the Exit in good faith. In a detailed judgment running to 112 pages, the trial judge confirmed that Saxon Woods has indeed suffered unfair prejudice owing to the actions of Mr Costa.

Despite its obligations under the SHA, the Company under Mr Costa's stewardship failed to give good faith consideration to expressions of interest from third parties in transactions that would have constituted an Exit under the SHA. To further his aim of retaining sole control over the Exit process, Mr Costa excluded shareholders and directors from the decision-making process and misled the board of directors. These failures are expanded upon below.

The lessons

1. Good faith: Preparatory steps are not enough

Parties to a contract can agree to act in good faith. The interpretation of such an agreement, and what steps will constitute good faith, is the subject of much disagreement and case law. In this context, the Company's shareholders agreed in the SHA to work together in good faith towards an Exit, to occur no later than 31 December 2019.

Mr Costa argued that the Company engaged in preparations for an Exit before the end of 2019 and that this was sufficient to satisfy the obligation to work in good faith towards an Exit by the end of 2019. The Judge disagreed, finding that taking preliminary steps towards an Exit was not sufficient to meet the requirement of working in good faith towards an Exit. The decision not to perform the obligation until an unspecified time in the future resulted in the Company falling short of its good faith obligations. As the Judge commented, the specified date for an Exit was, and was intended to be, fixed. Deciding not to take any steps to market the Company prior to the specified date could not constitute a reasonable attempt to fulfil the obligation.

Where an obligation has a specified deadline, businesses should take note that simply taking preparatory steps may not be sufficient to show good faith.

2. The dangers of delegating

Investors in the Company that were introduced by Mr Costa (roughly 77% of shareholders) were, with some exceptions, broadly happy to leave decisions to Mr Costa. The Judge commented that such investors did not possess “any great desire to be closely involved in the affairs of the Company”. One such investor, acting as a witness for Mr Costa, was described as “relying on Mr Costa’s stewardship”. Much of the evidence examined the Company’s relationship with an investment bank, Jefferies, and what Jefferies had been instructed to do. The only decision-makers with direct contact with Jefferies and who provided it with a mandate were Mr Costa and another indirect shareholder and director, Mr Uberoi. The Judge found that both individuals understood that Jefferies had not been informed that the shareholders and the Company were obliged to work in good faith towards an Exit by the end of 2019. As a result, both individuals misled the board by giving a different impression.

The Judge found that Mr Costa, at all times during the exit process, took the view that he was the Company. In this case, the combination of directors delegating their duties and a controlling party who misled the directors resulted in the Company breaching its obligations to its shareholders.

Directors should exercise extreme caution when choosing to delegate their powers or when relying on one decision-maker to operate the Company. All directors are bound by duties, including promoting the success of the company and exercising independent judgment, reasonable care, skill and diligence. Though a director is permitted to delegate some powers in certain contexts, a total delegation of decision-making is likely to constitute a breach of these duties. Companies have a wide range of remedies against a director who breaches their duties, including damages. Commercially, directors should consider the potential impact on the business if they elect to hand the reins to a single decision-maker.

3. Can acting in the best interest of the company be an excuse for breaching contractual obligations?

The directors had a duty to cause the Company to comply with its contractual obligations under the SHA. Mr Costa argued, however, that the directors were released from their obligations in relation to the Exit as to cause an Exit by the end of 2019 would be to act in breach of their directors' duties. To support this argument, Mr Costa provided evidence to suggest that delaying the Exit increased the estimated sale price of the Company. Following this, to proceed with an Exit by the end of 2019, a lower sale price may have been accepted. As the best interest of the Company here is also the best interest of the shareholders, accepting a lower price was argued by Mr Costa to be a breach of the duty to act in the best interest of the Company. Mr Costa's lawyers relied on Heron International Ltd v Lord Grade [1983] BCLC 244, which states that directors will be in breach of their fiduciary duties if they are faced with competing bids and act so as to ensure the shareholders receive the lower offer.

The Judge did not agree with this argument. Here, the directors had a choice between pursuing a transaction by the end of 2019 and a possible but uncertain better transaction in the future. Directors are obliged to seek the best price for shareholders, but the Judge found the suggestion that it would be a breach of fiduciary duties to "elect for jam today over jam tomorrow" to be unsupportable. Such decisions are commercial, but no more. Evidence relating to the Company not being ready for sale by the end of 2019 and therefore potentially realising a low price if sold on that date was found to be "entirely beside the point".

The Judge commented that even if Mr Costa personally and sincerely believed that no offer at an acceptable price could be secured at that time, that belief would not of itself release him from the obligation to seek such an acceptable offer. In this respect, Mr Costa's argument was "simply wrong".

Whilst decision-makers should be encouraged to have a commercial mindset and prioritise the interests of the company, this decision acts as a warning to take contractual obligations seriously and to seek advice when the tension between each aim becomes strained.

4. Asserting privilege against shareholders

In addition to the highly contentious trial, the proceedings gave rise to various satellite and procedural disputes. One such example explored the Company’s right to assert privilege against Saxon Woods, thus avoiding disclosure of its legal advice.

It is an accepted rule that a company cannot assert privilege against its shareholders. Therefore, legal advice obtained by companies should be available to their shareholders. An exception to this rule is where there is a threat of hostile litigation by a shareholder against the relevant company. A s 994 petition (or a derivative action) does not fall under this exception as the relevant company is a nominal party only – the real dispute will be between shareholders.

The Company argued that a series of correspondence between the parties suggested that Saxon Woods was threatening hostile litigation against the Company. After conducting a thorough review of the correspondence, the Judge found that the wrongdoing asserted in the relevant letters demonstrated that the threatened action was not against the Company in the true sense, but against the alleged wrongdoers identified as directors and shareholders (specifically, Mr Costa). As a result, the exception to the general rule was not triggered and the Company was not entitled to assert privilege. The Company would be a necessary and nominal party only to such proceedings and should not descend into the arena and take sides in what is a matter between shareholders.

The careful analysis of inter partes correspondence (and its significant impact on the outcome of this application) should remind decision-makers of the importance of seeking legal advice at the earliest stage of shareholder disputes. In addition, directors should remember that legal advice obtained for their company will generally be available to all shareholders.

Conclusion

The case demonstrates that the directors of private companies must always act in the best interest of all shareholders with open and transparent decision-making. Unilateral decisions are unacceptable, regardless of reasoning, as Saxon Woods (as a minority shareholder) was able to successfully claim that it had been unfairly prejudiced.

The case is a reminder that unfair prejudice claims can be complex, costly and lengthy, and that parties should seek expert legal advice before taking steps to pursue or defend them.

The team has been shortlisted by Legal Business for Commercial Litigation Team of the Year in recognition of their work for Saxon Woods Investment Limited on this case.