DIRECTOR DUTIES, SHAREHOLDER RIGHTS AND CORPORATE GOVERNANCE: LESSONS FROM RECENT CAYMAN AND UK DECISIONS

In this update, we provide a brief overview of two recent, unrelated, decisions of the UK Supreme Court and the Cayman Islands Grand Court that provide helpful guidance on directors’ duties, shareholder activism, proxy contests and the interpretation of constitutional documents. While the cases arose in different contexts and in different courts, both emphasise the importance of transparency, adherence to corporate documents and governance frameworks, and respect for corporate decision-making processes.

SAXON WOODS INVESTMENTS LTD V COSTA [2026] UKSC 21

The decision in Saxon Woods Investments Ltd v Costa [2026] UKSC 21 addressed whether a director who genuinely believes that a particular strategy is in the company’s best interests can nevertheless breach their duties to the company by secretly pursuing that strategy contrary to a decision of the board of directors.

Background

The key background facts were as follows:¹

• Mr Costa was a director and the former chairman of Spring Media Investments Limited, a company incorporated in England and Wales. He also had a ‘substantial indirect interest‘ in the company.
• The company and its shareholders had agreed to work together in good faith towards a sale of the company by the end of 2019.
• The board delegated control of the sale process to Mr Costa. However, he believed that delaying the sale would likely generate a much better financial return for the company and its investors.
• Mr Costa actively worked to ensure that no other director or shareholder had any knowledge of or involvement in the sale process. He also employed delaying tactics and gave the board the impression that the company was fulfilling its obligations under the shareholders’ agreement despite knowing this was not the case. At the same time, he pursued a different strategy without board approval that he genuinely believed would be of greater benefit to the company in the long run.
• Mr Costa was successful in delaying the process beyond the end of 2019, but the prospect of a beneficial sale was then ‘completely destroyed‘ by the adverse impact of the Covid-19 pandemic.

The key issue before the UK Supreme Court was section 172 of the UK Companies Act 2006 (the UK Act), which provides that:

‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole…‘

The statutory duty under the UK Act originates from a long-standing common law duty, which has been expressed by Lord Greene MR in In Re Smith and Fawcett Ltd [1942] Ch 304, 306 (in the context of directors’ discretion with respect to acceptance of share transfers) as being a duty on the directors to ‘…exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose.’

Later cases have held that the test for breach is subjective, in the sense that ‘…the court will not interfere with the (subjective) view of the directors merely because it forms a different (objective) view of what was really in the best interests of the company.’²

The decision

The court dismissed Mr Costa’s appeal. In doing so, it held that section 172 of the UK Act is not a purely subjective test, and that the requirement for good faith includes both the director’s state of mind and conduct.

Among other things, the court commented that:

‘Of course, the court will start by accepting the business judgment of the board (or, as the case may be, the individual dissentient director), providing his belief is, as a matter of fact, found to be genuine. To that extent, and in that sense, the test is subjective. But the individual director does not thereby obtain carte blanche to seek to implement his dissenting view by any means, however covert or disloyal, he thinks necessary.’³

Key takeaways

In England and Wales, directors’ fiduciary duties have been substantially codified under the UK Act, including the duty under section 172 to act in good faith. By contrast, in the Cayman Islands, directors’ fiduciary duties arise primarily from common law and equitable principles, rather than statute.

Although decisions of the UK Supreme Court are not binding in the Cayman Islands, they are frequently treated as highly persuasive. In addition, given the court’s discussion of, and emphasis on, the ongoing importance of common law principles in the context of fiduciary duties, the case contains some important lessons for directors of Cayman Islands companies. These include:

• While a director’s honest belief remains important, good faith extends to the manner in which the director behaves. The court will consider not only the outcome sought by a director, but also the means by which that outcome was pursued.
• Directors who disagree with a board decision should ensure their concerns are raised through appropriate governance channels, including requesting further board consideration, recording dissent in board minutes or, where appropriate, resigning, rather than pursuing an alternative strategy.
• In the absence of anything to the contrary in the company’s articles of association, boards must function collectively. Accordingly, while directors may disagree with each other on strategy, disagreements should be addressed through board processes (including by majority decision, where applicable) rather than covert action.
• Where delegation occurs, its scope must be clearly defined. A director acting under delegated authority must exercise that authority consistently with the purpose for which it was granted. Delegation does not provide an independent mandate to pursue a different strategy from that approved.
• Disloyalty of the type at issue in the case is also likely to breach the duties to act in accordance with the company’s governing documents and to only exercise powers for the purposes for which they are conferred.

The decision reinforces the principle that transparency and loyalty remain fundamental aspects of directorship, and the need to have in place, be familiar with, and comply with appropriate governing documents and corporate governance frameworks. It has particular significance for founder-led businesses, joint ventures and companies where influential directors may exercise substantial control.

For an analysis of the case from a Jersey law perspective, please see our Jersey team’s article, Defining Disloyalty: Jersey takeaways on directors’ duties following the UK Supreme Court’s decision in Saxon Woods Investments Ltd v Costa.

MILFAM LLC V SCULLY ROYALTY LTD ET AL [2026] CIGC (FSD) 54

The decision in MILFAM LLC v Scully Royalty Ltd. Et al [2026] CIGC (FSD) 54 arose from a contested proxy battle involving Scully Royalty Ltd. (Scully), a Cayman Islands exempted company listed on the New York Stock Exchange. The dispute required the Cayman Islands Grand Court to consider shareholder meeting procedures, the interpretation of articles of association and disclosure obligations in contested board elections.

Background

The key background facts were as follows:⁴

• MILFAM LLC (MILFAM), a substantial shareholder of Scully, sought to replace the incumbent directors of Scully with its own slate of five nominees.
• The incumbent directors purported to postpone the annual general meeting at which voting on the new directors was to occur shortly before it was scheduled to take place.
• MILFAM considered the postponement to be invalid and proceeded to hold the meeting itself, at which it passed resolutions appointing a chairman and electing its nominees to the board.
• MILFAM claimed that the directors had no power to postpone the meeting, while the incumbent directors claimed that the postponement was valid and that the resolutions passed were of no effect because there was no chairperson validly appointed and MILFAM’s nomination notice was defective by reason of inadequate disclosure.

The decision

The court ultimately held that:

• the directors did not have the power under Scully’s articles of association to postpone the meeting;
• the articles of association did not include an implied term, and there was no proper or sufficient basis for implying into the articles a term or provision, giving shareholders (or their proxies) present at the meeting the power to appoint the chairperson of that meeting when no directors are present at the meeting;
• accordingly, the appointment of a chairperson was invalid and the meeting was unable to move to and conduct any business;
• as a result, the resolutions purporting to appoint MILFAM’s nominees as directors were also invalid; and
• further, even if all of the above had been valid, MILFAM’s nomination notice and proxy statement failed to disclose relevant and material matters required to be disclosed by the articles concerning its relationship with, and the positions held by, two of the five nominees, which, had those matters been disclosed, could have affected the decisions of shareholders voting or appointing proxies to vote at the meeting. Accordingly, the resolutions appointing MILFAM’s nominees would have still been invalid.

Key takeaways

The decision in this case will have ramifications for a broad range of Cayman Islands companies, from start-ups raising capital through to publicly listed companies. There are a number of matters arising from the case for directors, shareholders, investors and advisers to consider, including:

• To avoid procedural issues invalidating actions taken by the directors or shareholders, the memorandum and articles of association of a company should be fit for purpose and reflect the way the company will operate in practice. Using an ‘off-the-shelf’ set, without comparing its provisions to the manner in which stakeholders want the company to operate, may risk issues of this nature arising in the future.
• The articles should be seen as a living document and should be updated to respond to changes in circumstances (for example, to accommodate the increase in virtual meetings in recent years, where appropriate).
• Directors (including director nominees) should familiarise themselves with the terms of the governing documents for any company they are a director of and seek advice where appropriate.
• Compliance with any disclosure obligations under the articles of association is key. As the court noted:

‘The onus is on those who have failed to make proper disclosure to show that the decision making of a reasonable shareholder could not have been affected by receiving the proper disclosure. If this threshold test is not satisfied, it follows the votes cast by the shareholders cannot be relied on as representing their true and fully informed views and so are not safe and cannot stand.’⁵

• Where a company may become the subject of shareholder activism or a contested election, directors should consider obtaining legal advice on meeting procedures and constitutional requirements at an early stage. Procedural defects may ultimately determine the outcome regardless of the underlying merits of the competing proposals.

Questions?

If you would like legal advice or further information on any issue raised in this update, please reach out to your usual Mourant contact or one of the key contacts listed on this page.