Although the facts in Watson and others v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm) were somewhat unusual (involving options granted by one company to directors of another company which provided consultancy services under a service agreement to the grantor company), the judgment raises some interesting points.
The option agreement in question contained a clause which provided that ‘the option may only be exercised with the consent of a majority of the board of directors of the company’. No such consent was given when the option holders sought to exercise their options, and the option holders brought a claim for specific performance of the option agreement.
The judge concluded that the clause could not be interpreted as giving the company an unconditional right of veto of exercise of the options. Instead, it was a discretionary power which was subject to implied limits, and as such should be exercised in a way which is not arbitrary, capricious or irrational. In fulfilling their duties, the directors would need to ensure that a proper process was taken for the decision in question (taking into account the material points and not taking into account irrelevant considerations).
On the evidence, the judge found that there was barely any considered exercise of the discretion: the question of the exercise of the options was discussed extremely quickly at a board meeting and the matter was dealt with ‘very casually’, with no clear evidence of what was discussed. The judge held that there had not been a proper exercise of the discretion and the option holders succeeded in their claim for specific performance (so the parties were to proceed as if consent to the exercise of the options had been given).
The case is a reminder of the need to ensure that a proper process is adopted when considering the exercise of any discretion, ensuring that it is exercised reasonably (taking into account material points and disregarding irrelevant considerations). It also emphasises the importance of accurate record-keeping and minutes. This may seem common-sense, but should not be overlooked when a board of directors or remuneration committee is required to consider the exercise of any discretion under share plan rules.
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Share options: exercise of discretion
Although the facts in Watson and others v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm) were somewhat unusual (involving options granted by one company to directors of another company which provided consultancy services under a service agreement to the grantor company), the judgment raises some interesting points.
The option agreement in question contained a clause which provided that ‘the option may only be exercised with the consent of a majority of the board of directors of the company’. No such consent was given when the option holders sought to exercise their options, and the option holders brought a claim for specific performance of the option agreement.
The judge concluded that the clause could not be interpreted as giving the company an unconditional right of veto of exercise of the options. Instead, it was a discretionary power which was subject to implied limits, and as such should be exercised in a way which is not arbitrary, capricious or irrational. In fulfilling their duties, the directors would need to ensure that a proper process was taken for the decision in question (taking into account the material points and not taking into account irrelevant considerations).
On the evidence, the judge found that there was barely any considered exercise of the discretion: the question of the exercise of the options was discussed extremely quickly at a board meeting and the matter was dealt with ‘very casually’, with no clear evidence of what was discussed. The judge held that there had not been a proper exercise of the discretion and the option holders succeeded in their claim for specific performance (so the parties were to proceed as if consent to the exercise of the options had been given).
The case is a reminder of the need to ensure that a proper process is adopted when considering the exercise of any discretion, ensuring that it is exercised reasonably (taking into account material points and disregarding irrelevant considerations). It also emphasises the importance of accurate record-keeping and minutes. This may seem common-sense, but should not be overlooked when a board of directors or remuneration committee is required to consider the exercise of any discretion under share plan rules.
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