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Discretion - recording decisions

Posted on June 22, 2017

We’ve written before about directors exercising their discretion in connection with share plans, but this is an area which always has the potential to create perpetual difficulties.

A recent case demonstrates three key matters that companies should bear in mind when granting options where there is any element of discretion involved:

  • Firstly, any conditions attached to the option should be clearly communicated within the option documentation
  • Secondly, if the directors must exercise their discretion, they should apply the discretion to the specific matter in hand, and exercise it reasonably and with due care and attention;
  • Thirdly, there should be a clear record of the reasons why discretion was exercised in the way it was.

By doing this, company directors can protect themselves from the unpleasant and unnecessary court proceedings that can, and do, arise – as exemplified in the Marcus Watson, Rob Hersov, Twysden Moore v Watchfinder.Co.UK Limited case described below.

A company granted options to three individuals. Included in the option agreements was a clause that amounted to an ultimate veto by the board – options could only be exercised if a majority of the board agreed to it.

When the time came for options to be exercised, the board of directors decided that the options could not be exercised, exercising their veto. The optionholders made a claim, and succeeded, on the basis that there had been “no meaningful exercise of any discretion”.


No unconditional veto

One of the key points noted by the judge was that, despite what the option agreement said, it was simply not possible for the board to have an unconditional veto on the option exercise – effectively this would mean there was “no option to speak of in the first place”. However, the existence of the clause suggested that some qualification or restriction related to the option. The problem was deciding what the qualification was, and exercising discretion as to the extent it applied.

 

Unclear performance conditions

There had been some discussions about the conditions relating to the option exercise but no specific conditions appeared to have been set out in the option agreements. As the judge pointed out, “where a share option effectively depends on some sort of performance by the other party, it is important that they know reasonably clearly in advance what should be done”. Crucially, the lack of any specific conditions meant it was difficult to know exactly what the board was supposed to be exercising its discretion about.

 

No records of decision

When the optionholders were initially told that the board had refused consent to the option exercise, they requested details of the board meeting and the reasons given for refusal of consent. This was not forthcoming. In court, the evidence produced relating to the board’s exercise of discretion was, according to the judge, “inconsistent and unsatisfactory”, both in relation to the reasons for the board’s decision and, indeed, as to details on whether or when the board meeting had taken place.

In particular, there didn’t seem to be a board minute recording the board’s discussions or decision –in fact there was, according to the case report, “not a single contemporaneous document recording what was actually said at the meeting nor any pre-meeting discussion document dealing with the option”.

The judge concluded that “there was no real discussion, it did not focus on the correct matters, it proceeded on a mistaken view of what it was about and it was arbitrary”.

For more information about our trustee services, please contact operations@rm2.co.uk or call to speak to one of our advisers on 020 8949 5522.

 

 
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