Changing Vesting Provisions in Share Plans

The High Court recently ruled in favour of two former employees of Lloyd Bank plc, finding that shares that they were awarded under a share plan had been wrongfully withheld.
This happened when the board attempted to change the vesting conditions for share awards retrospectively by the introduction of a “malus” clause, and overrode the previous decision of the remuneration committee.

There are two separate issues here: the changing of performance conditions after the event; and the process followed to make those changes. Retrospective amendments to share scheme vesting conditions are contentious. The terms of an award under an employee share plan should be clearly set out on the date of issue – or at the very least, the rules and individual share or option agreements should state categorically the extent to which a performance condition might be amended by the board (or an appropriate committee of the board).

Further, it seems likely that the examination of malus (and clawback) clauses by the courts is likely to increase in future, in particular for listed companies. Because such clauses can be so potentially punitive, they are highly likely to be struck out where judges discover issues around process.

Details of the case

The company had tried to operate a “malus” clause in the context of a Long Term Incentive Plan (LTIP).
A malus clause prevents the vesting of awards at all (as opposed to a “clawback” clause, which enables the company to recover employee shares from individuals).

In this case, the employees had been advised by the remuneration committee that the performance conditions had been met and the shares had vested in full. However, the current board subsequently changed its view on the performance conditions, sought to amend the LTIP Rules by introducing a malus clause, and refused to transfer the shares to the employees.

The board was entitled to amend the Plan Rules, but not to amend the terms of the specific awards, which had already vested before the malus provision was added. The judge noted that the power of amendment could be used for “tidying up” but could not be used as a “swingeing power” to rewrite the terms of the awards.

Furthermore, the remuneration committee, as a committee of the board, had already ruled that the awards had vested in full. The board had no authority to overrule their decision. The decision by the board to introduce the malus clause was a decision taken too late, and by the wrong body.


Although private companies are less likely to incorporate complex malus and clawback clauses in their employee share plans, performance and vesting conditions are common. It’s important that these are clearly set out in individual agreements, and also that the plan rules are categorical about how any amendments can be made, including whether and to what extent changes can be made retrospectively.

RM2 can advise you on how best to draft your performance conditions to ensure maximum flexibility, and can also help with the processes and paperwork to ensure any amendments are made effectively and correctly within the limits of your plan rules.
Call us on 0208 949 5588 or email if you’d like more information.