Employee share options: exercise discretion rationally

Posted by Jennifer at 10:50 on 5 Dec 2017

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The High Court has provided a useful reminder of perhaps a common-sensical view that directors must act reasonably when exercising a discretion and be able to demonstrate that they have evidence of a decision-making process.

The option agreement involved stated “The Option may only be exercised with the consent of a majority of the board of the directors of the Company”. The option holders tried to exercise the options and the Company refused to issue the shares and stated that the directors did not consent.

However, the High Court found that the Company did not have an unconditional right to veto any exercise as this rendered the option effectively meaningless (really just a right to ask for shares!).

Also, due to the fact that the Company could not provide any board minutes relating to the decision to veto the exercise of the options, it was very easy for the Court to decide that no reasonable decision-making process had taken place and that the Company must issue the shares to the option holders as they had requested.

There are often situations where private companies want to exercise their discretions in relation to employee share scheme related matters particularly where there is conflict with the option holder or a tricky leaver situation.

Don’t forget to document the evidence showing that a decision reached in relation to the discretion took place and was not taken arbitrarily or unreasonably.

Please contact RM2 (020 8949 5522 / enquiries@rm2.co.uk) or consult our free fact sheet downloads for more information.