July 2017: UK: Exercising discretion. Case update: Watson v Watchfinder

This is another important case which says that companies must exercise discretions reasonably and should document their reasoning. The High Court ruled that Watchfinder’s board had breached their duties and had acted unreasonably when exercising their discretion in relation to an Option Agreement.

Background Facts

  • Watchfinder had entered into an Option Agreement with three individuals.
  • The Agreement stated: “The Option may only be exercised with the consent of a majority of the board of directors of the Company”.
  • When the option holders sought to exercise their options, the Watchfinder board refused consent.
  • The option holders asked the court to allow them to exercise their options.

The Decision

Watchfinder claimed they had an unconditional right to veto any exercise. This was rejected by the High Court – if there was a right to veto, the ‘option’ was meaningless.

Instead, the High Court confirmed that when exercising discretion, boards must remember the Braganza duty – not to act capriciously, arbitrarily or unreasonably.

The High Court ruled that Watchfinder had acted unreasonably and without due consideration. The board was unable to produce any evidence of a reasonable decision making process.

Accordingly, the option holders were able to exercise their options.

Tapestry Comment:

When exercising discretion in relation to any share and incentive plan, like early leaver clauses or malus and clawback,  it is important to consider all the facts, avoid conflicts of interest and act reasonably.

In addition, you should always document your decision making process and the facts relied upon!

If you need any advice regarding the drafting or exercise of discretionary terms, or your wider share plan documentation, we are always happy to help!

Bob, Jordan and Tom

Bob Grayson   Jordan Levy   Tom Parker

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