The granting of share options is usually a form of incentivisation and can help align Option Holders with the goals of the directors and shareholders of the granting company. However once a decision is taken to grant share options it is imperative that both the management of the company granting the options and the option holders have a clear understanding of the circumstances in which the options become exercisable and when they lapse. This clarity was missing in the Watson v Watchfinder case and led to the employer losing their case.

A services agreement was entered into between Adoreum Partners and Watchfinder and an option agreement soon established. The agreement contained the clauses “The Option may only be exercised with the consent of a majority of the board of directors of the Company” and “If the consent specified has not been obtained by the Investors before the Options Expiry Date the Option shall lapse and neither party to this agreement shall have any claim against the other under this agreement except in relation to any breach occurring before that date.”

When the service agreement terminated, the option holders sought to exercise the option but were rejected by Watchfinder who claimed the board did not consent.

The judge concluded the case in favour of the option holders, stating that the clauses essentially amounted to an unconditional veto which would render the options useless, which could not have been intended.

Watchfinder had also not followed a ‘proper process’, known as the ‘Braganza Duty’, when exercising discretion. In this case there were no recorded minutes which showed the board following a ‘proper process’ to decide how to exercise the options in a way that fulfilled the Bragazna Duty.

It is crucial to clearly identify exercise conditions if these are applicable, discuss circumstances in which the options may lapse, ensure the importance of the ‘target’ is considered by the board and form a unanimous decision that reflects a directors duty to act in the best interests of his company, and accurately record minutes to constitute a “proper process” that can be relied upon to show the intention and express wishes of the parties.