In this case, share option agreements were entered into which provided Watchfinder’s board of directors with the absolute discretion to refuse to consent to the exercise of the options. When the option holders sought to exercise their options, the board refused to grant their consent. The option holders took Watchfinder to court seeking a remedy of specific performance to allow the option holders to exercise their options.
The High Court held that the board could not have an unconditional right to veto the exercise of the options. If it did, the options would be “meaningless” as the claimants would be in no different position from any person who sought to purchase shares in Watchfinder.
However, the Court made it clear that the clause in the agreement containing the right to refuse consent to the exercise of the options could not be disregarded in its entirety. The Court held that it acted as a restriction or qualification on the right to exercise the options, meaning that the directors had the discretion to refuse consent to the exercise of the options in certain circumstances, not an absolute right to refuse in all circumstances. HHJ Waksman QC followed the Supreme Court’s decision in Braganza v BP Shipping, which stated that a party exercising discretion must ensure that such discretion is not exercised in a way which is arbitrary, capricious or irrational.
The board was unable to show that its discretion was exercised in accordance with the principles set out in the Braganza decision for a number of reasons. Importantly, the board did not have any written minutes and sought to rely solely on hearsay evidence from two directors. From the evidence that was produced, the court found that only the Chairman of the board spoke with the other directors concurring, that it was dealt with quickly and that it was not a considered exercise of discretion that took account of the relevant factors.
As a result, the court ruled that the board of Watchfinder did not follow a proper process in making the decision, had essentially acted unreasonably and the claimants were successful in their application to force Watchfinder to allow them to exercise their options.
This case highlights to directors not only the importance of adhering to their statutory duties, but also the importance of keeping a clear paper trail of decision-making, particularly in relation to those decisions which require the exercise of their discretion. When making decisions, directors should ensure that board minutes and resolutions set out the factors that are taken into account in order to clearly demonstrate how and why a decision was made.
Directors (along with any other form of decision-maker) should also be wary of relying on a purported absolute veto. For example, options are intended to be exercisable (or not capable of exercise) when certain criteria are fulfilled, these should be stated in the relevant agreement rather than relying on a general right to consent for exercise of the options.