The High Court has recently held that a requirement for directors’ consent in a share option agreement did not amount to an absolute right of veto.
In December 2011, Watchfinder.co.uk Ltd, a company dealing in second-hand watches, entered into two agreements: a sales and marketing services agreement with Adoreum Partners (a business development consultancy), and a share option agreement in favour of three of Adoreum’s directors.
The sales and marketing services agreement required Adoreum to introduce Watchfinder to prospective customers and investors in return for a monthly retainer and finder’s fees. The share option agreement (as subsequently varied) gave the optionholders the option to buy an aggregate of 5% of the issued share capital of Watchfinder for £150,000, subject to the consent of a majority of Watchfinder’s directors.
Among the potential investors introduced to Watchfinder by Adoreum were the Richemont group and Beringea LLP. Watchfinder was keen to have Richemont as an investor, because it was active in the luxury goods market, but negotiations were unsuccessful. Beringea, however, paid $5 million for a 15% shareholding in Watchfinder in the summer of 2014.
In March 2016, the optionholders sought to exercise their option to buy shares in Watchfinder, the value of which had increased considerably, but the directors of Watchfinder declined to give the necessary consent. The optionholders then brought a claim against Watchfinder for the issue of the option shares.
The court found for the optionholders. HHJ Waksman QC held that the requirement for consent by Watchfinder’s board could not be construed as an unconditional right of veto. That would make the option meaningless, because it would make the grant of shares entirely within Watchfinder’s gift. Instead, the requirement should be read as subject to an implied term that the right of veto should not be exercised unreasonably, capriciously or arbitrarily.
In this case, the directors should have considered whether the optionholders, as directors of Adoreum, had made a real or significant contribution to Watchfinder, taking into account the ‘manifestly relevant consideration’ that Adoreum had introduced Watchfinder to Beringea, which had made a substantial investment. Accordingly, the optionholders were entitled to exercise their option as if consent had been given.
The lesson here is that, where an agreement provides for consent to be given by the directors of a company, the board should follow a proper process in reaching its decision, ensuring that all relevant factors are considered and recording its reasoning in board minutes.