Daniels and another v Lloyds Bank PLC and another [2018] EWHC 660 (Comm)

In a summary judgment, the High Court found that an employer (or group company) could not artificially impose malus provisions to avoid paying out shares under an LTIP to certain former executives. Whilst this case is fact specific based on the contractual provisions, it highlights points that companies should consider when thinking about applying malus and/or clawback.

In this case, the bank had granted a number of LTIP awards that were subject to performance conditions based on the integration of HBOS. By the time the performance period had ended, there was little shareholder support to reward those who had participated in the decision to acquire HBOS. In light of this, the bank decided not to satisfy LTIP awards held by a handful of individuals (whilst honouring the bulk of the awards to employees) and sought to rely on a recently introduced a malus provision in order to do so.

The High Court held that the malus provision did not apply to these particular awards as the amendments powers were to be narrowly construed and did not give the bank the power to apply a significant detrimental provision retrospectively. Furthermore, even if the provision had applied to the LTIP awards, it had not been validly used and so the awards had vested and were entitled to be paid out.

The case is a warning to companies that they cannot impose malus and clawback provisions on existing awards without taking into account whether the amendment powers under the LTIP are sufficient and whether it is rational for the employer (or a group company) to use those amendment powers.

Key points to consider for companies when reviewing malus and clawback provisions are:

1. What are the terms of awards? Particularly around vesting and how the malus/clawback provision fits in.

2. Was the provision part of the original award terms? If it was added later, does that amendment apply prospectively or retrospectively?

3. Who has the discretion? Is it the board or the remuneration committee?

4. What process does that body have to go through to make the decision - including what is set out in the plan rules or policies?

5. Noting decisions and reasoning in meeting minutes is key and these should be carefully worded.

This area is likely to become more of a focus as more and more companies consider implementing or expanding malus and clawback provisions.