In the case of Watson & Ors v Watchfinder.co.uk Ltd, the High Court considered a provision in an option agreement which purported to give the board complete discretion over whether an option could be exercised.

Case background

The claimants were three individuals who owned a business development consultancy engaged by Watchfinder to provide various services. They were paid a monthly retainer for their services and separately entered into an option agreement to purchase a particular percentage of Watchfinder’s shares at a given price. The option agreement provided that ‘the option may only be exercised with the consent of a majority of the board of directors [of Watchfinder]’.

The claimants tried to exercise the option but the board of directors refused consent. The claimants brought a claim for specific performance of the option agreement, arguing that Watchfinder could not exercise its discretion over the grant of consent in a way that was arbitrary, capricious or irrational.

The Court’s decision

The High Court concluded that the clause could not be interpreted as giving Watchfinder an unconditional right of veto of exercise of the options as this would render the option worthless as the grant of shares would be entirely within the gift of Watchfinder and the position would be no different from when any person sought to buy shares in Watchfinder. It therefore found it was a discretionary power which was subject to implied limits. The judge held that there was a duty on the board to follow a proper process, including taking into account the material points and not taking into account irrelevant considerations and to not reach an outcome which was outside what any reasonable decision-maker could decide.

In this case, there had not been any proper exercise of the discretion; there had been no real discussion at the board meeting and the board had reached an arbitrary decision, the Court therefore held that it should proceed as if consent had been given and the claimants were accordingly granted specific performance of the option agreement.

Practical implications

• Don’t rely on an absolute veto right in an option agreement – if a company wishes an option to only be exercisable in certain circumstances, it should introduce conditions into an option agreement.
• When exercising discretion – ensure that a proper process is adopted. The board should act reasonably and give proper weighting to the material facts.
• Produce a document trail – keep accurate board minutes when the board is exercising discretion under share plan rules.

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