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Exercise of share options and board discretion

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​There was an implied duty on the directors of a company not to act unreasonably, arbitrarily or capriciously when deciding whether to give their consent to shares being bought under an option agreement.  The decision is a good reminder of the requirements often imposed on a decision maker when exercising a contractual discretion, namely the need to act reasonably, to consider all relevant issues, to follow a proper procedure and to be able to adequately evidence that those requirements have been complied with: Watson & ors v Ltd [2017] EWHC 1275 (Comm).

Three individuals (the claimants) sought specific performance of a share option agreement they had entered into with Watchfinder (the defendant), a company specialising in the pre-owned luxury watch market. 

The claimants were all shareholders and directors in a consultancy business, whose services had been retained by the defendant in an effort to attract investment in its business, in particular from Richemont, a large luxury goods group.  Separately, the claimants had entered into a share option agreement with the defendant (the Agreement), which, as amended, entitled the claimants to purchase a certain percentage of the defendant’s issued share capital at a set price.  However, the Agreement provided, at Clause 3.1, that “the Option may only be exercised with the consent of a majority of the board of directors of the Company [ie the Defendant]”. 

The claimants introduced an investor to the defendant who made a substantial investment, although they were unsuccessful in persuading Richemont to invest.  The claimants then sought to exercise the option at a point in time where the relevant shares were worth much more than the option price.  However, the defendant refused to issue the shares on the basis that the necessary board consent had been refused.  The defendant argued that specific performance should be refused on the basis that it had an unconditional right to veto the exercise of the option. 

Defendant has discretionary veto, but subject to implied terms

HHJ Waksman QC (sitting as a judge in the High Court) rejected the defendant’s argument that it had an unconditional right to veto the exercise of the option.  The judge held that the defendant’s proposed interpretation would render the option “meaningless because the grant of shares [would be] entirely within the gift of [the Defendant]”.  It would be a “commercial absurdity” to conclude that the Agreement, which formed part of an overall contractual package, was, in fact, worthless, particularly in light of the fact that the Agreement was a separate agreement within the contractual package, the sole purpose of which was to grant the option.

Despite rejecting the defendant’s argument, the High Court held that it could not ignore Clause 3.1 entirely.  In Judge Waksman’s view, Clause 3.1 acted as a “restriction or qualification” on the claimants’ right to exercise the option, but that the veto contained therein “must constitute a discretionary power subject to implied limits on the part of [the Defendant]”.

Braganza duty

Following the Supreme Court decision in Braganza v BP Shipping [2015] 1 WLR 1661, the judge held that the defendant had to exercise its discretion “in a way which [was] not arbitrary, capricious or irrational”.  Although a so-called ‘Braganza Duty’ would not be imposed upon a party faced with the exercise of a contractual discretion in every case, it was appropriate to do so in relation to the Agreement because of the “obvious potential conflict of interest as far as the existing shareholders of [the Defendant] [were] concerned” as those shareholders would have their shareholdings diluted and/or would be unable to issue such shares to other investors willing to pay far more than the option price.

The Court found that in order to properly discharge its ‘Braganza Duty’ the defendant was obliged to:

  • follow a proper process, including taking into account the material points and not taking into account irrelevant considerations; and
  • not arrive at a decision which was outside what any reasonable decision-maker could decide. 

In deciding whether the discretion had been properly exercised, it was necessary to know the target of the discretion, ie to understand what the defendant should have considered when exercising it.  Given the emphasis of the parties’ commercial relationship was the successful introduction of a significant investor to the defendant, the defendant’s board should have asked itself whether the claimants had contributed to the growth or value or prospects of the defendant in some significant way.  Significantly, the judge rejected the defendant’s contention that the board should have focused on the target of whether Richemont invested.  If the real intention of Clause 3.1 had been to limit the exercise of the option to circumstances in which Richemont had invested, then this was something that could and should have been introduced as a specific and express condition.

Discretion not exercised properly

The defendant failed to demonstrate that it had discharged its ‘Braganza Duty’.  It was unable to produce any evidence to demonstrate that the decision taken was anything other than arbitrary.  Only the managing director had spoken on the issue at the relevant board meeting; at the time of the board meeting a number of board members (including the managing director) were under the mistaken impression that the board had an unconditional veto over the exercise of the option; some of the directors had been overly focused on the fact that the claimants had not secured Richemont as an investor; and there was no real consideration of the fact that the claimants had introduced an investor who had made a significant investment.  As a result, there had been “barely any considered exercise of the discretion at all [and] in any event in no way could it be described as in compliance with the Braganza Duty”.  No substantive discussion had taken place, the board had not focused on the correct matters, it had operated under a mistaken view of what the decision was about and it had taken the decision in an arbitrary manner.  The Court held that it should proceed as if consent had been given and so the claimants succeeded in their claim for specific performance.


Private companies often want to retain a degree of discretion in their share option plans in order to provide flexibility and allow for changing circumstances to be accommodated.  This case serves to highlight that, when drafting such agreements, a party granting an option should be wary of relying solely upon a purported absolute veto.  Instead, if there are certain circumstances in which it is intended that options granted should be exercisable, those circumstances should be clearly articulated.  For example, if the defendant had wanted the option to be conditional upon investment from Richemont, a specific clause to that effect should have been inserted into the Agreement. 

More generally, the case serves as a timely reminder to any party exercising a contractual discretion of the importance of establishing a paper-trail demonstrating the factors considered, the process employed in reaching any decision and the reasonableness of such a decision.  Indeed, if the defendant in this case had been able to establish that its board had gone through the proper process, and considered all relevant matters, the outcome may have been very different.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Amy Edwards at


This case was also covered on Compact Contract, a blog where experts from Allen & Overy analyse the latest contract law themes and developments, and what they mean for your business.”​