Giovanni Mallone v BPB Industries Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Mr Justice Wilson,Lord Justice Waller |
| Judgment Date | 19 February 2002 |
| Neutral Citation | [2002] EWCA Civ 126 |
| Docket Number | Case No: A2/2001/0665 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 February 2002 |
[2002] EWCA Civ 126
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
(Mr C Symons QC, sitting as a Deputy High Court Judge)
Lord Justice Waller
Lord Justice Rix and
Mr Justice Wilson
Case No: A2/2001/0665
Nigel Inglis-Jones QC and Andrew Colvin (instructed by Messrs Lloyd & Co) for the Claimant/Respondent
Nicholas Randall (instructed by Messrs Clifford Chance) for the Defendant/Appellant
This appeal arises out of the cancellation of Mr Mallone's share options in BPB Industries plc ("BPB") as a consequence of his dismissal from his executive position as managing director of BPB's Italian subsidiary, BPB Italia Spa ("BPB Italia"). The question is whether that cancellation was lawful and effective under the terms of BPB's Senior Executive Share Option Scheme (the "Scheme").
Mr Christopher Symons QC, sitting as a deputy high court judge, held that the discretion vested in BPB's directors had been wrongfully exercised in three respects. First, it did not entitle the directors to cancel options which had been held for a period of three years and thus could be said to have matured. He therefore distinguished between those of Mr Mallone's options which had matured and those which had not: as a matter of construction of the relevant rule the directors had power to cancel the immature options but not those which had been held for three years. Secondly, if that was wrong as a matter of construction, the directors had nevertheless acted irrationally in cancelling the mature options. Thirdly, the directors had acted prematurely because at the time of cancelling the options Mr Mallone was still a director of various group companies.
Mr Mallone's employment as managing director of BPB Italia ceased on 2 (or possibly 3) November 1995. At a meeting of the directors said to have been held on 3 November 1995, his options were cancelled. Formally he remained a director of various group companies until his resignation from those offices on 4 January 1996. On 18 September 1997 he wrote to BPB to exercise his options, and it became common ground that the relevant date on which that exercise, if valid, would have been effective and the respective shares acquired and sold would have been 27 September 1997. In the event the judge held that Mr Mallone's exercise of the options which had already matured at the time of their cancellation ought to have been recognised, and awarded damages of £100,636 plus interest.
BPB's appeal from that judgment and order raises two issues, the first an issue of construction as to the relevant rule, ie rule 5(b)(iii) of the Scheme, and the second as to whether the directors' discretion was in any event exercised in a way that any reasonable employer could have done, or, as Mr Nicholas Randall, BPB's counsel, would prefer to say, in good faith. There is no respondent's notice or cross-appeal with respect to the immature options. There is no question on appeal as to quantum.
A third issue was raised, it is fair to say by the court itself, with reference to the judge's finding that the directors' discretion was exercised prematurely. That issue was dealt with in the main in written submissions following the hearing.
The Scheme
BPB's Scheme was open to any "executive", defined as any full-time employee or full-time director employed by any one or more companies within the Group: "full-time" was non-exclusively defined as normally requiring 35 or more hours to be devoted to the duties of the executive's employment or office. BPB is an English company with an international spread. The Scheme was operated by BPB's directors or a duly authorised committee of such directors. An "option" is defined for relevant purposes as a "right to subscribe" for BPB's shares "which has been granted…and is still subsisting". Grant of options is effected by resolution of the directors and evidenced by the issue to an executive of a written notice stating the number of shares subject to the option, the subscription price and the date of grant. An executive to whom an option has been granted becomes a "participant". The options granted cannot be exercised until the third anniversary of the date of grant and lapse on the expiry of ten years from date of grant. It is in that sense that an option held for three years can be said to be a "mature" option and an option held for less than three years can be said to be an "immature" option, but those expressions are not found in the Scheme's rules and are adopted merely for the sake of convenience.
The judge made the following findings about the Scheme:
"3. The…Scheme was formed in 1984 to provide long term incentives to selected key executives. It enabled those executives to share in the long-term success of the Group. By 1995 there were some 60 participants in the scheme. Membership of the Scheme was kept under review each year and final decisions as to which executives should participate in each year's round of options, and at what level, was taken by the board on the recommendation of the Chief Executive. A senior executive was not entitled to participate as of right and might be included one year and omitted the next. The Board delegated the task of formally granting options to the Options Scheme Committee who normally granted options in July of each year."
The critical rule which fell to be construed was rule 5(b)(iii). Rule 5, of which it formed a part, is headed "Time of Exercise and Lapse of Options" and contains four sub-rules, (a) to (d). Rule 5(a) states the general rule already mentioned above that save as otherwise provided options can only be exercised between the third and tenth anniversaries of their date of grant. Rule 5(c) states the default rule that save as otherwise provided
"(c) Options will lapse forthwith on the Executive ceasing to be employed by the Group".
Rule 5(d) contains a partial definition of the concept of "ceasing to be employed by the Group" by providing that —
"(d) No Participant shall be treated as ceasing to be employed by the Group until he ceases to hold an office or employment in the Company or any company of which the Company has Control."
Rule 5(b) contains the important provisions within which any participant has to bring himself in order to avoid the default rule that his options would lapse on his ceasing employment.
Rule 5(b) falls into three parts, (i), (ii) and (iii). Rule 5(b)(i) is concerned solely with participants who die: their personal representatives may exercise any option capable of being exercised within twelve months of death. Rule 5(b)(ii) is concerned with participants who cease to be employed by the Group "by reason of injury, disability, redundancy, retirement…or the company by which he is employed ceasing to be a member of the Group". In such a case, there is no discretion in the directors to cancel any part of the participant's options. Moreover, save in the case of retirement, a participant can exercise options even within three years of their grant. It can be said that rule 5(b)(ii) is dealing with participants who cease employment for reasons which are in no sense their fault. There was a dispute below as to whether Mr Mallone ceased his employment because he was made redundant, a reason within rule 5(b)(ii). Indeed, the formal letter written to him on 2 November 1995 terminating his employment at BPB Italia stated that he had been made redundant—if indeed (BPB Italia's primary contention at that time) he had ever had a contract of employment with BPB Italia at all! Nevertheless, the judge found that the real "reason for Mr Mallone's dismissal was not related to redundancy but rather related to his performance" and there is no appeal from that decision. Therefore rule 5(b)(ii) did not apply in his case.
Rule 5(b)(iii) is the critical rule and I will set it out in full:
"…an Option may be exercised…
(b)…(iii) in the event of the Participant ceasing to be employed by the Group for any other reason (other than on the grounds of his misconduct or as provided for in Rule 6) either:
(1) during the six months after such cessation: or
(2) during the period expiring six months after the later of the third anniversary of the Date of Grant of the last Option he was granted under this Scheme and the third anniversary of the date (prior to such cessation) on which the participant last exercised an Option (in whole or in part)…
provided that exercise under this Rule 5(b)(iii) shall not be permitted in respect of more than an appropriate proportion of the number of Ordinary Shares comprised in (and remaining subject to) the Option, such proportion being determined by the application to such Option of a fraction of which the denominator is thirty-six and of which the numerator is either the number (not exceeding thirty-six) of complete calendar months during which the Participant has been an Executive since the date of Grant or such other number (not exceeding thirty-six) as the Directors in their absolute discretion determine."
It follows that rule 5(b)(iii) operates to prevent the default rule applying on the cessation of employment in all cases save for those dealt with by rules 5(b)(i) and 5(b)(ii), "misconduct" and rule 6 (which deals with changes in control and winding-up of BPB). It is common ground that it is the operative rule in the case of Mr Mallone. It therefore covers a sort of middle ground between cases where the participating executive ceases employment with BPB without any fault on...
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