John McCarthy v McCarthy & Stone Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice May,Lord Justice Lloyd,The Chancellor |
| Judgment Date | 04 July 2007 |
| Neutral Citation | [2007] EWCA Civ 664 |
| Docket Number | Case No: A3/2006/1791 |
| Court | Court of Appeal (Civil Division) |
| Date | 04 July 2007 |
[2007] EWCA Civ 664
The Chancellor of the High Court
Lord Justice May and
Lord Justice Lloyd
Case No: A3/2006/1791
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
Mr Justice Peter Smith
HC05C01270
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr D Sweeting QC & MR J Jupp (instructed by Messrs. Clarke Wilmott, Southampton) for the Appellant
Mr M Griffiths QC (instructed by Messrs. Travers Smith, London) for the Respondent
Hearing dates: 14 June 2007
Introduction
McCarthy & Stone plc, a public company carrying on business as a developer of sheltered accommodation for the elderly, adopted a Company Share Option Plan on 10th November 2000 (“the 2000 Scheme”) to provide further incentive and remuneration for its full time directors or employees. Rule 4.4 of that scheme provided that
“4.4 Where an Option Holder ceases to hold any office or employment the Remuneration Committee shall in its absolute discretion determine whether the Option will be exercisable having considered the extent to which the Performance Condition has been achieved at the date of termination. If the Remuneration Committee so decides the Option Holder may exercise all or a proportion of his Option(s) during the period which begins on the date of such cessation and ends twelve months later, such proportion being determined by the Remuneration Committee pro rata to the achievement of the Performance Condition.”
On 21st November 2000 the Company granted to its Executive Chairman, the eponymous Mr McCarthy (“the Claimant”), an option over 138,786 shares in the Company to be exercised not earlier than three nor later than ten years after its grant at an exercise price of 267.5p. The relevant performance condition was an increase in earnings per share in the period of three consecutive financial years commencing on 1st September 2000 equal to or greater than 10% per year above the level of the rate of inflation (as defined). This condition had been satisfied when, on 31st December 2003, the employment of the Claimant by the Company and all offices of the Claimant with the Company ceased.
On 22nd December 2004 the Claimant gave notice to exercise this option. The matter was considered by the Remuneration Committee on 17th January 2005. The minute of their meeting records:
“After discussion of the conduct of [the Claimant] and the proper weight to be given to the achievement of the Performance Condition, IT WAS RESOLVED by the Committee in exercise of its absolute discretion under Rule 4.4 that the notice of exercise dated 22nd December 2004 served on behalf of [the Claimant] be accepted as a valid notice of exercise in respect of 75%…..that is to say…valid over 104,089 shares at an exercise price of 267.5 pence per share”.
At the same time the Executive Committee resolved that the Claimant might exercise three other options granted to him under other schemes to the extent of 100%. The Claimant exercised all four options to the permitted extent thereby giving rise to liabilities to income tax and primary National Insurance contributions of £197,931.33 which was duly paid by the Company between 22nd April and 12th May 2005.
The Claimant was dissatisfied with the decision of the Remuneration Committee not to accept his notice to exercise as valid with regard to the remaining 25% or 34,697 shares at 267.5p. On 18th May 2005 he instituted these proceedings against the Company seeking declarations to the effect that the performance condition having been wholly satisfied and the Remuneration Committee having determined that the option would be exercisable he was entitled to do so in respect of all the shares, not just 75% of them. On 1st June 2005 the Company demanded reimbursement by the Claimant of the sum of £197,931.33 and, in due course, counterclaimed in the same proceedings for payment of that sum as money paid to the use of the Claimant. This was on the basis that the Company had been compelled by law to pay to the Revenue money due in respect of the Claimant's remuneration for which the Claimant receives credit in his personal liability to taxation.
On 15th February 2006 Master Bragge ordered the trial as a preliminary issue:
“Whether on its true construction Rule 4.4…has the meaning and effect set out in paragraph 12 of the Particulars of Claim and if so whether the claimant is entitled to the declarations sought.”
In paragraph 12 of the Particulars of Claim the Claimant contends that:
“On its true construction and meaning Rule 4.4 of the Share Option Plan:
(a) confers a discretion on the Remuneration Committee as to whether an option is exercisable, for which purpose the Remuneration Committee is required to consider the extent to which the Performance Condition has been achieved at the date of the termination;
(b) In the event that the Remuneration Committee does so exercise its discretion:
(i) permits the Claimant to exercise his Option in full when the Performance Condition has been met; or
(ii) where the Performance Condition has not been met requires the Remuneration Committee to determine the proportion of his Option that the Claimant may exercise pro rata to the achievement of the Performance Condition;
(iii) alternatively requires the Remuneration Committee to determine the proportion in which the Option is to be exercised, whether or not the Performance Condition has been met, pro rata to the achievement of the Performance Condition.
On the same day, that is 15th February 2006, the Company sought summary judgment on its counterclaim under CPR Part 24 on the basis that the Claimant had no real prospect of succeeding in his defence to the counterclaim.
The trial of the preliminary issue and the application for summary judgment came before Peter Smith J on 11th July 2006. By his order made on 21st July 2006 he declared the determination of the Remuneration Committee on 17th January 2005 to be invalid and directed such Committee to reconsider its decision in the light of his judgment handed down on 20th July 2005. Further he gave summary judgment to the Company on its counterclaim in the sum of £197,931.33. Permission to appeal was given to the Claimant by Waller LJ, the judge having refused it. By a respondents' notice filed on 19th December 2006 the Company also appealed against the judge's conclusion as to the invalidity of the determination of the Remuneration Committee.
Thus these appeals raise two distinct points. The first arises from the preliminary issue and relates to the determination of the Remuneration Committee on 17th January 2005, the effect of which was to deny to the Claimant an effective option over 34,697 shares in the Company at 267.5p. In that connection the Company seeks to rely on the fact that after the order of Peter Smith J the Company was taken over and its shares delisted. The second is whether the judge was right to give summary judgment on the counterclaim requiring the Claimant to reimburse the Company for the sum of £197,931.33 it had paid in respect of the Claimant's liability for tax and National Insurance arising from the exercise, as permitted by the Remuneration Committee, of all four options.
The determination of the Remuneration Committee
As its formulation shows, the preliminary issue relates to the proper construction of Rule 4.4. I have quoted the rule in paragraph 1 above but now need to put it in context. The 2000 Scheme is as to Part A an approved scheme. Part B, under which the Claimant was granted the relevant option, is not. Common to both are certain definitions contained in General Rule 1. They include a definition of “Performance Condition” as “the objective performance condition which must be met before Options may be exercised”. General Rule 2 provides that the plan shall be operated at the discretion of the Directors who shall determine whether any option should be granted under Part A or Part B.
Part B rule 1 deals with the grant of options at the discretion of the directors. It imposes an obligation on the Company to issue to the employee to whom it has granted an option a certificate under the seal of the Company. The rule provides what information the certificate should contain. Such information includes “the Performance Condition that must be satisfied before the exercise of an Option”. Rule 2 contains the conditions relating to the grant of options. They include:
“2.3 Options shall be granted subject to the condition that (save as provided in Rules 4.3 and 4.5 and 5) they shall only be exercisable (in whole or in part) following the attainment of the Performance Condition.
2.4 In the application of Rule 2.3, when events have happened which cause the Directors to consider that the Performance Condition has become unfair or impractical, they may, in their discretion (provided such discretion is exercised fairly and reasonably), amend, relax, waive or substitute such Performance Condition. After any such amendment, relaxation or substitution the Directors shall issue to the Option Holder a replacement Option Certificate or other notice including the details specified in Rule 1.2. Any such amendment, relaxation or substitution shall not result in the Option being subject to Performance Conditions which are more difficult to satisfy than those which applied immediately prior to such amendment, relaxation or substitution.”
Rule 3 deals with the number of shares in respect of which options may be granted.
Rule 4 governs the right to exercise an option. Rules 4.1 to Rule 4.4 are in the...
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...to payments of an employee's income tax and National Insurance contributions by an employer under the PAYE scheme in the case of McCarthy v McCarthy & Stone [2007] EWCA Civ 664. That is put forward by Miss Windle as being a directly analogous authority. I accept that it is authority for the......
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