John McCarthy v McCarthy & Stone Plc
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE PETER SMITH |
| Judgment Date | 20 July 2006 |
| Neutral Citation | [2006] EWHC 1851 (Ch) |
| Court | Chancery Division |
| Date | 20 July 2006 |
| Docket Number | Case No: HC05C01270 |
[2006] EWHC 1851 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Peter Smith
Case No: HC05C01270
Derek Sweeting QC & Jeffrey Jupp (instructed by Clarke Wilmott) for the Claimant
James Goudie QC & Martin Griffiths (instructed by Travers Smith) for the Defendant
Hearing dates: 11 th July 2006
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Peter Smith J :
INTRODUCTION
This judgment arises out of a hearing on two matters:-
) A preliminary issue by order of Master Bragge dated 15th February 2006 "to determine whether on its true construction of Rule 4.4 of Part B of the McCarthy & Stone PLC Company Share Option Plan (Unapproved) 2000 ("the Share Option Plan") 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 declaration of support"
) An application for summary judgment brought by the Defendant on the grounds that it believes that the Claimant's Defence to its Counterclaim has no real prospect of success and there is no other reason why it should await trial.
BACKGROUND
The Claimant was a director and latterly an employee of the Defendant until December 2003.
The Defendant operated two Share Option Schemes. The first was the Executive Share Option Scheme (the 1996 scheme) which was adopted on 16th January 1996. The second was the 2000 Scheme which was adopted on 10th November 2000.
After his retirement the Claimant sought to exercise his share options. He gave notice on 22nd November 2004 that he wished to exercise his option over 138,786 shares which had been granted on 21st November 2000. There was an initial denial of entitlement but ultimately the Defendant's Remuneration Committee in January 2005 allowed the Claimant to exercise his option over 75% of the shares granted to him.
The relevant rule (4.4) is as follows:-
"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".
It is necessary to elaborate a little on the Scheme Rules.
In the rules "Performance Condition" is defined as "the objective Performance Condition which must be met before Options may be exercised". The objective condition is where the increase in earnings per share in the performance period is equal to 10% or greater than 10% per year above the level of the rate of inflation. The performance period was three consecutive financial years of the company commencing on 1st September 2000 i.e. expiring on 1st September 2003.
The Performance Condition was satisfied and it was satisfied before the Claimant left his employment with the Company. It will also be seen that the Performance Condition is linked to the overall increase in the earnings per share of the Company during the Performance Period. It is not a performance that is personally linked to the Claimant. This is not surprising given his role in the Defendant. His role would be the directing force presumably which would lead to the increase in the value of the shares over the relevant period. That is important because it is necessary in that context to examine the reasons the Remuneration Committee gave for not entitling the Claimant to a 100% exercise over his Share Options.
Under rule 2.3 the Options are only exercisable following the attainment of the Performance Condition. There is an overriding power (rule 2.4) when events happen which cause the Directors to consider that the Performance Conditions become unfair or impractical. In that eventuality they can amend, relax, waive or substitute such Performance Conditions and issue a replacement Option Certificate or other notice. It is not permissible under that rule to impose more onerous conditions.
RIGHTS OF EXERCISE
The Option may not be exercised before whichever is the later of the 3rd anniversary of the Date of Grant or any date which has been specified in the Option Certificate or it can be ascertained that the Performance Condition has been achieved.
Rule 4.2 provides that save as set out in 4.3, 4.4 and 5.6, an Option may only be exercised by an Option Holder whilst he is a Director or employee of a Group Company.
Rule 4.3 gives an absolute right to a personal representative of a deceased Option Holder to exercise an Option during the period of one year following the date of death. This is somewhat surprising when one looks at the elaborate provision of 4.4 which applies when the Option Holder has ceased to be in employment or hold any office. If that cesser occurred by reason of death none of the complications created by this case would arise.
Rule 5.6 is a variation which applies when there are changes of control, Schemes of Arrangements or compulsory acquisitions or there is a winding up. Clearly that has no implication to the present dispute.
DECISION OF REMUNERATION COMMITTEE
The Remuneration Committee met on 17th January 2005. It does not have any lawyers in its composition but that is a bad point because it acted with the benefit of legal advice as the minute shows. The minute shows that, after reporting the request to exercise and summarising the rule and being mindful of the fact that the Performance Condition had been exceeded, the decision is as follows:-
"The Committee discussed the circumstances surrounding the approach made on behalf of the McCarthy family interests in June 2003. In making the approach JSM had allied himself with the interests of a competing business. He had not been in a position to make any material contribution to the performance of the Company or the achievement of the Performance Condition from the date the approach was made. The results of the approach had been very considerable disruption to the normal operations of the Board, a risk to the morale and retention of staff, and a cost to the Company in terms of legal and professional fees in the order of £300k. At the time the approach was withdrawn JSM, whilst still a Director of the Company, had been responsible for a press announcement suggesting that the shares in the Company were over-valued. Further, prior to termination of his employment he had circulated an email message to staff in terms which implied that their interests would be better served by joining the competing business of which he indicated he had agreed to become a Director.
After discussion of the conduct of JSM 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 22 December 2004 served on behalf of JSM be accepted as a valid notice of exercise in respect of 75% of the options granted to JSM under the 2000 Unapproved Plan, that is to say that the exercise of options by JSM be regarded as valid over 104,089 shares at an exercise price of 267.5 pence per share".
It would be seen that the Committee considered that an approach had been made by the McCarthy family interests (the Claimant's family) to acquire the shares. They concluded that the Claimant had allied himself with interests of a competing business in June 2003 and had not been in a position to make any material contribution to the performance of the Company or the achievement of the Performance Condition from the date the approach was made. It is suggested that that caused considerable disruption to the operations of the Board affecting morale and cost the Company £300,000.
The Claimant disputes these matters. It is of course to be appreciated that the Performance Condition was achieved despite these matters and that the Performance Condition is not a personal performance indicator addressed to the Claimant. Finally the Performance Condition is over 3 years and the alleged disruption was for 3 months. If the reduction was by 25% on an apportionment basis that is far too high. The minute does not say how the Remuneration Committee arrived at the figure of 75%.
CLAIMANT'S SUBMISSIONS
The Claimant in essence contends that the Remuneration Committee has to perform a twofold exercise. First (looking at the first sentence of clause 4.4) it has an absolute discretion to determine whether the option will be exercisable "having considered the extent to which the Performance Condition has been achieved at the date of termination".
Mr Sweeting QC, who with Mr Jupp appears for the Claimant acknowledges that in that exercise the satisfaction of the Performance Condition is not anything other than an important but not determinative factor that can be taken into account. He also concedes that they have an absolute discretion which cannot be challenged provided they are bona fide in their decision not to exercise. It was unclear to me precisely what he said about the other factors. At some stage during the course of his submissions he appeared to accept that a bona fide belief in the factors referred to in the minute (although disputed) could be considered by the Remuneration Committee at this first stage. Later in his submissions he retreated from that view.
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