Queen’s Bench Division
Watson and others v Watchfinder.co.uk Ltd
 EWHC 1275 (Comm)
|2017 April 19, 20, 21; May 25||Judge Waksman QC sitting as a High Court judge|
Contract — Construction — Share option agreement — Claimants having option to acquire shares in defendant company subject to consent of defendant’s board of directors — Whether agreement subject to requirement that discretion to grant or withhold consent not to exercised arbitrarily, capriciously or irrationally
The claimants were directors and shareholders of a business development consultancy whose services the defendant company retained to assist it in attracting investors. At the same time, the defendant entered into a share option agreement with the claimants on terms which, as later amended, provided for the claimants to purchase a certain percentage of the defendant’s issued share capital at a given price, but also provided that the option could not be exercised without the consent of a majority of the defendant’s board of directors. The claimants later sought to exercise the option but consent was refused. The claimants brought proceedings for specific performance of the share option agreement, contending that, as a matter of construction of that agreement or by way of an implied term, the defendant could not exercise its discretion over the grant of consent in a way that was arbitrary, capricious or irrational.
On the claim—
Held, claim allowed. Although the court would not, in every case, inevitably find that a discretion should not be exercised in a manner that was arbitrary, capricious or irrational in the public law sense, it was appropriate to do so in relation to the share option agreement. To conclude otherwise would give rise to commercial absurdity and render the share option agreement worthless. The exercise of the discretion should entail a proper process for the decision in question, taking into account the material points, not taking into account irrelevant ones and not reaching a decision that was outside what any reasonable decision-maker could decide, although it might not be appropriate to apply to contractual decision-makers the same high standards of decision-making that were expected of the modern state. To decide whether the discretion had been properly exercised, it was necessary to know the “target” of the discretion in the sense of what the decision-maker was meant to consider when exercising it. Although the share option agreement set out no limits on the exercise of the discretion, that did not mean that it provided an unconditional right of veto on the exercise of the option. Considered against the background evidence, the “target” for consideration was whether the claimants had made a real or significant contribution to the progress and growth of the defendant. The defendants had given no real consideration to that issue and had reached a decision that was arbitrary. The court would therefore proceed as if consent had been given and the claimants were accordingly entitled to specific performance.
Braganza v BP Shipping Ltd  1 WLR 1661 applied.
Tom Montagu-Smith QC (instructed by King & Wood Mallesons LLP) for the claimants.
Erin Hitchens (instructed by Brachers LLP, Maidstone) for the defendant.
Sally Dobson, Barrister