McCarthy v McCarthy & Stone Plc

Under a share option rule giving a remuneration committee an absolute discretion after an employee leaves, the committee must undertake two distinct stages. It first decides whether the option is exercisable, having regard to the performance condition and acting bona fide. If it allows exercise, it must determine the proportion strictly pro rata to achievement of that condition. It cannot reduce the proportion by reference to unrelated allegations of misconduct where those matters did not affect achievement of the performance condition. An unlawful discretionary decision is a nullity and must ordinarily be reconsidered; the claimant cannot retain only the favourable part of the decision. An employer who pays tax and employee National Insurance properly attributable to an employee’s share-option gains may recover those sums where the payment discharged the employee’s primary liability.

The claimant, formerly a director and employee of the defendant, sought to exercise options granted under the defendant’s 2000 Share Option Plan. The performance condition had been fully achieved before his employment ended, but the remuneration committee permitted exercise over only 75 per cent of the options, relying partly on alleged conduct connected with a possible competing business.

The court determined the proper construction of rule 4.4 and the consequence of the committee’s decision. The defendant also sought summary judgment on a counterclaim for £197,931.33 paid under the PAYE regime for income tax and employee National Insurance arising from the claimant’s exercise of options.

1. Construction of rule 4.4. The rule required a two-stage process. At the first stage, the remuneration committee had an absolute discretion to decide whether the option should be exercisable, provided it acted bona fide and considered the extent to which the performance condition had been achieved. It could consider bona fide matters relevant to the claimant’s conduct insofar as they affected that condition.
2. At the second stage, once exercise was permitted, the committee had no further discretion over the proportion. The proportion had to be determined pro rata to achievement of the performance condition. The condition was measured by the company’s increase in earnings per share, not by a personal assessment of the claimant. Alleged disruption, costs and other disputed conduct which had not affected achievement of the condition could not be used to reduce the proportion.
3. The committee had proceeded on the mistaken basis that rule 4.4 gave it a single global discretion. Its determination was therefore invalid. The claimant was not entitled simply to retain the favourable decision to permit exercise while rejecting the 75 per cent limitation. The proper remedy was a declaration that the determination was invalid and an order requiring reconsideration under rule 4.4.
4. Tax counterclaim. The defendant’s payment of PAYE income tax and employee National Insurance discharged liabilities for which the claimant was primarily responsible. The statutory machinery did not itself expressly create a reimbursement obligation, but the payment was recoverable in quasi-contract because it discharged the claimant’s liability and conferred a corresponding benefit. The principle stated in Bernard and Shaw Ltd v Shaw [1951] 2 All ER 267 was correct.
5. The claimant’s defences based on express and implied contractual terms had real prospects of success and were unsuitable for summary determination. The defendant was, however, entitled to judgment on the quasi-contractual basis.