MccArthy v Mccarthy & Stone Plc

A contractual share option scheme required a two-stage decision when an option holder ceased employment. The remuneration committee first had an absolute discretion whether to permit exercise. If it permitted exercise, the proportion exercisable was determined objectively and pro rata solely by achievement of the performance condition. Where that condition was fully achieved, 100% was the only permissible proportion.

An employer may obtain restitution when compelled by law to pay an employee’s income tax or primary National Insurance liability. The remedy remains available despite the absence of an express contractual right to reimbursement, provided the payment discharged the employee’s underlying liability and was not made officiously.

A former executive chairman claimed entitlement to exercise the whole of a share option after the relevant performance condition had been achieved in full. The company’s remuneration committee permitted exercise of only 75%, relying partly on his conduct. Peter Smith J held that the committee had misconstrued the scheme, declared its determination invalid and remitted the matter for reconsideration.

The judge also gave the company summary judgment for £197,931.33. The company had paid income tax and primary National Insurance contributions arising from the former chairman’s exercise of four options.

The former chairman appealed against the remission and the summary judgment. By a respondent’s notice, the company challenged the ruling that the committee’s determination was invalid. The issues were the construction and consequences of rule 4.4 and whether the statutory payments were recoverable in restitution.

1. Share option appeal allowed. Rule 4.4 required two sequential decisions. At the first stage, the remuneration committee had an absolute discretion whether an option held by a former employee should be exercisable. Achievement of the performance condition was an important consideration at that stage, but it was not necessarily the only one. At the second stage, once exercise had been permitted, the committee had to determine the exercisable proportion pro rata to achievement of the performance condition. The absolute discretion did not extend to that calculation: paras [20]–[23].
2. The performance condition had been achieved in full. The only legally permissible proportion was therefore 100%. Although the determination was ordinarily for the committee, a remission was unnecessary where only one lawful answer existed. The court could declare that answer without requiring a potentially circular series of reconsiderations and challenges: paras [25]–[31].
3. The subsequent takeover and delisting did not justify withholding declaratory relief. The claimant was entitled to a declaration that, before the takeover, he could exercise the option in full. Any resulting remedy would lie in damages: paras [29]–[31].
4. Appeal against summary judgment dismissed. A person compelled by law to discharge another’s primary liability may recover the payment in restitution where the payer did not officiously expose itself to liability and the payment discharged the defendant’s liability. The absence of an express contractual right of recoupment did not exclude that remedy: paras [34]–[39].
5. Under the Income Tax (Earnings and Pensions) Act 2003, the share-option gain was employment income charged to tax for which the employee was liable. Tax accounted for by the employer under PAYE was treated as deducted in respect of that liability. The collection machinery did not alter the employee’s underlying liability: paras [40]–[46].
6. Under the Social Security Contributions and Benefits Act 1992, primary contributions were the earner’s liability, although the employer was liable in the first instance to pay them on the earner’s behalf. The legislation did not exclude restitution where deduction from earnings was unavailable. The company’s compelled payments discharged the claimant’s liabilities, leaving him with no real prospect of defending the counterclaim: paras [47]–[51]. The company’s cross-appeal was dismissed.

1. Court of Appeal (Civil Division): The claimant’s appeal concerning the share option was allowed and declarations were substituted for the remission ordered below. His appeal against summary judgment on the company’s counterclaim was dismissed. The company’s cross-appeal was dismissed: [2007] EWCA Civ 664.
2. High Court, Chancery Division: Peter Smith J declared the remuneration committee’s determination invalid, directed reconsideration and entered summary judgment for the company for £197,931.33. No citation is stated in the judgment.