Watson & Ors v watchfinder.co.uk Ltd

A contractual requirement for board consent before exercising a share option did not give the company an unconditional veto. Construed in the context of the option agreement and the parties’ commercial package, the provision created a discretionary power subject to implied limits. The discretion had to be exercised rationally and in accordance with the Braganza duty: through a proper process, by taking account of relevant considerations, disregarding irrelevant considerations, and avoiding an irrational outcome. The target of the discretion was whether the option holders had made a real or significant contribution to the company’s progress, growth or prospects, such as introducing a significant investor. A purported decision based on a mistaken understanding of an absolute veto, reached without meaningful consideration of relevant matters, was invalid. The court therefore treated consent as given and ordered specific performance.

The claimants, directors and shareholders of Adoreum Partners, sought specific performance of a share option agreement requiring Watchfinder to allot them 5% of its shares for £150,000. The agreement stated that the option could be exercised only with the consent of a majority of Watchfinder’s board.

The claimants had complied with the formal exercise requirements, but the board had refused consent. Watchfinder contended that clause 3.1 conferred an unconditional veto. Alternatively, it argued that the discretion could be exercised by reference to the claimants’ performance, the absence of investment by Richemont, or their contribution to Watchfinder’s growth. The central issues were the construction and legal limits of clause 3.1 and whether the board had validly exercised its discretion.

1. Construction. Clause 3.1 did not confer an unconditional right of veto. That construction would make the option meaningless because the allotment of shares would be entirely within Watchfinder’s gift. It was inconsistent with the language, structure and commercial purpose of the separate option agreement and the wider contractual package.
2. Implied limits. Clause 3.1 created a discretionary power subject to the limits identified in Braganza v BP Shipping [2015] 1 WLR 1661. Watchfinder had to adopt a proper decision-making process, take account of relevant considerations, disregard irrelevant considerations, and avoid an outcome outside the range open to a reasonable decision-maker. The court could not substitute its own view of what the decision should have been.
3. Target of the discretion. The discretion was not directed merely to whether the claimants were suitable future shareholders, nor did it make Richemont’s investment an unstated condition. Nor could it depend on an undefined requirement that Watchfinder approve generally of the claimants’ performance. The appropriate focus was whether Adoreum or the claimants had made a real or significant contribution to Watchfinder’s progress, growth or prospects. Introducing a significant investor was an obvious example.
4. Application. The board’s decision was reached quickly and casually. The evidence did not establish a meaningful discussion or proper prior consultation. The decision proceeded on the mistaken belief that the board possessed an absolute veto and focused principally on Richemont’s failure to invest. It failed to consider the material fact that Adoreum had introduced Beringea, whose substantial investment contributed materially to Watchfinder’s value and growth. The decision was therefore arbitrary and did not comply with the duty.
5. It was common ground that, in those circumstances, the court should proceed as if consent had been given. The claimants succeeded in their claim for specific performance. Consequential matters were reserved for the handing down of judgment.