Daniels & Anor v Lloyds Bank Plc & Anor

A general power to amend an employee incentive plan does not authorise retrospective alteration of awards already granted unless clear words, read in their contractual and commercial context, confer that power. Particular scrutiny is appropriate where the amendment would replace an objective, criteria-based entitlement with a broad discretion to remove an earned award.

Where plan rules provide that an award vests upon the authorised committee determining that its performance conditions are satisfied, vesting follows automatically from that determination. A later decision by the company not to transfer the shares cannot reverse it. A contractual discretion defined by specified criteria must be exercised by reference to all those criteria, as well as rationally. Broad exclusion clauses and references incorporating plan rules must also be construed in their full context.

Two former executive directors sought summary judgment for the transfer of shares conditionally awarded under a long-term incentive plan following the acquisition and integration of HBOS. The plan originally made vesting dependent upon objective performance conditions. Shortly before the final determination, the remuneration committee purported to introduce a discretion permitting awards to be reduced to nil.

On 14 March 2012 the remuneration committee resolved that the performance conditions had been satisfied in full. The board nevertheless decided that shares should not be transferred to the claimants. The defendants relied on the amendment power, the new discretion, an exclusion clause and provisions in the claimants’ retirement agreements.

The principal questions were whether the amendment validly applied to existing awards, whether the awards had vested, whether the discretion had been exercised lawfully, whether the exclusion clause barred relief, and whether the retirement agreements affected the claimants’ rights.

1. The applications for summary judgment succeeded. The defendants’ pleaded defences had no real prospect of success.

2. The plan’s general amendment power did not authorise the introduction of a retrospective discretion capable of removing existing awards. A power permitting one contracting party to alter another’s rights detrimentally requires clear words, assessed in their contractual and commercial context. The plan distinguished between the plan itself and awards granted under it. Its objective conditions were fixed at the award date and created contingent entitlements. The amendment provision was directed to the structure and administration of the plan, not to rewriting granted awards. The purported introduction of rule 6.4 was therefore ineffective in relation to the claimants.

3. The awards vested on 14 March 2012. Under rules 6 and 7, vesting and transfer were distinct stages. Vesting followed automatically when the remuneration committee formally determined that the performance conditions had been satisfied. Rule 6.4, had it been valid, formed part of the same vesting process and had to be considered by that committee. The committee made no downward adjustment. The board was not the relevant committee and had no power under the rules to reverse vesting by refusing to transfer the shares.

4. Although academic, rule 6.4 would have permitted an adjustment to nil. Its discretion was nevertheless defined by specified criteria and was not equivalent to a wholly discretionary bonus power. It required consideration both of the performance of the company, group member, business area or team and of the affected participant’s conduct, capability or performance. The decision-maker also had to avoid arbitrariness, caprice and irrationality. The minutes did not disclose consideration of the required dual test.

5. Rule 15.7 did not exclude the claims. Read in its setting under employment terms, it addressed losses properly characterised as employment claims rather than claims enforcing vested rights under the plan. Clear words would have been required to remove the ordinary remedies for breach.

6. The retirement agreements incorporated the plan rules in force when those agreements were made. Without clear language referring to rules effective from time to time, later amendments were not incorporated. Rule 6.4 therefore could not have affected either claimant even if the general amendment power had otherwise authorised it.