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Tapestry
Case Alert: UK - Important case on
malus,
clawback, discretion and the role of RemCo
March 2018
Dear Client
This week
a much anticipated UK High Court case, concerning malus adjustments
to awards under a Lloyds Bank LTIP, concluded in favour of the
ex-Lloyds executives bringing the claim.
The Judge determined that the awards did in fact vest in full,
could not be lawfully withheld, and ordered Lloyds Bank to pay
£1.35 million in shares to Eric Daniels (former CEO) and £933,239
in shares to Truett Tate (former head of wholesale banking). Lloyds
Bank have since confirmed they will not appeal this ruling.
Share plan
implications
There are a number of important points which were considered in the
case which should be taken into account when drafting malus and
clawback terms, implementing them and making decisions to operate
them. The case addressed:
- Whether plan rules and awards can be
lawfully amended, after grant, to include malus provisions?
- What evidence of discretion is required
when malus provisions are used?
- Who can/should make decisions under share
plans? The remuneration committee, the board or both?
Summary of facts
- Two former senior employees of Lloyds Bank
plc were granted LTIP awards in April and May 2009.
- The awards were subject to a number of
conditions including the success of the HBOS merger.
(The merger did go ahead but Lloyds had needed a significant
government bailout).
- In January 2012, RemCo agreed the awards
should be made in full and vest at or around 2 March 2012
- In February 2012, the LTIP rules were
amended, by RemCo, to include a malus provision, to adjust
awards (including to nil) at the “Committee’s” discretion.
- In March 2012 a board meeting was held
during which the negative implications of delivering the
shares, following the HBOS merger, were considered.
- This board meeting was adjourned and a
RemCo meeting convened - it was determined that the
performance conditions had been fully satisfied and the awards
should vest in full.
- The board meeting was reconvened and the
bank decided, in light of the legal and reputational risks,
not to honour the awards to Daniels and Tate.
- Proceedings against the bank began 5 years
later, in August 2017.
Amending plan rules and awards
The Lloyds LTIP rules allowed the “Committee” to amend the “Plan”
at any time in any way. However, the plan rules also indicated that
any conditions attaching to an “Award” must be determined at grant.
Numerous arguments were raised and the Judge concluded with several
important points:
The plan rules and the award are separate in nature. The provision
to allow for amending the rules was intended to alter the structure
and administration of the plan, not to amend existing award terms.
In any event, amending awards to the detriment of participants
should not be done lightly. In this case, no consent from
participants was sought in relation to the detrimental amendment.
The amendment was also made after the performance conditions had
been satisfied and the awards had likely already vested.
The plan rules in this case set out a “cards on table” approach,
where awards were granted with clear conditions from the outset.
The Judge determined that the malus terms were not “conditions”,
but instead a mechanism to exercise discretion after conditions are
satisfied. However, inserting malus terms after the grant date was
nevertheless entirely inconsistent with the “cards on table”
approach of the plan.
Tapestry
comment
If you are
looking to amend your company’s plan rules and awards, this case is
a clear reminder that you should not make adjustments to the
detriment of existing participants without careful consideration.
The plan rules probably did not require any employee consent
to make amendments to the plan, but the judge took the view
that if it was to add a significant detrimental term then
their agreement would be required. This case is under English
law but there will be similar legal principles in other
countries. You should also consider the wording of your
malus and clawback clauses and whether these are enforceable.
Whilst it is of course possible to rely on malus and clawback
terms, these must be properly incorporated into any agreement.
Discretion
Also considered was the discretion to exercise the malus provision.
It was made clear that any decision to exercise discretion cannot
be made arbitrarily, capriciously or irrationally. Such a decision
should also be evidenced.
Without concluding whether the discretion was lawful, the Judge
made it clear that evidence of considerations, when exercising
discretion, should be well documented. In this case, the board
minutes did not adequately consider whether the bank’s recent
performance and the potential negative implications associated with
the awards justified the bank’s withholding of those awards.
Tapestry
comment
We have
previously reported on the importance of clear minute taking and
ensuring decisions are well documented. This case is a further
reminder of the importance of meeting minutes and how they may end
up being used as evidence, or demonstrate a lack of evidence, in
any proceedings.
Decisions
by RemCo and the board
One of the key questions considered was whether the board, in this
case, were in fact able to make the decision to reduce the awards
under the plan.
The Judge highlighted that under the plan rules “the Committee” had
the discretion to adjust awards under the malus provisions. Turning
to the definitions in the rules, “the Committee” was defined
as “a duly authorised committee of the board of directors of the
Company”. The Judge made it clear that, based on this wording, the
Board were not in a position to determine the exercise of
discretion in relation to malus provisions. The Board and the
Committee are not one and the same and whilst both can have
authority to exercise discretions, the plan rules must provide for
this.
Tapestry
comment
This point
is of particular interest to the share plans industry where plan
rules often overlap the role of the “Board” and the role of the
“Committee”. What this case has shown is that the words of the plan
rules will be carefully reviewed if there is litigation. Decisions
to exercise malus provisions can be discussed at Board level, but
must be made by the body that has power under the plan rules, in
this case, the RemCo. You should ensure clarity in your plan rules
and that you are comfortable with which body or bodies have the
authority to make key decisions. It is also important
to keep under review what the plan rules and the terms of the malus
and clawback say and that they meet the practice in your company.
This is a significant decision that has far-reaching implications
for amending plan rules, exercising discretions, the use of malus
and the decision making process.
If you want to discuss any of the points above, or want help with
any of your share plans, please do contact us.
Janet, Bob and Tom
  
Janet Cooper OBE
Bob Grayson
Tom Parker
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