Board consent to exercise of option – absolute veto or subject to implied duty of reasonableness?

19 / 07 / 2017

In the interesting case of Watson and others v Limited, the High Court analysed whether the discretion given the board of directors in deciding whether to approve the exercise of an option under a share option agreement amounted to an unconditional right of veto or was subject to a qualification that it must not be exercised capriciously, arbitrarily or unreasonably.

The claimants had entered into a share option agreement (the Agreement) with Limited (Watchfinder) to purchase up to 5% of Watchfinder’s issued share capital. Clause 3.1 of the Agreement provided:

“3.1 The Option may only be exercised with the consent of a majority of the board of directors of the Company [i.e. Watchfinder].

3.2 If the consent specified in Clause 3.1 has not been obtained by the Investors [i.e. the claimants] before the Options Expiry Date the Option shall lapse and neither party to this agreement shall have any claim against the other under this agreement except in relation to any breach occurring before that date.”

When the claimants sought to exercise the option, no such board consent was given and accordingly, Watchfinder argued that the option could not be exercised because clause 3.1 amounted to an unconditional right of veto in favour of Watchfinder.

The Court disagreed stating that constructing clause 3.1 as an unconditional right of veto would render the option meaningless because the grant of shares would then be “entirely within the gift of Watchfinder”. In that event, the claimants’ position would be no different from when any person sought to buy shares in Watchfinder.

Instead, the Court decided, referring to the Supreme Court decision in Braganza v BP Shipping,[1] that the board’s exercise of discretion on clause 3.1 was subject to implied limits not to exercise it unreasonably, capriciously or arbitrarily (the Braganza Duty). The fulfilment of this duty entails “a proper process for the decision in question including taking into account the material points and not taking into account irrelevant considerations”.

As the board of Watchfinder had been under the impression, based on a number of different legal opinions, that it had an absolute right of veto, the Court found that there had in fact hardly been any real exercise of the discretion at all that could be described as in compliance with the Braganza Duty: “There was no real discussion, it did not focus on the correct matters, it proceeded on a mistaken view of what it was about and it was arbitrary.”

Accordingly, the claimants succeeded on their claim and, as the claimants had otherwise fulfilled all the formal steps required for the exercise of the option, the Court ordered specific performance of the Agreement.


The case highlights the importance of clearly setting out any specific and express conditions for exercising options in a share option agreement. It also emphasises the need to properly document important board decisions, including prior consultation with the directors, and the specific matters the board took into consideration when reaching decisions, especially when exercising discretion in order to demonstrate, where applicable, compliance with the implied duty not to exercise its discretion unreasonably, capriciously or arbitrarily.

For further information, please contact Marlies Braun at

[1] [2015] 1 WLR 1661