By Dónall Breen - 30 April 2018
The High Court has recently decided that Lloyds Bank did not have the power to apply a malus (reduction) clause to awards vested under a long-term incentive plan.
The case involved two former executives of Lloyds whose share awards were reduced to nil after the bank’s board decided that due to the unsuccessful HBOS acquisition (which they oversaw), granting them significant pay-outs would cause serious reputational damage. They relied on a malus clause which had been inserted into the rules after the executives’ share awards had already vested, with the malus clause purporting to apply retrospectively. The two executives had not agreed to a version of the rules that contained the malus clause in question.
The High Court ruled that the malus clause could not be used retrospectively and the full awards should be paid out.
The judgment is significant as many companies, especially financial institutions, inserted these types of malus clauses into LTIP rules after the introduction of the Remuneration Code. Often these clauses were intended to apply retrospectively, which has now been cast in doubt. Even more significant is this judgment was decided on a summary judgement basis, meaning the bank’s defence had no real prospect of success.
The judgment also has implications for the timing of settlement agreements. The two executives signed compromise agreements before the new malus clause was inserted into the rules. The judge found that “that rule could not have been effective [for the two executives] who signed off on what were intended to be final deals before that clause was ever (purportedly) introduced”.
Although it is a very fact specific case, it is useful reminder that should you come across exiting employees with a share scheme entitlement, you may have to think twice before relying on amended versions of the rules.