Discretions in employee share schemes
Produced in partnership with Sam Whitaker of Shearman & Sterling LLP
Discretions in employee share schemes

The following Share Incentives guidance note Produced in partnership with Sam Whitaker of Shearman & Sterling LLP provides comprehensive and up to date legal information covering:

  • Discretions in employee share schemes
  • What are discretions in employee share schemes?
  • Where discretions may be included in employee share schemes
  • Legal constraints on the exercise of discretions
  • Can claims for breach of contract based on exercise of discretions be excluded?
  • Drafting and exercising share scheme discretions in practice

What are discretions in employee share schemes?

It is common to see contracts include powers for a party to determine a particular matter ‘in its absolute discretion’. Does such wording in practice mean what it purports to say, ie that the discretion can be exercised in any manner which that party sees fit? The answer under English law is almost certainly ‘no’, as there are now significant legal constraints imposed by law on the exercise of such discretions.

The inclusion of discretionary powers in employee share incentive schemes is now relatively common. There are various areas of employee share plans where such discretions may be found. For example, they may be included in relation to provisions which allow vesting/exercise of awards and, perhaps most commonly, in relation to participants who are leaving employment and who may be designated as ‘good leavers’ or ‘bad leavers’ with particular consequences for the awards held by them under the scheme.

Such discretions may be drafted as ‘absolute’ discretions (under which the company purports to have discretion to take any decision it considers fit) or more limited discretions under which the board must act ‘fairly and reasonably’. In practice, some tax-advantaged share schemes will require the latter wording. In addition, some discretions may be drafted so that it is explicit in the drafting that the discretion