Peter Frost on the rules governing share deal contracts

Share options granted to executives can normally only be exercised while the executive remains in employment. They are granted pursuant to the rules of a share option scheme.These rules customarily provide that the options will lapse on termination unless an employee leaves their job for one of a limited number of reasons.The rules normally also provide that if the options lapse on termination the employer has no liability in this regard to the employee.This situation has been seen as unsatisfactory but a challenge to this based on the Unfair Contracts Terms Act was rejected some time ago (owing to an exclusion in the act relating to contracts for securities; the position is different in Scotland where the exclusion does not apply).Levett v Biotrace International Plc caused excitement because it appearedto suggest that this position was once more under attack.Levett's employment was terminated because of a "spat" with certain customers. The rules governing the options were slightly unusual in that the provisions of a side letter extended the available circumstances for exercise to include notice of termination given by the company.The employer argued that this provision, combined with the exclusion clause, prevented exercise, but the court found: "There is nothing in the rules which compels [us] to conclude that it was intended that the company could rely on their own breach of contract to prevent exercise."However, the court then went on to say that the exclusion clause "makes it clear that [the option holder's] rights are confined to those set out in the rules and that if under those rules his share option lapses he cannot claim any loss indirectly by way of damages for wrongful dismissal".It is therefore not clear what the court would have concluded without the side letter. In my view this case does not actually affect the previous position and turns on the wording of the side letter.But it may well suggest that remuneration committees should ensure that the relevant exclusion clause contains an explicit reference to repudiatory breach of contract.Peter Frost is an employment partner

at Herbert Smith.