Review, Reason, Record - the pitfalls of not keeping proper records

Review, Reason, Record - the pitfalls of not keeping proper records


Author: Al Hammerton

Applies to: England and Wales

A recent case, Watson and others v Limited, highlights the importance of keeping detailed records of discussions at board meetings particularly in relation to exercises of discretion.


Watchfinder (W) entered into a service agreement with a business consultancy firm (A). Around the same time the members of A entered into an Option Agreement with W in relation to shares in the Company. A term in the Option Agreement at clause 3.1 (the clause) stated that 'the Option may only be exercised with the consent of the majority of the board of directors of the Company'.

The service agreement had mixed success and was eventually terminated and subsequently the option holders sought to exercise the option.

W refused on the basis that the required board consent had not been obtained. When the option holders wrote to W asking for the reasons for the rejection they were not provided with any explanation. It was W's position that the clause amounted to an unconditional right to veto the exercise of the options.

The option holders then brought a claim for specific performance of the option agreement.

The decision

The Court held that while the clause was intended to act as some sort of restriction in the Option Agreement it was not an unconditional veto. If the Company did have an unconditional veto over the options, it would make part of the package offered to the firm entirely meaningless. This could never have been the intention of the parties.

The so-called 'Braganza duty' which concerns the exercise of discretion was considered by the Court. This duty states 'fulfilment of the duty will entail a proper process for the decision in question, including taking into account material points and not taking into account irrelevant considerations'.

Whether proper process was followed and what exactly the board considered when exercising its discretion was examined by the Court.

The judge then went on to examine what exactly the board of directors considered when exercising its discretion. The company records indicated that the matter was discussed as a last item on the agenda at a board meeting. Only one director spoke about the matter and indicated that he would be voting against the grant of the option. There was no evidence provided for the reasons behind this decision or any evidence that the other directors discussed the matter before the proposal was rejected.

The lack of detailed records of the Board's discussions meant that the Court had to determine what the 'target' of their considerations were based on witness evidence.

It was held that the considerations actually made were either forwards looking (were the option holders suitable shareholders?) or were backwards looking (centred on the option holders previous performance under the service agreement). Neither of these approaches were sufficient to fulfil the Braganza duty.

A proper process for the decision would have been assessing whether the requirements of the Option had been met within the wider context of the original purpose of the Agreement.

The Claimants succeeded in their claim. The Court held that '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.'

There are lessons to be learnt from this case.

  1. When exercising board discretion, significant thought needs to be given to the 'target' of the board's consideration. Namely whether consideration is being given to the material points and whether these are reasonable in the circumstances.
  2. Proper records of the discussions at board meetings must be kept. In this case the Court had to infer the focus of the board discussion as there were no detailed records kept by the Company. The lack of record keeping inevitably worked in the claimants' favour as it demonstrated disregard for the seriousness of the matter and a lack of consideration.


This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.